Understanding The Importance & Leveraging Whole Life Insurance
Learn what whole life insurance is about.
Whole life insurance has it existed in Canada for a very, very long time. In fact, it dates all the way back to 1847. One of the companies that’s one of the oldest insurance companies in Canada, Canada life, they’ve in fact paid dividends on what’s referred to as participating dividend paying whole life insurance since 1848. That’s a tremendous history. Now, many of the other main companies that are insurance carriers in Canada offer what’s referred to as participating dividend paying whole life insurance. It’s extremely common and it’s been around for a very, very long time. Now, that type of insurance can be very unique. In fact, one of the most unique aspects of is the fact that is participating. So participating refers to you as an owner, if you own one of those contracts, you participate in the profitability of the insurance company’s money pool when it relates to their participating account. That being said it’s great position to be in because it’s those accounts have been around for so long.
Learn what whole life insurance is about.
They’re so well managed, and they’re looking at meeting the guarantees of their lifelong product, as well as supporting a strong stable dividend payment for their Parson par policy owners for a very extended period of time. That’s how they’re managed. And they’re looking at things in terms of hundred year lifespans. Now, one of the core fundamental components of a whole life insurance contract in Canada, is that by age 100 the cash value must equal the death benefit. Now that’s based on what the initial death benefit is when the policy is set at the very beginning. So if it’s a very small policy, well, all the cash will continue to accumulate to whatever that original death benefit number is, if it’s a larger policy, the same thing will apply, it’ll simply accumulates a little bit quicker because it has to reach that objective that’s a little bit larger.
Whenever your timeline starts, whether its age zero, or age 70, for example, it just means that the timeframe is changed to age 100, and how quickly they need to accumulate the cash inside of that program for the purpose of paying the eventual death claim because it’s a guaranteed contract. Now, there are other types of whole life insurance that you can get. There’s a whole life that’s referred to as non-participating and non-participating whole life insurance policy does not receive any dividends. They do not share in that ownership structure. And they’re not able to participate in any of the profits or extra divisible surplus that is generated by the insurance company. It’s not as common but we do see them from time to time. But often there’s confusion in the marketplace between when we just make a blanket statement or a blanket label on what whole life insurance is.
The reality is whole life can be done a number of different ways. And most carriers carrier carry a version of a whole life contract, that that could meet many of those objectives. Some have a non-participating product, some have a participating product, some have both of those items. Now, you can also have a non-participating product that may have some additional benefits or bonuses added in. Again, that’s a more unique structure. But as part of where these policies can vary based on the carrier and also vary based on the timeframe of when they were originally created. What has been very stable and very consistent in Canada is dividend paying, participating whole life insurance contracts. It’s really one of the staple foundations of many people’s primary financial plans. In fact, prior to the development of the mutual fund industry and the RSP program, etc. Even back in in the First World War and Second World War timeframe, one of the foundational areas where people would save and stockpile capital was when the safety and preservation of a participating dividend paying contract, it was a very standard asset that people would seek to go and get. And so that is still the case today. It’s simply that people are less aware and have a less understanding about how that product works, and how it can benefit them. One of the key advantages to these participating dividend paying whole life insurance contracts is that they’re actually an asset. The asset is in what’s called the cash value or cash surrender value. As that cash value cash surrender value accumulates and builds up over time. And there’s ways to optimize that to make it happen a little bit quicker, depending on the design of the policy that becomes an asset on the book.
The benefits So when you’re filling in your balance sheet, and you look at assets and liabilities, the cash value is an asset in your personal balance sheet as it would be in your business or your corporation. And so in fact, there’s a great article called bolstering the balance sheet written for corporations. It’s very good for CPAs to learn and understand how this asset which is, which kind of falls in the category of more of a fixed income asset is such a powerful asset on the books of a corporation. That’s why many large corporate organizations do have this type of insurance available to them. And so it really is a foundational stable asset class. And because it’s such a stable asset class, it has these robust guarantees that are attached to it. It continues to accumulate every single day that the insured individual regardless of who that insured person is, continues to age so every day that they take air into their lungs and they continue breathing. The insurance company is required to add more cash value into that contract. And as that cash value accumulates, where we see the real tremendous advantage for people who want to incorporate this as a primary asset in their financial life is that you have total access to the control the use of liquidity of that cash value. And what’s very common is that people will seek to either collateralize that cash value asset, very similar to how you can collateralize home equity in a house and then be able to access capital and put it to work in some other location. Whether that’s investing in your business or investing in a in another piece of real estate or some type of an asset that you want to go and get. The key is that the reservoir where you are able to create that access is based on this foundational asset class of the participating dividend paying whole life insurance contract that cash value. Now, every once in a while somebody dies, that’s part of life. That’s one of the those standardized things we have death and taxes Of course, well when that that event does happen, because we know that At Will any outstanding indebtedness, any outstanding policy loans are completely repaid with the tax free death benefit that shows up. And then any remainder, which is usually substantial, is paid tax free to the named beneficiaries that the policy owner chose at that time. What’s other another advantage, of course for business owners is that that tax free windfall of capital can go into the corporation and then it increases the notional account referred to as a capital dividend account, at which point additional shareholders in the corporation would be able to draw out basically a tax free dividend out of the corporation as a representation of that death benefit that was paid on a lost shareholder or key employee.
So it’s a very common practice and something’s been around for a very long time in Canada and in fact in North America, and what we’re finding is that people are starting to reeducate and re understand the fundamental values of a simple A very consistent, stable asset class like this that supports long term secure, consistent growth without the fluctuations of the marketplace such as the stock market, the mutual fund market, etc. It is not hindered by those, those vast fluctuations and changes that those typical markets have, because of the thinking process and the management style of how they look at the lifelong aspect of these policies on the books, the life company. They’re managed in 100 year lifespans, and that’s that longevity thinking in how they’re the insurance company is never in a position where they’re forced to sell items that they have invested in the power pool, because they can choose to wait out markets because they’re looking at these extensive time frames. And so it really puts the insurance company who is managing that pool of money on behalf of all the participating owners. It really puts them in a power position to be able to really control the outcome and be very conservative so that they can support the guarantees of the product and meet a long term stable dividend payout or, or annual payment for the participating owners.
Whole life insurance offers consistent premiums and guaranteed cash value accumulation, while a universal policy provides flexible premiums and death benefits. You can borrow against the cash value of a whole or universal policy.
While term life insurance is a more affordable option than whole life insurance, it’s important to reiterate that term policies are only valid for a limited amount of time. However you might want to consider Whole Life Insurance if you want to ensure that you’re covered for your entire life, and to make sure that your family will have the money needed to cover your funeral and any outstanding financial debts
If you have more questions, feel free to reach out to one of the coaches that’s available at the Ascendant Financial team.
Schedule a call with one of our financial experts to show you how you can benefit from Whole Life Insurance.