The wealth-building potential of participating life insurance

by Leo Almazora12 Nov 2021

The COVID-19 pandemic has caused untold pain and suffering in Canada and across the world, but it has also come with a few slim, but definite, silver linings. One of those is an increased awareness of risk, whether it's of death or loss of wealth – which has led to a surge in interest and demand for life insurance.

That increased demand fuelled a pickup in sales of life insurance policies, and that wave is continuing into 2021. "According to figures from LIMRA1, life insurance sales in Canada saw an increase of 30% year-over-year during the first half of 2021," said Mathew Smith, Regional Vice‑President of Sales, Individual Insurance, at Desjardins Insurance (pictured).

According to Smith, Desjardins Insurance observed a similar trend, with a considerable increase in their participating life sales among both individuals and business owners. Accounting for roughly half of all individual insurance life insurance sales tracked by LIMRA in recent years, participating life insurance is a popular product, which he attributes to several factors.

"In terms of safeguarding your wealth, there's a lot of security when it comes to participating life insurance," added Smith. "The fact that the cash value in your participating life policy is guaranteed to increase every year provides security and is a considerable source of value to individuals and business owners alike."

Participating life insurance policies offer another wealth-building benefit: beyond the guaranteed increases in cash value, policyowners are also able to get access to equity investments. As Smith explained, because policyowners are sharing in the profit and the risk from participating policies, regulations offer participating insurance certain advantages that give insurance companies the leeway to employ more competitive investment strategies than for non-participating insurance products.

"At Desjardins Insurance, the investment strategy behind our participating insurance products targets close to 50% exposure in non-fixed income, compared to other fully guaranteed insurance products that would usually be backed by a general account with less than 15% in non-fixed income investments," he said.

Given the current environment of low interest rates, the ability to diversify more toward equity investments within a financial product with strong guarantees makes participating life insurance an appealing option. With access to assets that have higher return-yielding potential over the long term, participating life insurance holds considerable appeal for those with greater financial needs to satisfy.

Another significant benefit comes from how life insurance, including participating life insurance, is typically designed to be protected from accrual taxation. As Smith explained, that feature effectively allows money placed in a participating life insurance policy to benefit from tax-preferred treatment akin to what one would find in an RSP or TFSA.

"Our business owner clients with excess cash sitting in their businesses are looking for ways to handle it in a tax-efficient manner," Smith added. "On the personal side, individuals buying participating life insurance policies may have maxed out their RSPs and TFSAs, and are looking for additional opportunities to get savings in a tax-preferred way."

Smith indicated that the bulk of industry sales are in the 45–60 age range, as many Canadians in that group have more needs to protect and the means to protect them. When asked about young adult Canadians who might prefer term life policies over participating insurance, he said term policies are quite popular with younger Canadians due to their greater affordability, but stressed that most insurance carriers allow the conversion of term life to participating life policies.

With a conversion feature, policyowners can protect their insurability by purchasing term life insurance today while they are healthy and exercising their conversion option in the future when affordability may be less of a concern. Smith emphasized that there may be some limitations, like age restrictions, when it comes to exercising a policy's conversion option. That's why it's important for policyowners to understand all the rules before purchasing a term life policy.

"A lot of people, especially young adults, might think of insurance only in terms of protecting income and providing financial security for their family in case the worst happens. There isn't anything necessarily wrong with that," mentioned Smith. "But with the security of cash values guaranteed to increase, access to non-fixed income investments and tax-preferred treatment, there are compelling arguments to consider participating insurance as a financial vehicle for wealth-building."

1According to LIMRA Monthly Individual Life Sales figures. as at November 2021.
*Desjardins Insurance refers to Desjardins Financial Security Life Assurance Company.