Whole life insurance or permanent participating insurance is a long-term investment product offered by certain insurance companies. It is often viewed as an “expensive” product as the premiums are hefty annual amounts. However, it is the only insurance product that provides guaranteed premium amounts, which will never change. Furthermore, the insurance company shoulders the investment risk on the policy.
Whole life policy premiums can be structured on a “pay for life” basis or for 8 or 20-year terms. My preference is the 20-year participating structure.
The policy guarantees a return over the life of the policyholder. This guarantees means that the premiums will never change, the death benefit will be, at a minimum, the guaranteed amount and the returns on the investment portion of the policy will be as described in the contract.
Funds accumulated under whole life policies generate income through their investments in fixed-income securities, policy loans and lapsed policy premiums. These are offset by cost of administrating the policies and paying out death benefits. The result creates annual dividends, which are distributed to the policyholders. Current policy dividends are in the 6-7% range. Equitable Life recently announced its policy dividends for the current year at 6.8%.
These earnings are the non-guaranteed portion of the whole life policies and increase the value of the policy. The dividends can be used to reduce annual premiums, purchase additional insurance coverage or distributed to the policyholder. If they are used to reduce premiums or purchase additional insurance coverage, they are not taxable as CRA views this as an adjustment of the policy premium. Cash distributions are taxable as ordinary income.
Whole Life polices are long-term investments. One must commit to the 20-year premium payments. Early cancellations have significant cost ramifications and will lead to personal losses. However, fulfilling the premium obligations and yearly dividends can increase the value of the policy threefold over a 30-40 year period.
So I like this as an alternative investment in everyone’s portfolio because:
- Guaranteed premiums for guaranteed returns and death benefits
- Policy dividends can be tax deferred if structured as additional insurance
- Income attribution to a minor does not apply to whole life policies
- Whole life policies purchased on grand-children can be transferred tax-free
- Whole life policies can create additional cash flows during retirement, through partial withdrawals or policy loans
- Investment value is not subject to stock market volatility
- Whole life policies can provide business owners with tax effective investments of excess cash flow