While permanent insurance is known for providing a death benefit to shield and protect loved ones, family, and business interests, it is also a unique alternative asset offering a living benefit by accumulating cash value over time.
One of the mechanisms for cash value growth is using dividends to purchase paid-up additions known as PUAs. While dividends are not guaranteed, Equitable Life of Canada has paid policyholders dividends for 88 years since they launched their whole life insurance in 1935. Another company, Canada Life, has paid dividends for 175 years.
Equitable Life is a mutual life insurance company. As a mutual life insurance company, it is not beholden to shareholder pressures like other publicly traded companies are. Instead, policyholders are shareholders in the company and are eligible to participate in the earnings of the participating account through dividend payments. In Canada, paid-up additions are a feature mutual life insurance companies such as Equitable Life of Canada offer to policyholders.
Policyholders can use dividends to purchase paid-up additions which are smaller amounts of insurance added and layered over time to the base policy. The paid-up aspect implies that premium payments no longer need to be applied as they are on a base policy.
Each paid-up addition also features a death benefit, cash value and can earn potential dividends. These dividends paid from paid-up additions may then be used to purchase more paid-up additions.
Layering paid-up additions fast-tracks and increases the value of the death benefit and cash value of the base par whole life insurance policy through uninterrupted, compounded growth. The cash value of paid-up additional insurance also grows on a tax-advantaged basis. You can equate it to putting a par whole insurance policy on legal steroids!
Of paramount importance to note, however, is leveraging paid-up additions as a dividend option to structure a par whole life insurance policy for maximum growth potential from the onset. At MacDev Financial, paid-up additions are the backbone and mechanism used in all our Bank On Whole Life™ concepts to structure and design par whole life policies for maximum growth and wealth building.
Using dividends to purchase PUAs provides long-term advantages and a more robust financial foundation for policyholders and their loved ones by creating equity through a lifetime to meet financing needs, supplement income in retirement, and for legacy planning and estate transfer so you can protect your assets and pass along your wealth to your children and grandchildren.
Should you decide not to choose a dividend option to purchase paid-up additional insurance, options on how to use your dividends are available. However, at MacDev Financial, we always recommend using dividend funds to purchase PUAs.
Paid in cash
Dividends are paid directly as cash payments. Dividends paid as cash are deemed interest income and may be subject to taxation. If this is the case, a reporting tax slip may be issued.
Dividends get allocated to pay down part or all the base premium on a par whole life insurance policy. This option is called a premium offset. If your dividend exceeds the amount owing on the base premium, the excess gets paid out to you in cash. Again, any dividends paid out in cash are interest income and subject to taxation. If dividend funds are insufficient to cover the base premium, the cash value is used to make up the difference, so the policy does not lapse.
Dividends are deposited with the mutual life insurance company in a deposit account similar to a savings account held outside your policy. The dividends earn a competitive interest rate which gets reviewed at least annually. You can withdraw funds at any time. However, dividend funds and the interest earned on dividends may be subject to taxation. If this is the case, a tax slip gets issued by the mutual life insurance company on the policy anniversary date.
Pay off policy loan or loan interest
Though not a normal practice, you can use dividends to offset loan interest or pay off a policy loan. The dividend is paid in cash to you and used to make a loan or loan interest payment through your online banking. However, the drawback again, dividends paid out in cash are deemed interest income and subject to taxation.
With this option, your policy begins a combination of basic permanent coverage (whole life insurance policy), which is what your premium payments cover, and a yearly renewable one-year term insurance coverage, thus the name enhancement. Your dividends pay for the one-year renewable term insurance policy, with any excess used to purchase paid-up additional insurance. Any paid-up additional insurance automatically replaces the part of the one-year term insurance. When all the one-year term insurance gets replaced with paid-up additional insurance, the dividend conversion point is reached, and any future dividend payments get used to keep purchasing paid-up additional insurance to increase the death benefit on the base whole life insurance policy. This option is ideal if your objective is to use your par whole life insurance policy for estate transfer purposes and you want a larger death benefit out of the gate rather than accelerating the cash value growth.
For more on maximizing par whole life insurance dividends, watch the video below.
Disclaimer: The material provided in this newsletter is for informational and/or educational purposes only. The information, opinions and/or views expressed in this newsletter are those of the authors and not necessarily those of the distributor. All financial endeavours should be vetted through a financial professional: life insurance broker, financial planner, accountant, lawyer, and/or other professional, as the reader, sees fit. MacDev Financial Group Corp., SET Financial Solutions Inc., including 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. The MacDev tagline, “Financial Control For Life” and “Bank On Whole Life” are trademarks of the MacDev Financial Group Corp. Click Legal for further information