Participating life insurance can combine permanent life insurance protection with a tax-advantaged savings component. It can provide insurance protection for life, provided premiums are paid when due.
Participating life insurance is flexible permanent life insurance with:
- A core of guarantees for basic coverage-premium, death benefit and cash surrender values
- A tax-advantaged savings component
- The potential for earning policyholder dividends that can be used to purchase additional life insurance or reduce your out-of-pocket premiums (policyholder dividends aren't guaranteed)
- A choice of riders and benefits that can be added to the basic policy
- Premium flexibility: You can choose to pay level basic premiums for a guaranteed maximum of 20 years or to age 100. The choice of premium-paying periods impacts values such as death benefit, dividend amounts and cash values.
How Participating Life Insurance Works
Participating life insurance policies have the potential for earning policyholder dividends. When you purchase participating life insurance, the premiums paid go into an account called the participating account, along with funds from other Canada Life participating policies.
Premiums and other basic values for these policies are calculated using long-term assumptions for mortality, investment returns, expenses (including taxes) and other relevant factors. The guaranteed premiums, guaranteed cash surrender value and guaranteed death benefit are based on these assumptions and are in place for the life of the policy.
If the overall experience in the participating account is more favourable than the long-term assumptions that support the guaranteed values (including investment returns, mortality and expense experience), a surplus is generated. A portion of the surplus may be paid to policyholders in the form of dividends.
The amount available for distribution in any year will vary upwards or downwards depending on the actual and expected experience. The amount available is also influenced by considerations such as:
- The need to retain earnings as surplus to, among other things:
- Ensure financial strength and stability
- Finance new business growth
- Provide for transitions during periods of major change
- Smooth fluctuations in experience
- Practical considerations and limits
- Legal requirements and prevailing industry practices
The Insurance Companies Act (ICA) of Canada contains a number of provisions that govern how the participating account is to be managed within a company with shareholders.
Participating Account Management Style
The participating account is broadly diversified and generally managed as a fixed-income account.
The long-term investment strategy has contributed to stable investment returns. During times of economic change, the life insurance company dividend scale interest rate has been relatively stable compared with many financial instruments.
Regular reporting of participating account assets demonstrates the stability and strength of the participating account.
In Canada, the opportunity to earn policyholder dividends is unique to participating life insurance policies. Participating policyholders share in the experience of the pool of participating life insurance policies through the payment of policyholder dividends.
You choose how you want your dividends to be used. The most popular dividend options are to use dividends either to buy additional permanent life insurance coverage each year or to buy a combination of term and permanent life insurance, which can make a larger amount of coverage more affordable. Insurance company manages the investment portion of a participating policy, so it doesn't require hands-on management by you. Assets in the participating account are managed in a diversified portfolio and are invested primarily in bonds, mortgages, equities and real estate.
Dividend scales are used to calculate dividends credited to policies. Dividends aren't guaranteed and will fluctuate, in actual experience, from those shown in sales illustrations provided by your financial advisor. Dividends into the future will depend on future dividend scales. The dividend scale, including dividends paid under it, is affected by a number of variables such as investment returns, mortality experience, expenses (including taxes) and other relevant factors.
Dividends credited to a policy have a cash value associated with them. This cash value, once credited to the policy, is vested and can't be reduced or used in any way without your authorization other than to pay premiums.