The benefits of dividend-paying whole life insurance extend far beyond protecting your loved ones, legacy and estate by providing a death benefit. Dividend-paying whole life insurance actually provides you with living benefits in the form of a cash value and annual dividends. When structured using the Bank On Yourself® strategy, the cash value of your personal whole life policy becomes a supercharged asset that builds equity you can use anytime for anything—funding your child’s post-secondary education, financing business expenses, to also serving as an additional tax-free retirement income stream. The options are endless. When you ‘bank’ on whole life insurance you can also bank on the following benefits.
The cash value asset of a dividend-paying whole life insurance policy can provide you with much-needed cash flow. In fact, it works a lot like a mortgage payment made on a real estate investment. Some of your payment pays the interest and some pay the mortgage, which builds equity over time. This equity becomes an asset you own. Once enough equity has built up, you can take out a loan in the form of a home equity line of credit (HELOC).
The same principle applies to a dividend-paying whole life insurance policy. When making a payment on your policy, a portion goes to premium and a portion goes to paying off your death benefit, building equity in the policy as cash value. You can then obtain a policy loan against the cash value to use for whatever you need. Another option is using the equity in the cash value as collateral to secure a bank loan from a financial institution of your choosing.
While many traditional investments and tax-deferral savings plans such as RRSPs, and RESPs are locked-in, taxable, or penalize you for early withdrawal, causing you to lose any gains, the cash value of a dividend-paying whole life insurance policy doesn’t have such restrictions and is an accessible, ready-source of cash. Although there is a very low minimum loan amount, there are no hurdles to jump over. No withdrawal fees. No credit check to run. It’s your asset! You simply ask your advisor to process a policy loan and the money is yours within a few days to use as you see fit. Also, your policy’s cash value remains uninterrupted because you are leveraging its equity in a loan you essentially payback, not withdrawing money.
Policyholder premiums paid on dividend-paying whole life insurance first cover benefits and life insurance company expenses. The surplus is accumulated into a “participating account” that is invested by the life company. Earnings on this account are impacted by returns on investments, mortality (death benefits paid out), policy loans, lapsed policies, expenses and taxes.
Any profit made on the participating account gets shared with policyholders in the form of annual dividend payments credited to their policies. The most efficient use of dividends is to purchase paid-up additional insurance which boosts the cash value and death benefit amount of the policy exponentially over time. Though dividends are not guaranteed, insurance companies such as Equitable Life of Canada, our preferred insurer of dividend-paying whole life insurance, has remained steadfast in its ability to credit dividends for over 80 years since it first launched participating whole life in 1936. Equitable Life’s current dividend scale has also remained consistent for the past 6 years despite lower interest rates which speak to the company’s ability to effectively manage its participating account on a yearly basis. The Bank On Yourself strategy has also helped to maintain the dividend scale as well.
The death benefit of a dividend-paying whole life insurance is paid out tax-free to the beneficiary under current tax law. Dividend-paying whole life insurance also provides certainty and helps you grow a guaranteed tax-free retirement income through a pre-set annual cash value increase and the possibility of annual dividends. Unlike an RRSP that is taxable income when you withdraw it, you don’t pay tax on withdrawals from the policy when you retire.
Disclaimer: This information is given for informational or educational purposes only. All financial endeavors should be vetted through a financial professional; example, life insurance broker, financial but not limited to its agents, staff, associates and/or partners will not assume any liability for any information printed in this article; indirectly, or assumed.