What is participating life insurance?
Participating life insurance is a type of permanent life insurance, meaning it covers you for your lifetime. Your premium payments are pooled into a separate “participating” account with other policyowners and together you share in the account’s earnings.
With participating life insurance:
- You have lifetime protection for your loved ones or your business.
- Your premiums stay the same for the life of your policy unless you choose to increase your payments.
- Your policy’s cash value is guaranteed to grow tax-free while inside your policy (and within government limits).
- Your beneficiaries will receive the payment tax free when you die.
- You can build wealth through cash value that’s guaranteed to grow and the potential to earn dividends.
- You have flexible options for how you access cash value.
How does participating life insurance work?
Along with being protected by the coverage itself, you participate in the account’s results and share in its earnings along with other policyholders.
What are dividends?
Dividends are a share of the participating account’s earnings that are paid to each policyholder.
The insurance company uses the pooled premiums to pay claims and cover expenses. They invest the rest in long-term assets such as bonds, mortgages, real estate and equities.
Any of these activities will affect what is available for dividends. That’s one of the main reasons dividends are not guaranteed.
Ways to use cash value and dividends
You have several options. You can:
- Withdraw money.
- Lower your future premiums.
- Pay for more coverage.
- Take out or repay policy loans.
- Offer cash value as collateral toward an outside third-party loan.
Each option has trade-offs, including interest costs and possible impacts on the payout you leave behind.
What’s the difference between participating life insurance and other life insurance?
Permanent life insurance
Universal life insurance also covers you for your lifetime. It’s flexible and has an investment component as well, and you can access your money through withdrawals or loans. It does not provide dividends.
Other forms of permanent life insurance, including participating, are also sometimes known as “whole life insurance.”
Term life insurance
Term life insurance protects you for a defined term (from 5 to 50 years with a Canada Life policy). You might get it to meet a specific need during a certain period in your life. That’s one of the reasons it’s usually less expensive.
What tax advantages does participating life insurance offer?
You pay no tax on your cash value’s growth as long as your money stays in the policy (and satisfies government limits). When you die, the beneficiaries you choose will normally also receive the payout directly, tax-free.
Who should consider participating life insurance?
Participating life insurance may be right for you if:
- You’re planning for the long term.
- Your income after meeting basic needs leaves room for higher monthly payments.
- You’re wanting to leave a financial legacy for your children, grandchildren or other loved ones.
- You own a business and want to plan for its succession.
- You’re seeking growth that helps you transfer wealth while minimizing risk and taxes.
Participating life insurance can give you more stable returns than investments held outside an insurance policy, even when the market drops.
The bottom line
Participating life insurance combines lifetime protection for your loved ones with the potential to grow your wealth tax-free.
It costs more than other types of life insurance but includes valuable guarantees you won’t find with other products.