Although it is the most basic form of permanent insurance, whole life is an attractive choice for clients who have a need for lifetime insurance protection and want a guaranteed policy and a premium that doesn’t change. Compared with policies with more flexible options, it could be considered “boring,” but boring may be just what a policyholder wants if it provides the desired comfort level.

“Whole life insurance has become increasingly popular among segments of the population whose needs are specific and who don’t have the time to follow the ups and downs of policies with variable options,” says Geoff Burman, president of Burlington, Ont.-based Broker Advantage Inc.

Burman is referring to permanent insurance products such as universal life, which has a high degree of flexibility in increasing or decreasing the face value; changing the amount, frequency, timing and duration of deposits; and choosing the most appropriate investment option. These policies, he says, are best suited to those with complex needs and sophisticated knowledge.

“The average Canadian does not have the time nor skill to monitor investments in an insurance policy,” he says. “Whole life, on the other hand, is not complicated and delivers what it promises.”

Susan St. Amand, president of Ottawa-based Sirius Financial Services, agrees but with one caveat. “What’s stated in the policy is what you get,” she says. “The face value and the cash value are guaranteed and the premiums do not change. There is no downside or upside risk.” However, she argues, whole life is not flexible enough to accommodate changes in the life of the policyholder: “Typically, the insurance needs of an individual may change over time, but whole life locks a person in for life.”

David Barber, insurance advisor and former president of the Independent Financial Brokers of Canada, agrees that a client’s insurance needs may change over time but suggests that whole life insurance can fill a need at a particular stage in an individual’s life. For example, at a younger age, when a significant amount of coverage is required but there is no estate to protect, cheaper term insurance may be the best option.

At a later stage, when an individual has built up assets, whole life can come into the picture. “It is a great way for settling an estate,” he says. “It is simple, has no administration fees and the cost is fixed.” This is not to say that other insurance, such as UL, cannot be used in a similar manner, but whole life is distinguished by its simplicity.

Whole life insurance, also referred to as “straight life” and “ordinary life,” provides protection for the life of an individual. There are two types of policies — participating and non-participating.

> Participating. The owner of a participating policy receives a dividend when the insurance company pays out less in death benefits than projected, has positive investment returns and keeps expenses under control. These dividends are not guaranteed and are calculated as the excess of the actual return on the policy reserve over the guaranteed rate, which is simply the difference between the total anticipated costs and what the insurance company paid in death benefits and operating expenses for a given period. Higher than forecast investment returns can also be reflected in the dividend.

Philip Kung, president of Markham-based RGI Financial Services Inc. , notes that the dividend paid by a whole life policy is different from that paid to investors by a corporation. “Dividends paid by a corporation represent a share of profit, while dividends from a whole life policy are a refund of premiums,” he says.“Because these dividends are a refund of premiums, they are not taxable, as is the case for dividends from a corporation.”

The refund of premiums can significantly offset the total premiums paid over the life of the policy, making it a valuable option.

Depending on the option chosen by the policyholder, the dividends can be paid in cash, used to reduce future premiums, left to accumulate in an interest-bearing investment account or used to acquire additional paid-up whole life insurance or one-year term insurance. If the dividend is used to acquire additional insurance, further evidence of insurability is not required.

> Non-participating. A non-participating policy does not pay dividends. The death benefit, cash values and premiums are guaranteed for the life of the insurance contract.
“Demutualization has resulted in a decrease in the issue of participating policies,” says Burman. “As a result, we’re seeing the issuance of more non-participating policies.”
The reduction in participating policies results from the fact the shareholder-owned corporations that were formed as a result of demutualization assume the risk of issuing policies.

@page_break@> Premiums. Premiums for whole life policies are higher than for term policies and generally include the cost of insurance, a portion that is allocated to the cash value and a small portion for expenses. However, whole life premiums are fixed and are guaranteed not to increase.

“Higher fixed premiums are also based on the fact that the cost of insurance increases with age, making premiums too expensive for older individuals,” says Kung. “So, by using a fixed premium that is equally spread over the life of the policy owner, it is easier to maintain the policy.”

Although whole life insurance remains in force for life, the policy owner has the option to pay premiums for life or to choose a limited payment period — say, 10 or 20 years or up to age 65. Premiums will be higher if a shorter payment period is chosen but, once premiums are paid for the specified period, coverage is available for life. Barber says this can be an effective choice for relatively young individuals to take care of their life insurance needs without having to think about the cost of insurance as they get older.

The portion of the premium that is allocated to the cash surrender value (CSV) is not necessarily a forgone amount. If a policy owner decides to cancel a policy, he or she may be entitled to receive the CSV, and this is clearly stated in the policy contract, less any surrender charge. The surrender charge usually declines progressively over time, reaching zero after about 15 years, and is based on a percentage of the minimum premiums paid. The longer the policy is in force, the smaller the surrender charge becomes and the greater the CSV. During the early years of a policy, the surrender charge will be larger than the CSV.

Closely tied to the CSV is a non-forfeiture benefit — a benefit that cannot be removed. If a policyholder chooses to stop paying premiums, he or she may receive the CSV in cash, take an automatic premium loan based on the value of the CSV to maintain the policy, purchase reduced paid-up insurance using the CSV or acquire extended term insurance.

The automatic premium loan ensures that a policy will not lapse. It is taken from the cash reserves to keep the policy in force until the entire amount is used up. Depending on how long the policy has been in force, reduced paid-up insurance can be purchased based on a percentage of the face value of the policy, using the cash reserves in the policy to ensure that a death benefit is paid. Single-premium term insurance can also be acquired that will insure the original face amount of the policy for the time period the available funds will cover.

It is important to note that if the non-forfeiture option is exercised based on the premise that the policyholder no longer needs insurance, the CSV is usually paid to the policyholder without surrender charges — but this does not apply if the client simply decides to cancel a policy.

A policyholder can also borrow about 90% of the policy’s CSV. The loan, at the
prevailing interest rate, will either reduce the CSV upon surrender or reduce the death benefit by the outstanding amount of the loan. A whole life policy can also be used as collateral for a loan.

Unlike term insurance, which provides coverage up to a specified age, whole life covers the individual for life. It also offers guaranteed benefits and is less complex than other types of permanent insurance. IE