Participating whole-life policies offer attractive returns

The Montreal Gazette, John Archer, April 2012

If I were to present you with an investment opportunity that has historically produced higher returns and lower risk than the TSX composite index, five-year GICs, Government of Canada five- to 10-year bonds and the Dex universe bond index, and I said "jump," would you ask "how high?" Probably. However, the access to this investment comes with one important condition: You must be insurable.

Welcome to the world of participating whole life insurance.

Canada Life Participating Account graph

Participating whole life insurance, commonly known as "par whole life" in the industry, is a form of life insurance where the premiums are based on a policy that is never intended to end (unlike term life insurance that may terminate at age 75 or thereabouts, depending on the type of policy). In other words, the policy is designed to last for the insured's whole life.

To encourage a lifetime commitment to paying the premiums, insurance companies created participation whole life insurance so that policyholders could participate in the policies' investment returns and profits on the expenses and mortality costs. In the case of one insurance company, Canada Life, the country's first domestic life insurance company, it has been continuously paying its participating whole life policy holders a "dividend" on their policies since 1848, which is the year following the company's founding. That is a beacon of financial stability and reliability if there ever was one!

Not only this, the rate of Canada Life's dividend payout has averaged 9.7 per cent vs. that of the S&P/TSX composite total return index of 9.1 per cent over the 30-year period running from 1981-2010. And this has been done with a standard deviation rate (a measure of volatility and risk) of only 1.6 per cent (indicating very low volatility) vs. that of the TSX of 16.7 per cent over the same period. Some of the more creative advisers have positioned par whole life as a portion of their clients' fixed-income portfolios due to the superior and consistent investment returns relative to other fixedincome investments (mind you, the returns compare pretty favourably to equity returns as well). Currently, Canada Life's par whole life dividend rate is running at 6.96 per cent. Most other par life companies offer similar dividend rate scales at the moment and must be approved annually by the respective insurance company's board of directors.

Rarely is life insurance purchased simply for the sake of potentially long-term investment returns, as it is normally secured to either create or preserve an estate. This is the same for participating whole life, as there must be an insurable need to apply for the policy (family protection, estate planning, funding buy/sell agreements for partnerships, key-man insurance, holding company estate transfers, etc.) and approval for the policy is subject to evidence of good health (usually involving a full or partial medical exam and relevant related tests at the insurance company's expense). This insurance piece, of course, has a related expense in the form of the life insurance cost, but the ability to benefit from cash values and/or additional paid-up insurance benefits from the policy dividends has lessened the pain of the cash outlay for par whole life policyholders. Naturally, due to the typically level insurance premiums (vs. those of term life policies that often rise dramatically as you age) par whole life is more expensive than term life policies in the earlier years of the policy but often less expensive in the later years.

In the 1980s, with the heady returns offered by the equity markets, insurance companies created a variation of par whole life called universal life. In the case of universal life, the "investment portion" of the insurance premium, which is the amount deposited in the policy above the cost of the pure insurance, was deposited into separate accounts that would see their investment returns tied to a selection of various index-related funds or term deposits.

If the investment fund did well, so did the universal life policy and these surplus returns would accumulate on a tax-exempt basis, subject to certain limitations.

Par whole life also pays tax exempt "dividends" but the investment management of the surplus premiums is run by the life companies' own portfolio managers who allocate funds toward a portfolio composed of government and corporate bonds, residential and commercial mortgages, private lending, real estate, equities and short-term investments as well as the par whole life policy loans (individuals borrowing against the cash values of their par life policies). History has proven that the investment funds of universal life policies have struggled in recent years due to higher management expense ratios (MERs) and poor market performance, while the par whole life returns have been very consistent. Hence, the renewed interest in this life insurance vehicle. Who knows? It may well prove to be the best longterm "investment" you have ever made. At the very least, your estate will be happy!

This article appeared in The Montreal Gazette in April 2012. It is reprinted with permission.

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