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Whole Life Insurance


Prior to 1980s the majority of insurance companies in Canada where mutual life insurance companies. By 2010 it was the opposite, the majority of insurance companies in Canada were stock insurance companies. When insurance companies demutialized and went public their participating policy owners received shares in the insurance company.

Whole life insurance policies pay a dividend. The track record of dividend payments by Canadian insurance companies are impressive compared to guaranteed investments such as GIC’s or Government Bonds. The risk is dividend payments in whole life insurance policies are not guaranteed. If there is an epidemic and the insurance company has to pay out a large number of death claims dividends can be suspended. Fortunately this is rare and has not happened in decades. In a whole life insurance policy the insurance company manages all the investments for the policy owner versus a universal life insurance policies that require the policy owner to manage their own investments. The disadvantage is whole life insurance policies have higher premiums than universal life insurance policies.

Whole life insurance policies are long term commitments. People make long term commitments all the time, they take out mortgages, get married, have kids, start a business or buy an existing business. You can purchase a whole life insurance policy to suite your budget and personal financial needs. Participating whole life insurance is one of the few gems left for Canadian to invest in and is often overlooked. The cash values and dividends in whole life insurance policies are attractive investment and savings vehicles, they can be used for a multitude of different purposes during one’s lifetime. Cash values in a whole life insurance policy is an asset that can be accessed and used at any time.

Stone-Hedge Financial Group Inc. uses four types of classification for whole life insurance policies. The insurance industry uses two classifications, participation and non-participating whole life insurance policies. Stone-Hedge Financial Group Inc. takes classifications a step further. We do not recommend or sell whole life insurance policies from foreign insurance companies operating in Canada. Canadian insurance companies are just as competitive, you can call us nationalist “Buy Canadian”. The reason is a foreign insurance company takes their profits from Canada and transfers them back to their home country. The Canadian subsidiary is left with enough capital to meet the capital requirements required by provincial regulators. Canadian insurers work the opposite, all their profits from foreign subsidiaries come back to Canada. Our clients want the security and peace of mind of knowing where their money is, they want their money in Canada. If you have further interest on this issue you can read our commentary published in the Insurance and Investment Journal Canadian advisors face AIG crisis fallout.

For the purposes of classification we will not include foreign insurance companies. In Canada mutual life insurance companies are owned by their participating policy holders versus public companies that trade on the stock exchange that are owned by their shareholders. Life insurance companies are accountable to their owners. In a mutual life insurance company it is their participation life insurance policy holders, in a public life insurance company it is their stockholders. We prefer mutual life insurance companies over publicly traded life insurance companies.

Participating and non-participation whole life insurance policies are offered by both mutual and stock life insurance companies. We prefer participating whole life insurance policies in well run mutual life insurance companies. A good analogy would be non-participating whole life insurance policies are like preferred shares and participation whole life insurance policies are like common shares. Common shares are more attractive investments in well run companies.

Whole Life Insurance Policies can be classified in the following order from the most attractive to the least attractive:

    1. Participating Whole Life Insurance – Mutual Life Insurance Company

    2. Participating Whole Life Insurance – Stock Life Insurance Company

    3. Non-Participating Whole Life Insurance-Mutual Life Insurance Company

    4. Non-Participating Whole Life Insurance-Stock Life Insurance Company

Benefits of dealing with a Mutual Company:

    1. Participating whole life insurance policyholders are eligible to participate in the distributable earnings of the participating account in the form of dividends.

    2. Dividends are undiluted by shareholder transfers.

    3. Participating policyholders elect the board of directors and have a right to vote on various other Company issues. The insurance company acts in their interests and answer only to them.

    4. A mutual structure allows the insurance company to offer continuity, stability and to grow the company for the long-term benefits of their policyholders.

    5. Insurance companies are not driven by shareholder pressures for quarterly results. As many publicly traded insurance companies consolidate and restructure, a mutual company only focuses on its policyholders.

    6. The insurance company's commitment to a mutual status means that their customers know who they are doing business with.  You cannot take over a mutual insurance company the same way a publicly traded company can be taken over.

Dividend Options in Whole Life Insurance Policies:

    1. Paid Up Additions – Dividends are used to purchase additional permanent life insurance. This increasing the face value and cash value of the policy. This is the most attractive option in a whole life insurance policy. The compounding effect of paid up additions can add up to a substantial sum when started at an early age. Dividends used to buy paid up additions are not subject to tax and grow on a tax-deferred basis. The adjusted cost base (ACB) of the policy is reduced by the amount of the dividend paid but is then immediately increased by the same amount. The dividend is deposited back to the policy in the form of a premium to purchase paid up additions. There is no tax reporting until a taxable disposition of the policy occurs.

    2. Premium Offset - The ability to use dividends earned to pay premiums. At some point in the future the projected future dividends plus the non-guaranteed cash value within the policy is sufficient to pay all future premiums. This is called the premium offset point.

    3. Premium Reduction - The annual dividend is applied to the premium. Unlike a premium offset where there is sufficient dividends earned and the policy has accumulated a sufficient non-guaranteed cash value to pay the entire premium. With a premium reduction the dividend is used to pay all or part of the premium. The policyholder can elect to have a premium reduction at any time and use the dividend to offset the premium. There is no tax reporting until the aggregate dividend paid exceeds the adjusted cost base (ACB) of the policy. Once the adjusted cost base (ACB) in the policy becomes less than the dividend paid, all future dividends are taxable regardless if they are paid out in cash or used to reduce the policy premium.

    4. Enhanced Protection-Dividends - Dividends are used to purchase a term life insurance policy. This option is used during the early years of the policy when there is a need for additional insurance. Dividends are used to purchase a combination of term life insurance and paid up additions. The portion used to buy paid up additions is subtracted from and then added to the adjusted cost base (ACB) of the policy. There is no tax reporting until a taxable disposition of the policy occurs.

    5. On Deposit-Dividends - Dividends are left on deposit with the insurance company to collect a competitive rate of interest. Future dividends are taxed once the dividends exceed the adjusted cost base (ACB) of the policy. Any interest earned on the accumulated dividends is reported to the policyholder annually.

    6. Paid in Cash-Dividends - Dividends are paid out directly to the policyholder. This option triggers taxation on the dividends paid out. The income is reported as taxable dividend income.

How to Access Cash:

    1. Policy Loan - This is the preferred option to access cash. The insurance company gives you a loan and uses the whole life insurance policy as collateral. The loan is automatically paid off when the death benefit is paid. The amount owing plus any accrued interest is subtracted from the death benefit.

    2. Policy Surrender - This is the least attractive way to access cash, once the policy is surrenders you lose your coverage.

    3. Dividends Paid on Deposit Withdrawals - If you have elected to have the dividends paid on deposit, cash withdrawals are made from a separate account outside the policy. All or a portion of the dividends paid to into this account can be withdrawn at any time.

    4. Surrender of Paid up Additions - If you have elected to have dividends in your policy purchase paid up additions you can also access cash. You surrender your paid up additions, the total cash value of the policy is reduced by the withdrawal. The income reported is based (pro rata) on the cash value of the paid up additions surrenders in relation to the policy as a whole (including the paid up additions). Depending on the adjusted cost base of the paid up additions in the policy a portion of the withdrawal is taxable.

Coverage Options:

    1. Single Life

    2. Joint First to Die

    3. Joint Last to Die

    4. Choice of Level Pay or 10, 15, 20 Year Pay Guaranteed Premium Options

Riders & Coverage Options:

    1. Disability Waiver of Premium

    2. Accidental Death & Dismemberment

    3. Guaranteed Insurability Option

    4. Children’s Protection Rider

    5. 10 & 20 year renewable and convertible Term Life Insurance


    1. Guaranteed Level or Limited Pay Premium

    2. Guaranteed Cash Value

    3. Guaranteed Death Benefit

    4. Tax Sheltered Growth

    5. Accelerated Deposit Option (offered by some Insurance Companies)

    6. Eligibility to Receive Dividends

    7. Excess to a Cash Reserve

    8. Tax Exempt Status

    9. Creditor Protection

    10. Professional Investment Management

    11. Ownership (with a Mutual Life Insurance Company)

Participating whole life insurance policies have not disappeared, they are still being offered by insurance companies in Canada. It is still one of the most attractive options available to Canadians for their insurance and investment needs.

Whole life insurance policies are ideal for children including new born babies. The premiums are very low and the financial benefits are tremendous. Whole life insurance policies can also be used to pay for your children's education. Give your children a head start by saving for them in one of the most lucrative investment and insurance vehicles in Canada.


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The information provided on this web site is intended for general information only. It should not be construed as legal, accounting, tax or specific insurance and investment advice. Clients should consult a professional advisor concerning their situations and any specific insurance and investment matters. While reasonable steps have been taken to ensure that this information was accurate as of the date hereof, Stone-Hedge Financial Group Inc. and its affiliates make no representation or warranty as to the accuracy of this information and assume no responsibility for reliance upon it.

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