Whole Life

Whole Life Policies

As the name states, whole life insurance policies are meant to insure someone for their “whole life”. The policy has an initial death benefit, which can grow through the purchase of paid-up additions. The investment account within a whole life policy is a multi-billion dollar, conservatively-managed portfolio. The premiums can be designed to be paid over a specific period of time, either on a guaranteed basis or based on the projected dividend scale of the policy. Whole Life policies have a long history in the Canadian market and are known and trusted for their stability.

Whole Life Investment Account

The investment fund, or Par Fund, within a Whole Life policy is a very conservatively-structured, balanced fund. The fund is invested in assets; such as bonds, mortgages, real estate, alternative fixed-income assets and a small percentage (usually less than 20%) in stocks. The returns are amortized, or smoothed, so as to eliminate volatility. Therefore, Whole Life policies will typically offer a stable rate of return, and are more attractive to the risk-averse investor.

Typical Participating Whole-Life Account
Public Bonds: 35.00
Private Fixed Income: 16.00
Commercial Mortgages : 11.00
Equities: 18.00
Real Estate: 18.00
Cash & Short Term: 2.00

Participating vs. Non-Participating

Whole Life policies are issued as either participating or non-participating. Both typically have the same product features and structure, with some points of differentiation which are explained below.

Participating “par” policies are offered by Sun Life, Great-West Life, Canada Life and London Life. These policies pay an annual dividend, referred to as the “current dividend scale”. The participating nature of the policy is that the dividend scale includes not only the performance of the investment fund, but also the mortality experience of all policies held in the Whole Life block of business. As people have been living longer, companies have not had to pay claims that were originally anticipated, resulting in a “mortality gain” component in the dividend scale.

  • Various Components of the Participating Account
  • Premiums from all policyowners go into the participating account.
  • All investment returns, positive and negative, impact the participating account.
  • Withdrawals from the account include expenses, taxes, policy loans/withdrawals and a portion of death benefits.
  • A portion of participating account earnings may be allocated annually to the policy as dividends – 97.5% of this portion is distributed to participating policyowners.
  • Dividends can be left to accumulate, applied against the required premium or purchase additional coverage within the policy.

Manulife Financial offers a non-par whole life policy. The cost of insurance and policy expenses are guaranteed. The policy earns a “performance credit” as opposed to a policy dividend. Additionally, the performance of the policy is purely based on the investment fund, whereas a par policy includes a gain or loss on the mortality experience of the block of business.

In both par and non-par policies, the gains and losses within the investment fund are amortized over time, which is referred to as "smoothiung". As a result, when the interest rate is falling (such as over the last decade), the dividend scale or performance credit will be declining, meaning the policy rate lags current market rates. The whole life policy is guaranteed not to give a negative rate of return.

Dividends

Whole Life dividends have been declared every year over the last 125+ years by Sun Life, Manulife, Great-West Life, Canada Life and London Life through both of the world wars, the Great Depression and the recent financial crisis of 2008/09.

While in theory the policy owner has options as to what to do with the dividends paid, in nearly all cases the option is to use these dividends to purchase “paid-up additions” (PUA’s) also known as "paid-up insurance". These PUA’s are additional insurance that provide for growth in the policy. They in turn will earn dividends and more PUA’s are purchased into the future.

A rising dividend scale will result in higher cash values and hence a higher death benefit, and may allow for the policy to be placed in premium offset sooner than projected. Conversely, a reduction in the dividend scale will have the opposite effect, resulting in lower cash and death benefit values and possibly a delay in being able to use premium offset.

The smoothing of the performance of the investment fund results in the dividend scale lagging the current investment climate. This means that as interest rate returns on bonds are falling, for example, the dividend scale will decrease over time but well behind the drop in rates. The same is true as rates begin to increase. The smoothing of investment returns also eliminates the volatility of short-term moves in the market.  

  • The dividend scale is set once a year by the insurance company, taking into account a variety of factors.
  • The longer the people who are insured in the pool of whole life policies live (due to increased life expectancy and other factors), this creates a mortality gain, which enhances the dividend scale.
  • Given the size of the large whole life participating funds, the expenses to manage the fund are extremely low.
  • The investment earnings in the fund are the main factor in determining the dividend scale.
  • The returns within the fund are smoothed, meaning gains and losses are amortized over time. This eliminates investment volatility. This is a unique feature within a whole life product.

Whole Life Premiums

A whole life policy can be designed with three premiums options. 

  1. Basic premium only:  
  2. Basic plus Term Option (or Enhancement): The combination of basic and term option premium is done to allow the person to buy a larger amount of coverage because it is a combination of whole life and term that reduces over time. The result is that premiums will have to be paid over a longer period of time.
  3. Basic plus Deposit Option: The additional premium, known as “Additional Deposit Option” (ADO) allows the policy to be either "paid up" sooner or achieves higher policy values. There is a maximum allowable ADO permitted so as to maintain the policy as a tax-exempt policy. 

Whole Life policies have a cash value which is a combination of a guaranteed cash value and excess cash that will depend on the dividend scale. A policy can be illustrated so that a specified number of premiums are paid, for example over 10 or 15 years. After this time, the policy can be placed into “premium offset”, meaning no further premiums are paid by the policy owner, rather future premiums are paid from the policy. PUA’s are surrendered along with policy dividends to pay the future premiums.

Structure of the Policy

Whole Life policies can have two internal insurance cost structures: either a life-pay or a 20-pay (meaning no cost of insurance is charged after 20 years). In comparison, the 20-pay option requires higher premiums in the early years and provides lower early cash values.

It is also possible to design Whole Life policies with either high early cash and death benefit values, or alternatively, high long-term cash and death benefit values. The crossover, as to when high long-term value policy exceed the high early value policy, is around year 20.

  • A higher early value policy will provide for strong balance sheet management, meaning by the policy's 6th or 7th year, the cash value of the policy equals or exceeds the premiums paid. 
  • The high long-term value policy is for those who wish to maximize the long-term values and early cash values are less important.  

Finally, as mentioned in the whole life premium section above, a whole life policy can include some term coverage, known as “term option”. This option allows for reduced premiums. However, it also makes the future performance of the policy more sensitive to changes in the dividend scale and does not achieve growth in the death benefit until the term option amount has been eliminated.