Term 100 Life Insurance vs. Participating Whole Life
“As attractive as term insurance might be due to the lower cost, it’s important to realize that most insurance needs will require permanent coverage,” wrote Tim Cestnick in his “Tax Matters” column for The Globe and Mail.
Permanent policies can be divided into three distinct categories — whole life insurance, universal Life and term 100 insurance. Universal life plans offer a lot of flexibility but less in the way of guarantees. For clients looking for guarantees, Term 100 or Whole Life is generally the best route. Both policies will cover you for your entire lifetime as long as you keep paying the premiums, which (thankfully) remain level and do not increase. It’s a mistake to think that term 100 life insurance covers you until age 100. If you happen to make it to that age, the insurance company will usually continue to cover you, but you’ll no longer have to pay the premiums.
The major difference between participating whole life insurance policies and term 100 policies is that Term 100 policies generally have level premiums and lifetime protection — but no cash value the way participating whole life policies do. So, if the insured can’t afford their policy down the road, he or she is pretty much out of luck. You’re much better off going with a participating whole life policy with a cash value.
Here’s how the difference between participating and non-participating whole life policies breaks down.
Participating Whole Life Insurance: These plans offer features similar to non-participating policies — lifetime protection, guaranteed cash values and, in most instances, guaranteed premiums. Plus, they also generate an annual dividend.
The annual dividend allows the insured to share in the profitability of the insurance company. Dividend rates can fluctuate from year to year, and there is no guarantee that the company will pay a dividend in a given year. However, most life insurance companies in Canada continue to pay dividends — even in today’s low interest rate environments.
The annual dividend can be used to accumulate additional cash values, buy additional life insurance, reduce future premiums, or allow the dividend to be used to purchase a one-year term insurance policy, which, in theory, is eventually offset by the increasing first base whole life coverage.
Non-Participating Whole Life Insurance: These plans offer more simplicity and a lower premium, but they do not generate an annual dividend. Non-participating whole life policies provide lifetime protection, fixed premiums, and guaranteed cash values. Certain plans can be paid up in a limited number of years.
One additional benefit of participating whole life insurance policies is that insurance companies that are also mutual companies, who demutualized in the future to raise capital, would provide a demutualization benefit to policyholders. This windfall was seen several years back, when Sun Life, Manulife, and Canada Life changed from mutual companies to publicly owned companies.
There are usually five dividend options of participating whole life policies. They come in the following varieties:
1. Premiums in cash
2. Premium reduction: The tax advantage is that the premiums are non-taxable and never leave the policy
3. Accumulate interest
4. Paid-up additions
5. An enhanced option that buys one year of term insurance
Dividend rates on whole life policies can fluctuate. The three factors that have the biggest impact on these fluctuating dividend rates are the following:
C. Expense ratio
Surprisingly to some, mortality has the biggest impact on dividend rates. A large claim can throw a wrench on the profitability of the rest of the pool of participating policyholders. So how does Whole Life Insurance really stack up against Term 100 insurance? (See below.)
|Term 100||Participating Whole Life|
|Fixed Premiums||Fixed Premiums|
|lower premiums than particpating whole|
|higher premiums than Term 100|
|Generally, no cash values or paid-up options.||Guaranteed and Non- guaranteed Cash values|
|Increasing death benefit|
In addition, the cash values can be used to offset premiums if the insured happens to miss premium. This can be very important for people on a fixed budget or people with unexpected expenses.
If we compare a Term 100 plan to a participating Whole Life policy with an enhanced dividend option — the lowest-priced participating whole life plan you can get — it stacks up pretty favourably.
The scenario is a male non-smoker whose nearest age is 60 and who is looking for $50,000 in coverage
Industrial Alliance‘s Term 100 would cost $118.53 a month or $1317.00 a year.
Assumption Life‘s Par Plus with an Enhanced to Age 100 Dividend Option (premiums are fully guaranteed) costs $138.87 a month $1,543.00 a year.
Over 10 Years – Paid an extra $226 a year = $2260 over 10 years (cash values from the Assumption plan in year ten = $5,463.11)
Over 15 Years – Paid an extra $226 a year = $3390 over 15 years (cash values from the Assumption plan in year 15 = $11,455.65)
Over 20 Years – Paid an extra $226 = $4,520 a over 20 years (cash values from the Assumption plan in year 20 = $16,464.92
* The above cash value are based on Assumption’s current dividend rates.
The cash values in this example are not paid out on top of the death benefit. However, it does give the insured a lot of added flexibility if they need to stop paying the premiums for whatever reason or if they decide they want to cancel the policy.