Participating life insurance is a type of permanent life insurance that offers a powerful combination of lifelong guarantees and the potential for growth through dividends. While not widely used and often more expensive upfront than term or universal life insurance, its unique structure makes it a cornerstone of many sophisticated financial, retirement, and estate plans.
This guide will provide a deep dive into how it works, who it’s for, and what you need to know before considering a policy.
What is Participating Life Insurance?
Participating life insurance (“par” insurance) is lifelong coverage, typically whole life insurance, where the policyholder is eligible to participate in the profits of the life insurance company. These profits are distributed in the form of annual (but not guaranteed) dividends.
The largest and most established providers of participating life insurance in Canada include Sun Life, Canada Life, Equitable Life, and Empire Life.
The Key Features of Participating Life Insurance
The mechanics of participating life insurance involve guarantees similar to traditional whole life, along with the possibility of dividends. Here’s an overview of how it works:
- Premium Payments: As with most permanent life insurance, participating policies require regular premium payments to maintain coverage. A portion of each premium is directed to the insurance company’s “participating account.” The remainder covers the cost of insurance and company expenses. Premiums are guaranteed to remain level once the policy is issued.
- Cash Value Accumulation: A portion of the premiums paid is allocated to a cash value account that accumulates on a tax-deferred basis while it stays inside the policy, within federal tax limits.
- Possibility of Dividends: What makes participating life insurance unique is the prospect of earning annual dividends based on the performance of the participating account. While dividends provide an “upside” for policyholders, they are NOT guaranteed.
Dividend Options: The Power of Choice
While dividends are not guaranteed, major Canadian mutual insurers have a long history of consistently paying them. If and when dividends are paid, you have several options:
- Cash: Receive the dividend as a direct cash payment (this is often a taxable event).
- Premium Reduction: Use the dividend to lower your out-of-pocket premium payments.
- Accumulate at Interest: Leave the dividends in a side account with the insurer to earn interest, similar to a savings account.
Paid-Up Additions (PUA) – The most popular and powerful option.
You use the dividend to purchase small, fully paid-up “mini” whole life policies. Each PUA has its own death benefit and cash value, and it is also eligible to earn future dividends. This creates a compounding effect, systematically increasing both your total death benefit and your total cash value over time.
What are the Pros and Cons of Participating Life Insurance?
Like all insurance products, participating life insurance has both advantages and potential limitations to weigh:
| Pros | Cons |
|---|---|
| The base death benefit, cash value, and premiums are guaranteed and will never change. Potential for dividends. When used to buy PUAs, they create a powerful compounding effect on both your death benefit and cash value. Tax-deferred cash value growth within the policy Conservative assets backing contracts | Dividends are not guaranteed and may change in response to interest rates and market performance The cost is substantially higher than term insurance Less payment flexibility and control over investment than universal life insurance Require lifelong premium commitment |
Participating life insurance occupies an intriguing middle ground between very affordable term insurance and adjustable universal life insurance. For many, the trade-off of higher premiums for ironclad guarantees on both coverage and cost can be very appealing.
Who is Participating Life Insurance Best Suited For?
While not right for everyone, par insurance can be an excellent fit for certain individuals and situations:
- Long-term Savers: The tax-deferred cash value growth and potential for dividends can allow participating policies to accumulate substantial savings over decades.
- High-Income Professionals & Business Owners: The policy can be used as collateral for business loans (Corporate Owned Life Insurance) or to fund buy-sell agreements, while the cash value grows in a tax-sheltered environment.
- Parents & Grandparents Planning for the Future: A policy can be used to create a tax-free inheritance or build a pool of capital that can be accessed to help children/grandchildren with a down payment on a home or education costs.
- Individuals Seeking Tax-Advantaged Retirement Savings: For those who have maxed out their RRSP and TFSA, a par policy offers another avenue for tax-deferred growth. The cash value can be accessed via policy loans to supplement retirement income.
- Estate Planners: The guaranteed, tax-free death benefit provides immediate liquidity to cover capital gains taxes, probate fees, and other estate settlement costs, preserving the value of the estate for heirs.
Participating Life Insurance Products in Canada
While not as diverse as universal life contracts, insurers do offer a range of participating life insurance products to choose from. Here is an overview of some of the notable par life policies in Canada:
Sun Life Par Products
- Sun Par Protector II: Strong long-term cash value growth and dividends make this affordable whole life par policy ideal for young families.
- Sun Par Accumulator II: Faster initial cash value build-up compared to the Protector II makes this a fit for business owners and older individuals.
- Sun Par Accelerator: Unique 8-year pay participating policy with rapid cash value accumulation upfront before shifting to dividends and growth in later years.
Empire Life Participating Products
Empire Life offers two main par life products: Optimax Wealth and EstateMax.
Optimax Wealth provides early cash values, cost-effective life insurance protection, and tax-deferred savings accumulation, while EstateMax is designed for estate planning needs with a focus on long-term cash values.
Key features of Empire Life’s participating products:
- Multiple guaranteed premium payment options – 8-Pay, 10-Pay, 20-Pay or Life Pay
- Five dividend options, including cash, reduced premiums, paid-up additions, loan repayment, and a deposit for savings
- Lifetime insurance coverage with guaranteed minimum amounts
- Add-on critical illness and disability riders available
- Dividends and cash value growth over time
- Tax-advantaged savings and income
Empire Life has a long history and a strong reputation for paying dividends to participating policyholders. Their participating products offer guaranteed coverage plus the potential for dividends and growth over time.
Foresters Advantage Plus Participating Whole Life
Foresters Advantage Plus is a flexible par whole life insurance policy offered by Foresters Financial in Canada. It provides lifetime protection along with the opportunity for tax-advantaged cash value growth through annual dividends. Policyowners can choose premium payment periods of 10 years, 20 years, or for the lifetime of the insured. The death benefit, cash values, and premiums are guaranteed for the life of the policy.
Advantage Plus is eligible for annual dividends based on Foresters’ financial performance. Dividends can be taken as cash, used to purchase paid-up additional insurance, left on deposit to earn interest, or used to reduce premiums.
The policy also includes standard features like the Charity Benefit to donate to a charity when the death benefit is paid, the Children’s Insurance Benefit for term coverage on kids, and the Quit Smoking Incentive for discounted premiums. Additional customization is available through optional riders like Waiver of Premium, Accidental Death, and Guaranteed Insurability.
Overall, Foresters Advantage Plus aims to meet long-term protection needs while offering dividends, cash value growth, and flexibility.
Equitable Equimax Participating Whole Life
Equimax is Equitable Life’s flexible participating whole life insurance product that offers both guaranteed values and dividend potential for cash growth over time. It can meet various needs like final expenses, estate planning, and supplemental retirement income.
- Two plans – Equimax Estate Builder and Equimax Wealth Accumulator
- Premium payment periods of 10 years, 20 years, or lifetime
- Guaranteed cash values, premiums, and death benefit
- Eligible for non-guaranteed dividends based on company performance
- Dividends can be taken as cash, used to buy paid-up additions, or to reduce premiums
- Customize with riders like Critical Illness, Waiver of Premium, etc.
- Can be used for estate planning, final expenses, and income supplement
- Tax-advantaged way to build cash value that can be accessed through loans
- Equimax aims to provide lifetime protection plus potential growth through dividends
- From one of Canada’s oldest and most established mutual life insurance companies
There are some similarities across products, like lifetime coverage and dividend potential. However, nuances like premium payment terms, cash value accumulation, and dividend cycles should be reviewed with an advisor when selecting a policy.
How to Buy Participating Life Insurance in Canada
If you determine participating life insurance aligns with your financial plans and needs, here are some tips as you evaluate policies:
- Compare Quotes – Work with an experienced independent broker to shop rates from a wide range of insurers. Even small premium differences can really add up in the long term.
- Look for Discounts – Ask your broker what discounts might be available through employer or association relationships to reduce your costs.
- Review Annually – Conduct annual reviews with your advisor to see if dividends or cash value strategies can optimize the policy as your needs shift.
- Select a Stable Mutual Insurer – Opt for large, financially sound mutual life companies with a long track record of participating policy dividend payments.
- Prioritize Early Purchase – Buying earlier means lower premiums and maximizing the growth and dividend earning horizon.
- Discuss Risks – Review risks related to dividends not being guaranteed and tax implications of loans/withdrawals.
- Customize Design – Work with an advisor to structure the right product, premium term length, face amount, riders, etc., tailored to your goals.
Participating vs Non-Participating vs Universal Life
Participating and non-participating life insurance policies differ in key ways regarding dividends, premium costs, benefits, and ownership.
| Feature | Participating Whole Life | Non-Participating Whole Life | Universal Life |
| Dividends | Eligible for non-guaranteed dividends. | No dividends. | No dividends. |
| Growth Potential | Guaranteed cash value + potential dividend growth. | Guaranteed cash value only. All values are known at issue. | Growth is tied to the investments you choose within the policy. Can be variable. |
| Premiums | Highest, due to the dividend component. | High, but generally lower than participating. | Flexible. You can pay minimums or overfund the policy. |
| Investment Control | None. You rely on the insurer’s professional management. | None. | Full control. You choose from a menu of investment options (GICs, index funds, etc.). |
| Best For | Those wanting guarantees with upside potential and a “hands-off” approach. | Those wanting absolute certainty with no variables. | Those comfortable with managing investments and want maximum flexibility. |
So, is participating life insurance right for you? If you prioritize being able to customize your investments, universal life insurance may be preferable. Those focused solely on guaranteed lifetime protection at the lowest cost may opt for guaranteed level term insurance. But for many Canadians who highly value the stability and safety of whole life insurance and also want the possibility of enhancing their policy’s benefits through dividends, participating life insurance is a strong consideration.
The Bottom Line
In summary, while not the right fit for all, participating life insurance stands out with its assurance of lifetime protection, potential for upside through dividends, and strong long-term savings capacity through tax-advantaged cash value growth.
Canadians focused on both security for loved ones and saving for the future should take time to explore participating life insurance and whether it aligns with their financial planning needs and risk profile. With both lifelong guarantees and upside potential, participating policies truly offer the best of both worlds.
FAQs on Participating Life Insurance in Canada
Where can I buy participating life insurance in Canada?
Major providers offering participating life insurance include Sun Life, Canada Life, Empire Life, Equitable Life, and Foresters Financial. Independent insurance brokers like IDC Insurance Direct Canada can also provide quotes for par policies from multiple insurers.
Why are participating life insurance premiums higher?
Premiums are higher than term insurance because par policies provide permanent lifetime coverage along with guarantees like level premiums, cash value growth, and dividends (dividends not guaranteed). The trade-off is higher premiums for more guarantees.
When should I buy participating life insurance?
It's often best to purchase participating life insurance when young and healthy, as premiums will be lower and you'll benefit from dividends and cash value growth over a longer timeframe. However, par policies can make sense at any age.
Do participating life insurance dividends get taxed?
It depends on how you use them. If you use dividends to within the policy (for example, paid-up additions or premium reduction), the growth is not taxed annually. If you take the dividend as a cash payment, that amount may be considered taxable income.
Can participating policies be purchased for estate planning?
Yes, the lifelong guarantees and potential for dividends can make participating life insurance helpful for estate planning needs like wealth transfer, covering taxes and expenses, and leaving an inheritance.
Is it smart to pay premiums over a shorter term?
Options like 20 Pay or 15 Pay participating life may cost more, but allow stopping premiums sooner while maintaining coverage. This can make sense based on cash flow preferences.
How do I choose the best participating life insurance company?
Look for an established mutual insurer or provider with a long track record of financial strength and paying out dividends on their participating policies. Companies like Sun Life, Canada Life, and Empire Life are examples.
How much does participating life insurance cost in Canada?
There is no single price. Premiums depend on the insurer and your details (age, sex, smoking status, health class, province, coverage amount, dividend option, riders, and whether you pay for 10/20 years or to age 100).
Premiums are significantly higher than term life insurance because you are paying for lifelong coverage and funding the cash value and participating account. They are also generally higher than non-participating whole life policies.
