Participating and Non-Participating Whole Life Insurance

Participating and non-participating whole life insurance are both permanent life insurance. Both give you a death benefit the insurer guarantees and, in most designs, cash values guaranteed year by year. The difference is what can sit above those guarantees. A participating policy shares in the results of the insurer's participating account and may receive a policy dividend, which is not guaranteed. A non-participating policy receives none, and it usually costs less for the same guaranteed death benefit.

Decision in one minute. Compare the guaranteed base death benefit first. To compare price, hold that benefit and the payment period constant; to compare what a fixed budget buys, run a separate same-premium test. Then check year-by-year access to cash and whether you need lifelong coverage. The label alone cannot tell you which quote is better for your circumstances.

On this page: What the terms mean · Is the dividend guaranteed? · Why participating costs more · Dividend options and tax · Borrowing · The two quote tests · Who each suits

Non-participating does not always mean "fixed and nothing more". Some non-participating contracts give you the guaranteed values alone; others add a bonus the insurer declares, which can buy paid-up additions and is not guaranteed in amount. That makes three designs to compare:

Every "usually" in that table is there because Canadian products differ; the contract in front of you settles each row, and who each version suits sets out which rows matter most for you.

What do participating and non-participating actually mean?

A participating policy entitles you to share in the results of a separate account the insurer keeps for participating policies. For federally incorporated life insurers, section 456 of the Insurance Companies Act requires those accounts to be kept separately from the accounts for other policies (Insurance Companies Act, sections 450 to 470). Participating premiums are credited to that account, its share of investment results and expenses is allocated to it, and dividends are paid from it.

A non-participating policy has no share in that account and never receives a policy dividend. Some give you only what the contract guarantees; some add a bonus the insurer declares. Federal regulations define an adjustable policy as a non-participating life policy in which the insurer may, at its sole discretion, change the premium or cost of insurance, the amount of insurance or the surrender value. A policy is not adjustable where those amounts are stated in the policy or can be worked out from its terms (Policyholders Disclosure Regulations, as quoted in OSFI Guideline E-16). So ask whether a bonus rate is set by a formula you could check yourself, or at the insurer's discretion.

The guarantees in all of these are contractual obligations of the issuing insurer. They depend on its solvency and are not backed by any government, and the Canada Deposit Insurance Corporation insures eligible deposits, such as savings deposits, GICs and other term deposits; an insurance policy is not among them (CDIC, what's covered). If a member insurer fails, Assuris protects whole life policyholders for the higher of $1,000,000 or 90% of the death benefit, and the higher of $100,000 or 90% of the cash value, calculated after any policy loans (Assuris, whole life). Every life and health insurer authorized to sell insurance in Canada must be an Assuris member, but fraternal benefit societies may choose whether to join; if yours is one, check the member list on the Assuris site. A non-participating guarantee is not weaker than a participating one: it is the same kind of promise.

It is not always the same size of promise. For the same premium, the guaranteed cash values of two products can differ a great deal, and some designs leave part of the total death benefit unguaranteed. Compare the guaranteed columns of two illustrations, year by year, and ask which part of each death benefit is guaranteed.

How is a participating dividend decided, and who controls it?

Three things move a dividend: the investment results of the participating account; claims experience, meaning whether insured people died earlier or later than pricing assumed; and expenses, what the insurer actually spent against what it priced. A dividend reflects the experience of a block of policies. The policy is an insurance contract: the insurer invests the participating account, but you own no units of its assets.

The law puts structure around that process. The share of investment income or losses credited to the participating account must follow a set method. The company's actuary must find it, in writing, fair and equitable to participating policyholders. The directors must approve it, and the Superintendent must not have disallowed it (section 457). Sections 458 to 460 govern the allocation of expenses, including taxes, the filing of allocation methods with the Superintendent, and the actuary's annual fairness review. At a company with shareholders, section 461 allows only a limited part of the account's distributed profits to go to shareholders. The account is an accounting and allocation arrangement inside the insurer, not your personal deposit.

Under section 464, the directors may declare a dividend to participating policyholders under the company's dividend policy, after the company's actuary reports to them in writing on its fairness. The word is "may": the Act does not oblige a declaration, and subsection 464(3) restricts one in the circumstances it sets out, which concern the company's financial position. Section 165 also has the actuary report on fairness whenever the dividend policy is set or amended. OSFI's guideline describes policyholders' reasonable expectations as arising partly from marketing materials and point-of-sale illustrations. A projected dividend scale is not a payout anyone can enforce; the discretion is real but not unlimited, and you can ask the insurer for its dividend policy.

These federal rules and OSFI's guideline apply to life insurers incorporated under federal law. An insurer incorporated under a province's law answers to that province's statute, such as Quebec's Insurers Act, so ask such an insurer which rules govern its participating account and how it reports on it.

A participating policy is not a share, and a policy dividend is not a shareholder dividend. Still, the Act gives something. Under subsection 153(1), a person who holds participating policies issued by a federally incorporated company may attend a meeting of policyholders, or of shareholders and policyholders. There, that person has one vote, subject to the Act's conditions (Insurance Companies Act, sections 147 to 154). Some participating policies issued before June 1, 1992 may carry more or less than one vote, as their terms or the company's by-laws provide (subsection 153(2)). At a mutual insurer, which has no shareholders, voting and director-election rights depend on its governing statute and by-laws, and a vote never entitles a policyholder to a particular dividend. The full mechanism is on what a policy dividend actually is.

An insurer may use documented smoothing when setting dividends. Its participating-account disclosure says whether it does, what factors it uses and how often it reviews the scale; neither smoothing nor a past scale promises a timetable for future dividends. OSFI's guideline also asks insurers to disclose the account's target and actual asset mix; ask for the current figures.

Is the dividend guaranteed, and what does the scale rate mean?

No, the dividend is not guaranteed. A long record of paying a dividend every year says something about how a company has been run, but a record of paying something is not a record of paying the same amount. The AMF warns that dividends can be reduced, or be nil, and any scale can be lowered again.

Insurers also publish a dividend scale interest rate. It is one input to the dividend calculation, not the rate of growth of your cash surrender value or your personal return: your premium also pays for the cost of insurance, expenses, taxes and putting the policy in force. To see what your own premiums produce, ask for year-specific guaranteed and illustrated cash value internal rates of return, calculated using the premiums in your quote, at years such as 10, 20 and 30; the illustrated ones are not guaranteed.

An illustration showing decades of growing value is arithmetic from one assumption, the current scale held for thirty or forty years, not a forecast. What is contractual is the schedule of guaranteed cash values and the guaranteed death benefit, which do not move when the scale moves.

Illustrative example. Assume an illustration shows dividends of $1,500 a year for ten years, all used to buy paid-up additions: $15,000 of dividends is applied to additions. If the scale is reduced and the dividends turn out one third lower, $1,000 a year, $10,000 is applied instead. How much extra death benefit and cash value each amount buys cannot be worked out without the insurer's illustration. The original policy's guaranteed base schedule does not change when the dividend scale changes; what changes is the amount of additions bought and everything built on them. The figures are assumptions for the arithmetic, not any insurer's illustration.

When a scale falls, future additions are smaller, projected values fall below earlier illustrations, and a policy designed to carry its own premium from a given year may take longer to get there. The guaranteed column does not move; that is what it is for.

What does a non-participating policy offer instead?

The three columns of the opening table compare contract designs, not legal categories. The fixed-schedule design gives you one column: a guaranteed death benefit, guaranteed cash values and a level premium. If its illustration shows only guaranteed values, those do not depend on future bonuses, but a loan, a missed payment or a permitted contract change can still alter what you receive. It can also disappoint in other ways. Inflation erodes a fixed death benefit. Stopping premiums ends or reduces the coverage. And the promise depends on the insurer, with Assuris protection within the limits above.

The bonus design adds something the insurer declares. Where a contract offers one, the bonus is credited as the contract sets out and may buy paid-up additions, raising the death benefit and cash value. It is not a policy dividend and does not come from a participating account. Do not assume a bonus is guaranteed or that it can never be zero, and do not assume either way whether a bonus already credited can be taken back. The bonus clause answers all three, and how often the rate can change. "Bonus" is not, by itself, a classification: the Insurance Companies Act speaks of a "dividend, bonus or other benefit" on participating policies (subsection 464(1)), and some participating contracts use the word. Check the participation clause and the terms of the particular payment; OSFI's guideline treats a contract that states it is participating as participating, even where its dividends are zero, fixed or minimal.

A bonus does not by itself make a policy adjustable (see the definition above). Ask the insurer which amounts it may change, under what stated terms, and what it has changed in the past.

Whichever design you hold, check a few things each year. Are the premiums paid? Does the beneficiary designation still reflect your wishes? What is the balance of any policy loan, and what contractual values does your statement show? For a bonus design, what bonus was actually credited?

Why does participating usually cost more?

The Autorité des marchés financiers describes participating whole life as usually more expensive than non-participating (AMF). Dividends arise from differences between actual experience (investment, mortality, expenses, lapses) and the assumptions used in pricing (OSFI Guideline E-16). Participation gives access to possible dividends, not a guaranteed recovery of the price difference, and that only matched insurer quotes show the premiums and guaranteed values of the two designs side by side.

So the higher premium does not, by itself, buy a larger guarantee; whether one quote guarantees more than another shows only in the guaranteed columns of matched illustrations. What it buys is a share in the results of the account. The extra premium is certain and what it produces is not. That is not a reason to refuse it, but it is the reason to see the comparison in figures first.

A face amount alone does not make two quotes comparable; only matched quotes show the real difference (Test 1 further down).

What the extra premium can produce is real. A declared dividend applied to paid-up additions buys fully paid coverage inside the policy, raising the death benefit and cash value, and those additions can earn dividends of their own. Over decades that compounding pulls the illustrated column away from the guaranteed one, and it works in reverse when the scale falls. The product itself is described on how a participating contract works and what it costs.

What are the dividend options, and how are they taxed?

A declared dividend has to go somewhere, and the choice is yours within what the contract allows. The usual options are these:

• buy paid-up additions, which increase the coverage and the cash value;
• take the dividend in cash;
• leave it on deposit with the insurer, where it earns interest;
• use it to reduce the premium;
• buy one-year term insurance.

A dividend's tax treatment depends on the transaction your policy specifies, not simply on whether money stays with the insurer. Ask the insurer whether an amount used for paid-up additions is immediately applied to a premium under the policy, what proceeds and adjusted cost basis it reports, and whether any amount is taxable under section 148. A dividend taken in cash is treated under section 148 of the Income Tax Act as an amount received from the policy: it reduces the adjusted cost basis, and any part above the basis can be taxable, based on the insurer's figures at the time; the AMF warns that you may have to pay income tax on the cash option. A non-participating policy has no dividend options; any bonus is applied as its contract says.

A policy dividend left on deposit is not sheltered from the policy-dividend rules merely because it stays with the insurer. Under paragraph 148(2)(a) of the Income Tax Act, the dividend generally produces deemed proceeds, except to the extent it is immediately applied, as the policy provides, to a premium or a policy loan repayment. Proceeds can reduce the policy's adjusted cost basis; an income inclusion depends on the insurer's figures immediately before the transaction. Interest credited on the deposit may be taxable even if you receive no T5; when a T5 is issued, insurer-paid interest is generally reported in box 13 (CRA, T5 guide). Ask the insurer for its dividend, adjusted cost basis and interest reporting figures, and have an accountant assess your case.

The choice can usually be changed later. Check which option applies by default in your contract, because a default you never chose still shapes the policy. Each option is explained on the dividend options and what each one does.

Borrowing against either policy: who lends, and who receives the interest?

Both kinds of whole life usually let you use the cash value during your life, through two different transactions with different lenders.

A policy loan is an advance from the insurer, secured by the cash value. The contract says whether the loan rate is fixed, set by a formula, or set by the insurer from time to time; the insurer receives the interest and usually adds unpaid interest to the loan. An unpaid balance reduces the death benefit and surrender value, and if the loan and interest reach the cash value, the policy can lapse. For tax, a policy loan is a disposition under section 148(9) of the Income Tax Act, and the part above the adjusted cost basis is included in your income (section 148(1)); any taxable gain depends on the Act's definition of proceeds for that loan and the insurer's adjusted cost basis calculation immediately before it. If you later repay a loan that was taxed, paragraph 60(s) can allow a deduction, limited to the amount previously included in your income.

Your adjusted cost basis is not simply the premiums you have paid; the Act's definition adjusts it for, among other things, the cost of the insurance itself and earlier loans and dividends (section 148(9), "adjusted cost basis"). So do not calculate tax by subtracting total premiums from the cheque received: ask the insurer for its proceeds and adjusted cost basis figures for the particular loan before borrowing, have an accountant assess them, and ask whether an automatic premium loan is treated differently for tax.

A collateral loan comes from a financial institution or another lender, on its own approval and terms, with the policy assigned to it as security, and that lender receives the interest. The assignment is not a disposition: paragraph (f) of the definition in section 148(9) excludes an assignment made to secure a debt other than a policy loan. In Quebec, if a married or civil union spouse is the beneficiary, the designation is irrevocable unless the policy says otherwise (Civil Code of Québec, article 2449), and that spouse's written consent may be needed before an assignment; confirm with a notary.

Ask the lender and the insurer how an outstanding debt is dealt with on death, surrender or lapse, and what, if anything, would remain payable to beneficiaries; the signed assignment and loan agreement determine the lender's rights, including when it can demand repayment. Interest on either loan is not deductible just because a policy secures it: that depends on the use of the borrowed money, a question for your accountant. A later surrender or other dealing with the policy needs its own tax analysis; a death benefit paid under an exempt policy is not a disposition.

With a participating policy, ask whether an outstanding loan changes your dividends, since OSFI's guideline asks insurers to disclose whether a policyholder's own actions affect them; with a bonus design, ask the same about the bonus.

Illustrative example. A $30,000 policy loan left unpaid for five years at an assumed 6% compounding once a year grows to about $40,150, and the whole amount is deducted from what your family receives if you die with it outstanding. The rate is an assumption for the arithmetic, not any insurer's rate; your contract states how your rate is set.

A loan never makes the cash value "your own money" in the sense of an account. The named policyowner controls the contractual rights, subject to the policy, any assignment and applicable law; the participating account's assets belong to the insurer, and the cash surrender value is an amount the insurer owes under the contract if the policy is surrendered. If the money then goes to a relative, a family advance creates a second relationship:

1. The policyowner borrows from the insurer (a policy loan) or from a lender holding the policy as security (a collateral loan), and owes that lender under its terms.
2. The policyowner advances the money to the relative under a separate arrangement; the relative owes the policyowner, not the insurer.
3. If the relative pays late or never repays, the policyowner's debt, with its interest, is still owing.

Before making that second advance, identify the legal policyowner, the person insured, the beneficiary, the amount, whether interest is charged, the payment dates, the records to be kept and what happens on default or death. These are not terms a whole life contract supplies. Have the documents and tax treatment reviewed by a lawyer or, in Quebec, a notary, and by an accountant, including whether interest the relative pays is taxable income to you and whether an interest-free or low-interest loan to a spouse or other relative raises attribution questions.

The same arrangement is worked through on private family capital. How loans work year by year is on policy loans.

What should you ask the insurer to show you?

Run two comparisons, and keep them apart. Test 1, same guaranteed coverage: the same person insured, underwriting class, guaranteed base death benefit, premium payment period and riders; it shows what each design costs for the same guaranteed coverage. Test 2, same budget: the same person, class, payment period and riders, at the same annual premium; it shows how much guaranteed death benefit and cash value each design buys. Never quote a result from one test as a result from the other. Every figure below comes from the insurer's illustration for you, and a crossover between the designs may never occur in the years shown.

Test 1 worksheet: same guaranteed base death benefit (fill it in from the insurers' illustrations)

Test 2 worksheet: same annual premium (the payment period, scale date, loan and missed-premium rows are as in Test 1)

On death, the insurer pays the amount of insurance, not that amount plus the cash surrender value, and to receive the cash surrender value you cancel the coverage. There is often none in the first years, sometimes only part of it is guaranteed, and, the AMF says, the method and table used to calculate it must be included in the policy; ask to see that table (AMF, accessing the cash surrender value).

Cash value is not a refund available without consequences. Surrender normally ends the coverage; a policy loan leaves a debt and interest that can reduce what is payable at death or surrender. Ask for the amount you could receive after any loan and interest, not just the headline cash surrender value, and separately for the amount you are permitted to borrow, which may be less.

For each illustrated year, record cumulative premiums, guaranteed and illustrated cash surrender value, any borrowing, the net amount on surrender, the guaranteed death benefit and the death benefit net of borrowing. Ask whether surrender could produce a taxable policy gain; that needs the insurer's adjusted cost basis figures and an accountant.

You can send the request in writing: "For the same person insured, please prepare two comparisons of a participating and a non-participating policy, one with the same guaranteed base death benefit and one with the same annual premium, each with the same payment period and riders, at the current dividend or bonus scale and at a lower one. Show guaranteed and illustrated values at years 1, 3, 5, 10 and 20, state the scale date, the loan terms, the options if a premium is missed and any assumption you could not match, and leave a cell blank rather than estimate it."

Then ask these questions, and keep the answers in writing:

1. Which parts of this policy are guaranteed, and which are not?
2. Is this contract participating, non-participating with a bonus, or adjustable?
3. What is your dividend policy, or your bonus clause, and where is it published?
4. How has your dividend scale or bonus rate moved over the past ten years?
5. Does an outstanding policy loan change my dividends or bonus?
6. Does the guaranteed net surrender value exceed cumulative premiums at any year within my intended holding period? If not, write "not within the period shown". What would a surrender end, and what tax could it trigger?
7. If I stop paying premiums, which options apply: an automatic premium loan, reduced paid-up coverage, or lapse? An automatic premium loan is a policy loan: you pay interest on it, and it can leave the cash surrender value too low to keep paying premiums (AMF).

Compare with term 100 and the same payment period

The AMF tells buyers to compare participating insurance with term 100 insurance in cost, amount of insurance and cash surrender value. Term 100 often has little or no cash surrender value, so its quote shows roughly what lifelong coverage alone costs; check the one you are offered. The payment period changes the comparison as well: a policy paid over 10 years, over 20 years or to age 65 has higher premiums than one paid for life, and its values build differently. Ask for every quote over the same payment period, or treat each period as a separate test.

Are guaranteed issue and simplified issue policies participating?

Guaranteed issue and simplified issue describe underwriting routes; they do not establish whether a particular contract participates. Check that contract's participation clause and its early-death benefit. Guaranteed issue generally involves no health questions; simplified issue generally uses health questions without a medical examination. Coverage amounts are often small and premiums high for the coverage, because the insurer is accepting health it does not know.

They are often bought for final expenses when health has made an underwritten policy unavailable or unaffordable. Some limit the benefit for a death in the first years. Check the coverage limit, the cash values and the benefit in each early year; do not assume it equals premiums plus interest. The AMF notes that someone who believes they are in good health may be better off applying for underwritten whole life, which usually offers higher coverage and is not necessarily more expensive.

What can go wrong with each?

The drawbacks of a participating contract deserve full strength. It usually costs more for the same guaranteed death benefit, every year, whether or not the dividends ever produce anything. A household that cannot carry that premium through an ordinary decade has bought a commitment, not a benefit.

The amount above the guarantee depends on a scale no one guarantees. No board is obliged to declare a dividend in any year, and no illustration binds anyone. A plan that needs today's scale to last thirty years has an unfunded assumption inside it.

Early cash value usually sits below the premiums paid for years, because early premiums pay for the cost of insurance and of issuing the policy; leaving early returns less than you paid, sometimes much less. The reason is set out on why early cash value is lower than premiums paid.

A non-participating policy has its own risks. Its early surrender values are also low, and some designs have none at first. A fixed death benefit loses buying power to inflation, a bonus can be lowered, and an adjustable policy can be changed by the insurer. Compare the guaranteed surrender values at years 1, 5 and 10 on both illustrations before deciding which risk you prefer.

Before any comparison: is permanent insurance the right question?

Having money to spare is a budget, not a reason. A surplus of $20,000 a year does not tell you whether you need permanent insurance at all. Before any illustration, settle these:

• Is there a need for coverage that lasts for life, or only for a period?
• Can you be insured, and at what underwriting class?
• How long can the money stay in the policy without being needed?
• Do you have an emergency reserve outside the policy?
• Is there high-interest debt still to clear?
• Would the premium survive a bad year, not only a good one?
• Is access to cash during your life a real goal, or a nice extra?

A decision route for an insurance conversation

The AMF suggests checking whether a less expensive type of insurance combined with TFSA, RRSP, RESP or pension contributions would serve you better. These meet different needs; this practice, licensed for insurance and not securities, recommends no specific investment.

Term insurance covers a temporary need at a far lower premium, as explained on term insurance.

Who each version suits, and who should buy neither

A participating policy suits a household with a real and permanent need for coverage, a horizon measured in decades, and the patience to live with a figure it does not control, read in each annual statement. The Autorité des marchés financiers puts it plainly: participating insurance "is generally intended for an affluent clientele" (AMF). In our view, that means a surplus that would survive a poor decade.

A non-participating policy with guaranteed values only suits a buyer who wants a set amount payable at death, usually at a lower premium, with one column to read: someone who prefers a smaller certain outcome to a larger uncertain one, or for whom the price difference decides whether permanent coverage is affordable at all.

A non-participating policy with a bonus sits between the two. It may appeal to someone who wants contractual guarantees plus possible additions under that insurer's bonus terms. Its price relative to a participating quote must be shown by quotes, not assumed.

Neither suits a temporary need, a household still carrying high-rate debt, or anyone who may need the money back within a few years. The AMF advises assessing your coverage needs and considering other ways of meeting them before buying participating insurance; here, that means comparing the need, the premium commitment and each contract's guaranteed and illustrated values. Questions about registered plans or securities belong with a professional authorized to advise on them.

Both are insurance contracts, not investments. Judged only as a way to grow money, either one will usually disappoint. Judged by what it is built for, permanent coverage with guaranteed values, it can be the right contract for the right person.

Where The Infinite Banking Concept® fits

The approach described by Nelson Nash depends on accessible value growing inside a contract over decades. Practitioners use participating policies, because dividends applied to paid-up additions can compound inside the policy. Some non-participating contracts can also grow above their guarantees through an insurer-declared bonus, so the mechanism has to be confirmed in the specific contract, not assumed from the label.

The Infinite Banking Concept® is a registered trademark of Infinite Banking Concepts, LLC. Neither this practice nor its author is affiliated with, sponsored by or endorsed by that company or the Nelson Nash Institute. Neither this practice nor any policy is a bank, and a policy is not a deposit.

A method that relies on value building at a certain pace relies on dividends no one has promised, so their discretionary nature matters more here than in a plain coverage purchase. The arguments against the approach, including the ones that are right, are set out in objections and risks.

What this comparison comes down to

The non-participating policy is usually the cheaper and simpler of the two, and for a buyer who wants a guaranteed amount at death and little else, it can be the better fit. The participating policy usually costs more and may do more, and the word "may" carries much of that sentence. The way to put numbers on it is the two matched tests above, read guaranteed column first.

Everything here is written by someone paid by commission from an insurer when a policy is issued, as stated on the author page and at the foot of every page. The practice places participating policies more often than non-participating ones, which is one more reason to ask for both illustrations and compare them yourself.

Official sources and licence checks

Each rule described above can be read at its source, and each licence can be checked in a public register:

• Insurance Companies Act, sections 456 to 464, section 464 and section 153
• OSFI Guideline E-16
• AMF: participating and non-participating whole life insurance
• AMF: accessing the cash surrender value
• Income Tax Act, section 148
• Assuris: whole life protection
• CDIC: what's covered
• AMF register of firms and individuals authorized to practise, Quebec
• Insurance Council of British Columbia: licensee directory
• In Ontario, the Financial Services Regulatory Authority of Ontario publishes a public licence check on its own website.

A register shows whether a person may act in your province and for which classes of insurance; the insurer's contract and illustration remain the documents that settle your policy.