Whole Life Insurance, What Are You Investing In?
If you’re familiar with us you know we have extensive experience with Participating Whole Life Insurance policies for use in advanced strategies like Infinite Banking, or the Immediate Financing Arrangement.
A key benefit of these types of strategies is your ability to grow your wealth in a safe and secure manner.
Now how do you grow your wealth by purchasing life Insurance?
Often times when people think of life insurance, they think of it as an expense or another bill.
However with participating whole life insurance your premiums go into a fund called a participating account that is managed by the insurance company.
The money from this account is invested, usually quite conservatively, and as a result the cash value, or the amount of premium you pay into your policy grows with a dividend.
In this blog we’ll be discussing what sorts of things the participating accounts are invested in, why these investments tend to be more conservative in nature, and how the dividends that are paid to policyholders are determined.
What is the money in these policies being invested in?
Participating accounts from insurance companies in Canada typically invest in a diversified range of assets, including fixed-income securities, equities, and alternative investments.
The precise mix of assets can vary depending on the investment objectives and risk tolerance of the account.
Fixed-income securities, such as government bonds and corporate bonds, provide stable income streams and are less volatile than equities, making them an attractive investment for participating accounts.
Equities, on the other hand, offer the potential for higher returns over the long term, but are also subject to greater volatility and risk.
Many participating accounts also invest in alternative assets, such as real estate, infrastructure, and private equity, which can provide a diversified source of income and may offer lower volatility than traditional equity investments.
For example, one of the companies we work with, Canada Life has an extensive Real Estate Portfolio worth approximately $4.8 billion across 81 properties.
They invest in both Commercial real estate like office buildings, industrial complexes and more, as well as residential properties like rental apartments.
Their real estate investments are primarily located in Canada but may also include select international properties.
This is a fairly common practice across all the big life insurance companies in Canada.
In fact, we’re located in Vancouver, so if you walk around downtown, you’ll notice many buildings named after various Insurance Companies such as Canada Life, Manulife, or Sun Life.
Odds are, some of these properties were bought using funds from that companies participating account.
Why do insurance companies invest conservatively?
Overall, participating accounts offer policyholders access to a professionally managed investment portfolio that aims to deliver sustainable returns over the long term while managing risk effectively.
Life Insurance companies have been able to consistently reach this aim and continue to pay dividends to policyholders by investing conservatively.
Not only that, but they do this because Life insurance policies are typically long-term contracts that require insurers to pay out benefits to policyholders or their beneficiaries at some point in the future.
To meet these obligations, insurers need to invest their premiums in assets that can generate stable and predictable returns over the long term while minimizing the risk of losses.
Investing conservatively can help insurers achieve these objectives by focusing on assets that offer low volatility and high liquidity.
Using the example above about Canada Life, insurers may invest in real estate because it can provide long-term income streams and may have lower volatility than traditional equities.
In addition, Insurers are required by law to maintain minimum capital and surplus levels to ensure that they can meet their obligations to policyholders.
How do insurance companies calculate dividends?
They calculate dividends based on several factors, including the investment performance of the Participating Account, the expenses associated with managing the account, and the mortality experience of the policyholders.
The investment performance of the Participating Account is a key factor, If the account generates positive investment returns, which it often does given how conservatively it is invested, a portion of those returns will be allocated to policyholders in the form of dividends.
Historically over the last 100 years plus, the major Canadian Insurance Companies have consistently paid dividends to policy holders.
Some of the larger companies like Canada Life and Manulife have been consistently paying dividends for over 150years.
That’s longer than Canada has even been around!
As you can see the money you put into your participating whole life policy in the form of premiums is rather safely and securely invested in order to generated consistent and sustainable returns over the long term.
Right now in Canada you can expect a dividend rate of 5-6% depending on the company you work with.
If you want a more in depth version of how we calculate dividends, we actually have a full video on it here.
Next Steps:
If you are a Canadian business owner, incorporated professional or investor looking to structure participating whole life insurance for maximum wealth protection, leverage, tax savings and estate planning, please schedule a Discovery meeting and see if we can be a good fit to work together.
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