How Life Insurance Dividends are Calculated
We talk a lot about dividend paying whole life insurance in Canada and how you can leverage it to use it now while you are alive, and to leave a big legacy behind to your beneficiaries.
Today we’re going talk about the dividends that pay into these types of policies - how they are generated, what’s in them, how secure they are, who offers them and more.
The examples we are using are from large Canadian insurance companies and we have linked the websites of these companies below to provide the most accurate numbers for their participating accounts.
Why are dividends important to make leverage strategies work?
These strategies where we build up the cash values inside your policy and then leverage it with the insurance company or a bank benefit huge because of the dividend that generally pays to these types of policies.
The dividend grows the insurance asset which is underpinning your loans or line of credit.
This is great for you and for the bank because the asset you’re using as collateral is growing. The way we set it up both your cash values and your actual insurance amount will grow.
In order to do this strategy right you need to set up the dividend options correctly on day one. It is absolutely crucial that the person you’re working with does this right.
If this is something you are interested in, you should talk to us because this is what we specialize in, and we do this everyday.
What is the Dividend and what is it comprised of?
The dividend you receive when you have one of these types of insurance policies is made up of a few main parts:
Obviously there’s investment returns - when they take your money and invest it in the market or by lending it to large corporations and federal and provincial governments. This is the largest component affecting how much the dividend will be each year.
Mortality - this means if the insurance company actuaries do a good job and accurately estimate their mortality and expenses, there should be some additional yield.
Then money goes out to Expenses, taxes, inflation and there are policy lapses aka people canceling their insurance. All of these things affect the dividend that gets paid out.
These accounts also use a concept called smoothing - their goal with these accounts is stability over the very long term.
What smoothing does is amortize their investment gains and losses over a number of years - which helps maintain stability over time. In simple terms - when they have a huge year they don’t pay out all the profits at once, and when they have a down year, they can top it up so it’s consistent.
What is the Participating Account invested in to generate those returns?
When you are buying one of these policies, what’s your money actually invested in?
This varies a little bit from company to company but the core of the investments are the basically the same at all the insurance companies.
Think about it - Canada is only so big, so when your team is out there trying to invest billions of dollars in a highly regulated way there are only so many options you can look at.
Generally the big Canadian insurance companies are invested in varying amounts of:
Government bonds - this includes federal and provincial, but mostly provincial. They’ve all got their different bond strategies internally but as a consumer it’s way deeper in the weeds than you would every need to know.
If you think about who buys & holds a tremendous amount of bonds in Canada? Well that’s Life Insurance Companies. They are very good at bonds.
All the company’s bond desks are long term professionals with ample knowledge and resources. They have deep bond books all bought and maturing at different terms for the last 100 years.
The insurance companies are all increasingly investing in equities because interest rates are so low and bonds aren’t paying what they used to. They are cautiously moving up the risk curve to generate yield.
They also generally all do some level of private fixed income which means investing into private placements.
More of them are also getting into real estate - generally it’s commercial real estate ownership and management of things like office buildings and shopping malls etc.
They also lend money on commercial real estate through commercial mortgages and financing. You can see the big insurance company banners zap strapped to the fencing around big developments. That’s generally money from their participating accounts.
What’s also good is that these companies generally manage all or most of this in-house. They have 100s of people managing the investments of the PAR fund. They have an equities team, a bond team a real estate team, a lending team of professionals all working full time on this for you.
How long has the dividend for each company been paid?
Let’s take a look at the four companies we most commonly work with:
Sun Life
- Has paid a dividend to it’s participating account owners for over 150 years.
- PAR account is just over $14 billion in assets right now.
- In 2020 the Sun Life participating account paid out $520 million in policy owner dividends
Manulife
- Manulife has been in the game of paying dividends since 1887 so more than 130 years
- Paid out over $280 million in dividends to participating policy owners in 2019
Equitable Life of Canada
- They have been paying dividends for the last 100 years
- Their participating account just recently broke $1 billion and is growing fast
- A good part about the Equitable story is that they are a mutual company which means that the participating account holders are the company owners
Canada Life
- The Canada Life Par fund is the biggest in Canada at over $50 billion since they consolidated Canada Life, London Life and Great West Life recently.
- They’ve distributed dividends every single year since 1848 more than 170 years and longer than Canada has been a country.
Nobody can guarantee that these Canadian insurance companies will continue paying dividends in the future, but you can look at their more than a hundred year track record.
The fact is these types of policies are designed around having a dividend, and it would be a disaster if an insurance company didn’t pay a dividend.
But you can look at the facts and decide for yourself if you think Canadian insurance companies are going to continue to pay dividends.
What's the best company to use?
A lot of people ask us this as the first question - and the answer to this is the same as the answer to a lot of financial questions - “it depends”. What makes one company best for you is not the same as what makes another company best for someone else.
Some companies are better for people in different age bands like kids or parents or grandparents. Some companies are better for business owners who will own the insurance inside their company or holdco. Some have more cash values, some have more death benefit. It really depends on your situation and what you’re trying to do.
What we do is we meet with clients and have a very in-depth discovery process to find out more about your current situation - where you’re at today - and your goals and concerns moving forward - in other words where are you trying to go?
And because we’re dealing with insurance, your health also has an effect on which company we’re going to recommend. Some are more lenient and some are more conservative when it comes to underwriting.
There is no real answer to what is the best company to use. It needs to be chosen according to your needs, not just according to who pays the highest or lowest dividend.
What is the dividend now and how often does it change?
Today in early 2022, the dividend for the companies we work with is between 5.5 - 6.2%
The insurance companies all announce their new dividend scale interest rate once per year and each time the insurance company may or may not change it depending on what happened in the year.
More Info
To learn more about dividend rates, and how they effect leveraged life insurance strategies fill out the contact form below, or visit the links below.
Manulife Participating Account Insights 2020 - https://safepacific.sharepoint.com/:b:/g/TeamSite/ESzLqZgVXFBAkyQA0Ap6BFgB92GgV-7vqIOzAISAnqBIKQ?e=7j3dU6
Manulife Participating Account Annual Report 2020 -https://safepacific.sharepoint.com/:b:/g/TeamSite/Ec2b5tAtNS1PiAIIQySr_fMBQRSnS-Q-K7i3StMfprqODA?e=4oUYG5
Equitable Life Understanding Whole Life Insurance -https://safepacific.sharepoint.com/:b:/g/TeamSite/EVq0D4ZEQ-1Nn6YtoiIGq2YBPfxSBm4ibcA1-6NlO0H0dw?e=4IHbsP
Sun Life Answers About Participating Insurance - https://safepacific.sharepoint.com/:b:/g/TeamSite/EajOfUPXruFNg_dBeLBLeRYBSr9HYF7gbXfdfYk_oshbeQ?e=hUJJ0l
Sun Life Participating Account Overview 2021 - https://safepacific.sharepoint.com/:b:/g/TeamSite/Edr5xn67Dn1BlQIPR79fvNIBsYchKshv_lBJf226dpIINg?e=UzYLte
Sun Life Participating Account Facts & Figures 2021 - https://safepacific.sharepoint.com/:b:/g/TeamSite/EUXOlgT-SXlDo6C-zSKow70B3mTuxSMpV8R2_rQdCtVL7g?e=rldcAb
Contact Us
At Safe Pacific Financial, we specialize in helping Canadian business owners, incorporated professionals, and investors structure life insurance for maximum wealth protection, tax savings, and business growth.
If you would like to discuss whole life insurance or investments, we’re happy to chat and see if we can be a good fit to work with you. Fill out our contact form and we will get back to you within 24 hours on business days.
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