Participating life insurance policy – an overview

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by Ratehub.ca September 12, 2019 / No Comments

What is a participating life insurance policy?

Wouldn’t it be great if there were a life insurance policy that allowed you to get some money back while you’re still living? Well, the good news  – a participating life insurance policy is a form of whole life insurance that provides its holders the opportunity to receive dividend payments on an annual basis. The dividend payments are not guaranteed. But, when they do pay out, you can receive them as cash, use them to purchase additional coverage, or reduce your premiums.

That’s right, with a participating life insurance policy, you can actually see profits while you’re still alive. Let’s take a closer look at how participating life insurance works, and what the pros and cons of such a policy are.

A Different Form Of Whole Life Insurance

As a form of whole life insurance, participating life insurance provides you with the same coverage for your entire lifetime, regardless of changes to your health, providing that your premiums are paid in full and on time.  The amount you pay for your premium that over the actual policy cost is invested into an account. It’s similar to a managed mutual fund account because it’s able to accrue interest. At the end of the year, factors such as account performance, taxes, expenses and death benefits are examined for all participants in the policy. These elements help determine the dividend payout for the policy.

In essence, participating life insurance is like an insurance co-op: you and any other number of people pay into it, and if it performs well, you share in the profits.

Being able to see dividends from your life insurance policy while you’re still alive sounds pretty good, right?  Before you go running off to sign up for a participating policy, there are some important things to keep in mind.

Participating Life Insurance Can Be Pricey

Insurance companies, like most companies, are trying to make a profit. That’s no secret.  So if they’re going to provide the opportunity for you to make some extra money, you better believe they’ll want to cover their overhead first. Because you lock into the rate of premium at the time of signing up for your coverage, and your rate won’t change over the course of your lifetime, insurance providers want to make sure they aren’t losing money by covering you. All insurance policies are on a case-by-case basis, but a whole life insurance policy could cost you more than ten-times as much as a term life policy. It’s always a good idea to compare life insurance quotes before signing up for a plan, to ensure that you’re getting the best value for your dollar.

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Returns Are Not Guaranteed

The rate of return on a participating whole life policy fluctuates according to the various markets.  If the world market performs well, chances are the policy will. But it’s subject to dips and rises much as any stock or mutual fund would be.  Add to this the amount available to payout as dividends is based on the total number of policy payouts that year, and you could be looking at times when you don’t get to share in any dividends at all.

TIP: If you choose to get a cash-payout of the dividends from a participating whole life policy, it should be noted that this income could be taxable. If, however, you choose to re-invest the dividends, you will avoid any tax-consequences

Is a Participating Whole Life Insurance Policy For Me?

Because participating whole life insurance policies are often much more expensive than term life ones, they are often better suited to people in their mid-life and beyond, or those who are estate planning.  Of course, if you’re in a financial position where you can afford to pay insurance of about ten-times what a term life policy offers, then this could be the plan for you.

Most younger people aren’t in a position to pay the premiums of participating whole life policies, though. For these individuals, it is often better to invest the money that they could spend on such a policy into RRSP or other long-term savings plans.  If the individual finds herself able to maximize their RRSP contribution year after year, and is confident she will maintain her net income, than a participating whole life plan could be for her.

Consider the pros and cons of a participating whole life policy

PROS

CONS

Fixed rate no matter if your health condition or needs change Pricier than term life insurance and other whole life policies
Opportunity to receive dividends, which can be used to offset the cost of premiums or re-invested

No guaranteed dividend payout

Bottom Line

There are a lot of factors to consider when purchasing a participating whole life insurance policy. If you think such a policy is right for you, compare life insurance and see what different providers have to offer.

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