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How Are Whole Life Dividends Determined
Participating whole life insurance provides a guaranteed cash value and death benefit and the potential of earning dividends. Participating whole life insurance is the only life insurance contract that allows you to receive dividends. Dividends earned can add both to the cash value of a policy and to the death benefit with the selection of the right dividend option. Insurance dividends work similarly to stock dividends. When you pay your premium, a portion of this value will be placed in a participating account which is invested by the insurance company.
Each year, policyholders receive a portion of the earnings from the participating account. This dividend payout depends on the economic well-being of the insurance company providing the policy.
Yearly dividends will vary based on several factors specific to the policyholder and insurance company. Here are the factors that could influence your annual dividend amount:
- Current interest rates
- Insurance companys revenue and expenses
- Mortality rate of policyholders
- Insurance companys profit retained in cash reserves for the year
- Beginning and ending cash value of the policy
- Net of loans taken from whole life policy
The Secret Participating Policy Back Door:
If you are really interested in participating life insurance but cannot afford it, there is a hidden way to procure one. This may not be a secret, but it is not discussed nearly enough.
The simple solution to this problem is to choose your future participating insurer and purchase one of their convertible term policies. These policies may allow you to “convert” or “transfer” from one policy form to another within a given period of time and sometimes with no further underwriting required. This last part is the key to the value of a convertible policy. Remember to ask and confirm that the policy requires no further underwriting. If this is available it can be a terrific potential solution.
Some firms charge a fee via an endorsement, for these types of term policies and others offer it for free. The general idea with this type of policy is that when you are younger making less money you choose the convertible term and at some later time when you are making more money you will then be able to pay the higher whole life prices. Assuming the cost difference between the regular term and convertible term are minimal there is no real harm if you never end up converting the contract at a later time.
Convertible term policies are a great back door entrance to participating whole life insurance policies.
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How To Choose Between Term Vs Whole Life Insurance
Having a life insurance plan is critical to provide your family peace of mind and a financial safety net. But it can be confusing choosing between the two types, term life insurance and whole life insurance. How do you know which is best for you?
Term life insurance offers protection for your loved ones for a specified period of time and often supplements a permanent plan. Whole life insurance policies do not expire they are intended to provide protection for your entire life. Some types of permanent life insurance policies accumulate cash value.
Each plan type may have pros and cons depending on your needs. Read on to find out which may be right for you.
Dividend Options For Rbc Growth Insurance
One of the main benefits of RBC Growth Insurance is the opportunity to earn dividends in your policy. We set the dividend rate each year based on how invested assets perform, our expenses and mortality experience.
Choose from four options to receive dividends earned in your policy:
Uses your dividends to buy additional life insurance. This additional coverage is added to your original coverage amount, can earn future dividends and has its own cash value that can grow over time. Because the insurance is âpaid-upâ, you wonât pay additional premiums on the added coverage.
Receive your dividends directly, once a year. This option may be taxable.
Applies dividends to your premiums for the following policy year. If your dividends are more than your annual premium, the extra dividends are paid to you directly.
Dividends on Deposit
Automatically deposits dividends into an account that earns interest daily at a rate we set, which can change. You can withdraw funds from the account at any time. Interest earned in the account is taxable.
Note: The dividend rate is not guaranteed and may change annually.
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What Are The Types
There are 2 main types of permanent life insurance: traditional whole life insurance and universal life insurance. With a traditional whole life insurance policy, youll pay a fixed premium for the entire length of your policy, meaning your required premium payments will never go up. But if you need more flexibility, a universal life insurance policy allows you to adjust your monthly premium payments while continuing to accumulate cash value.
Know What Youre Getting Into
Whole life insurance is a product that has some uses, but its not for everybody. The additional benefits offered by whole life can often be found by using your retirement and investment accounts for gains, in combination with a term life insurance policy. Before purchasing any insurance policy, be sure to fully understand the options available, and the various provisions each policy comes with.
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Planning Your Whole Life Policy
A few things to discuss with your financial professional when choosing your whole life policy:
PremiumsMost people like to select the payment schedule that matches with their needs. Think about how you’d like to customize your premiums — you can choose how long you want to pay premiums with a guarantee that they won’t go up.
Mix of death benefit and cash valueConsider what’s important to you. Each of our products has a different balance of cash value accumulation and death benefit protection.
Cash value growthCash value can be as important as the death benefit. Policies can be structured to let you choose how quickly your cash value grows, so you can access it when you need to.
Find What You’re Looking For At Northwestern Mutual
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company and its subsidiaries. Life and disability insurance, annuities, and life insurance with long-term care benefits are issued by The Northwestern Mutual Life Insurance Company, Milwaukee, WI . Long-term care insurance is issued by Northwestern Long Term Care Insurance Company, Milwaukee, WI, a subsidiary of NM. Investment brokerage services are offered through Northwestern Mutual Investment Services, LLC a subsidiary of NM, broker-dealer, registered investment adviser, and member FINRA and SIPC. Investment advisory and trust services are offered through Northwestern Mutual Wealth Management Company , Milwaukee, WI, a subsidiary of NM and a federal savings bank. Products and services referenced are offered and sold only by appropriately appointed and licensed entities and financial advisors and professionals. Not all products and services are available in all states. Not all Northwestern Mutual representatives are advisors. Only those representatives with “Advisor” in their title or who otherwise disclose their status as an advisor of NMWMC are credentialed as NMWMC representatives to provide investment advisory services.
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What Is A Participating Policy
A participating policy is an insurance contract that pays dividends to the policy holder. Dividends are generated from the profits of the insurance company that sold the policy and are typically paid out on an annual basis over the life of the policy. Most policies also include a final or terminal payment that is paid out when the contract matures. Some participating policies may include a guaranteed dividend amount, which is determined at the onset of the policy. A participating policy is also referred to as a “with-profits policy.”
Surrendering Whole Life Insurance
With term life insurance, if you no longer have a need for insurance, you can simply stop paying. Once you stop, the policy lapses, and the insurance company will no longer pay any benefit if you pass away.
With whole life, its not that simple. If you stop paying, the cash value will be used to pay any premiums until the cash value runs out and the policy lapses. But there are alternatives to simply stopping payments. Options vary depending on your plan but may include:
Cash surrender value: You can simply ask for the cash surrender value to be paid to you. This is the cash value minus the surrender charge. This action ends the insurance policy, so you should only do this if you no longer have a need for insurance, or have new insurance in place.
Reduced paid-up life insurance: The company takes what youve already paid in, calculates how large of a death benefit that would permanently provide, and gives you a policy with the lower death benefit amount. This avoids any taxes and leaves you with some life insurance, but it may not be the full amount of coverage you need.
1035 exchange: You can exchange your policy for a different life insurance policy, or for an annuity. This can make sense to avoid taxes on the surrender value, or if you realize another whole life policy has substantially better features and youd prefer to have that policy instead.
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Whole Or Ordinary Life
This is the most common type of permanent insurance policy. It offers a death benefit along with a savings account. If you pick this type of life insurance policy, you are agreeing to pay a certain amount in premiums on a regular basis for a specific death benefit. The savings element would grow based on dividends the company pays to you.
Whole Life Insurance Vs Term Life Insurance
When discussing whole life insurance, one of the most common discussions is about term vs. whole life insurance pros and cons. While both policies involve premiums resulting in a death benefit, there is no accumulation of cash value with term life insurance. A term life insurance policy only covers someone for a period of time, and there is only a death benefit if they die during this coverage. Term insurance policies can be cheaper, short-term.
Whole life insurance tends to be more expensive than term initially, but it also creates an accumulation of wealth that can be collateralized or borrowed. This process can help build a financial legacy as well as provide a death benefit, and over time whole life insurance is less expensive than term insurance. When it comes to term vs. whole life insurance pros and cons, choosing which is right for you depends on your circumstances and financial goals.
|Get a working knowledge of how each type of life insurance policy works. After reading this 10-page booklet you’ll know more about life insurance than most insurance agents.|
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The Simple Alternative To Non Participating Whole Life Insurance:
It would be simple to just read this article here with no further “commentary.” However, that is not often the way we write about insurance on this site. Non participating may be the best type and form of insurance for some. However its hard to see how its the best form of insurance for most.
In my “opinion” non participating whole life insurance is best offered to clients that truly want whole life insurance forever and do not seem to be able to save their money in other financial accounts. Or for those that do not qualify for term life insurance.
For most others its hard to see why non participating policies beat a Buy Term and Invest the Rest concept. A simple thirty year term policy can cost as little as 1/6 of a non par policy in certain situations. Level Term Life Insurance in combination with Qualified account is a winning combination for most.
What is buy term and invest the rest? Simple it involved buying long term term life insurance policies and putting the residual savings into qualified savings accounts. A qualified savings account are accounts such as 401Ks and Roth IRAs, among numerous others.
Giving Money To A Charity Or Non
If you want to help your favorite causes, you can use your insurance policy in several ways. Charitable giving can also provide income tax benefits now, while youre alive. A charitable donation may entitle you to an income tax deduction often beneficial in cases when youve had a high earning year. In addition, you can leave the money accumulated in the account to the non-profit after youre gone. Note that tax laws change so it makes sense to consult with a tax advisor.
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Whole Life Insurance As A Retirement Income Source
Whole life insurance can be an extremely difficult product to understand for whatever reason. Weve encountered plenty of licensed agents who couldnt wrap their heads around what one can accomplish with this product .
Life insurance used for this purpose takes on two forms, one of which is way more desirablein my eyes at leastthan the other.
To help the newcomers, Im not a big fan of option one, though sadly this is where a majority of agents focus their attention.
Whole Life Insurance & The Financial Strength Rating:
A financial strength rating is an expert opinion provided by a rating agency of an insurer’s ability to meet and pay claims. When shopping for any type of insurance it is advised to focus on the higher rated carriers. With permanent forms of insurance, such as dividend paying participating whole life insurance policies it is imperative that you work with the highest rated carriers.
In general, assuming your underwriting criteria, typically there is no reason to consider a whole life dividend paying account with a AM Best Financial Strength Rating of less than A. This would include purchasing a policy through only the following AM Best FSR letter grades: A, A+, and A++.
A well versed financial strength rating may be able to assist you in ascertaining the financial worthiness of a given insurer and their ability to pay out dividends for the rest of your life.
“Checking the Financial Strength Rating of a Par Insurer is of Paramount Importance.”
A couple of other best practices with regards to this are to check the financial strength rating history for ten plus years and to check the rating with another rating agency as well. Fitch Ratings, S& P, and Moodys are the other three rating agencies along with insurance specialist AM Best that provide these ratings. Lastly I see no benefit to relying solely on the agent or the insurer for this information. Attempt to check FSRs yourself independently online.
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Icipating Life Insurance Dividend Taxability:
Taxability refers to whether something can be taxed. As in, are dividends typically taxed by federal income tax? The best answer to this question is to ask your tax planner this question about your specific situation. However in general, dividends from participating whole life policies are considered a return of premium and often not taxed. However, blanket statements like this can be wrong. There are taxes other than federal income tax. There are situations where multiple parties are involved. There are situations where life insurance policies become deemed a Modified Endowment Contract.
Icipating Life Insurance Carriers:
Who offers Participating Life Insurance policies? Generally most of the Mutual Insurers that offer Whole Life Policies will offer them. A partial list of Mutual Insures are below:
Savings Bank Life of MA
Western and Southern
Are there more? Sure there are, however these are the largest and more than likely most well known. Not all of the insurers shown sell life insurance policies in all US States.
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What Is Participating Whole Life Insurance
Participating whole life insurance is a type of permanent life insurance. It provides you with guaranteed lifetime coverage as long as you pay the policy premiums. Premiums stay the same throughout the premium paying period, so that even as you age or experience health issues, your costs to maintain the policy will not increase.
Beyond its insurance protection, a whole life policy has a tax-advantaged investment component that can help you build a larger estate than you could in a taxable account. The cash value that accumulates in your policy grows free of annual taxation.
Participating whole life insurance allows the policy owner to participate in the insurance companys profits. Each year, the company assesses its profit with the participating investment funds actual claims and expenses. These profits are then redistributed to you, the policy holder.
Although these payments are not guaranteed, most companies have rarely skipped a year of distribution.
These dividends can be taken in cash, left to accumulate or, most commonly, used to purchase additional paid-up insurance.
The Pros And Cons Of Whole Life Insurance
Here’s an overview of the benefits of whole life insurance as used in a variety of financial situations:
|A benefit of all permanent life insurance policies, so long as premiums are paid|
|No additional exams||If your health changes in the future, youll remain covered and arent required to take additional health assessments|
|Option to surrender||If your financial situation changes, you can surrender the policy and receive its cash value back from the insurer|
Similarly, there are multiple downsides to whole life insurance and, depending on your goals of coverage, these can often outweigh the benefits:
|Complex product||Whole life insurance is a complex product with many features and potential benefits, but these can be challenging to take full advantage of without a professional|
|High premiums||The cost of whole life insurance is significantly higher than term, and means it may not be a good choice unless you take advantage of all the potential benefits|
|Growth rate and fees||While the policys cash value is guaranteed to grow at a certain rate, this can be lower than other investment vehicles and you need to determine what fees are applied|
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