Participating Whole Life and Universal Life

Picture the same person asking two insurers for a proposal. The participating proposal shows one premium, a column of values the insurer guarantees and a column that depends on dividends nobody has promised. The universal life proposal shows a range of possible deposits, a list of charges and a menu of crediting options. The first asks you to commit to a payment and leaves most decisions to the insurer. The second leaves the decisions with you, every year, while its charges keep coming out of the account. Neither proposal tells you much until you have read its guaranteed pages.

In short: neither contract is a savings account or a deposit. A policy loan is a debt you owe the insurer, taking money out can be taxable, either contract can end if its terms are not met, and the guarantees in both are backed by the insurer, with Assuris protection within its limits.

One fact belongs up front. This practice mainly places participating contracts, and the author is paid by commission from the insurer when a policy is issued. Keep that in mind as you read the case for each, and check what follows against the contracts themselves.

What is the central difference between the two contracts?

The difference is who makes the decisions and who lives with the result. Participating whole life fixes the base premium and the guaranteed schedule of values and leaves future dividends to the insurer's declaration; universal life lets you choose deposits and crediting options, within limits, while its charges continue whether or not you deposit. A participating contract bundles everything into one premium: the coverage, a guaranteed schedule of values, and the chance of a dividend, priced together and never separated afterwards. A universal life contract unbundles them: your deposit goes into an account, the insurer deducts a cost of insurance and other charges, and what remains is credited according to options you choose.

Everything else follows from that one structural choice: what is guaranteed, how the charges appear, how much room you have with the premium, and how each contract behaves in a poor decade. The short version fits in three rows, with non-participating whole life in the last column for orientation.

Non-participating whole life has a fixed premium and guaranteed values like a participating policy, but pays no dividends, so nothing above the guaranteed column is expected, and some designs build little or no cash value at all; the contract states which. How it differs from the participating kind is set out on participating and non-participating. This comparison stays with the two contracts most often set side by side.

How do the two contracts compare side by side?

The table records how each contract is built. It does not say which one you should own; that depends on you, and the later sections deal with it. It describes common contract structures: not every insurer offers every option, so confirm each one in the contract you are shown.

Two benefits in this table are easy to confuse. The death benefit is paid when the insured person dies. The cash surrender value is what you receive if you end the contract while alive. They are different benefits: you cannot receive the cash surrender value and keep the coverage. Some universal life death benefit options add the account value to the face amount at death, which is still one payment, made at death.

How is each built, and where does the value come from?

A participating contract carries a guaranteed schedule of values written into it at issue, with dividends added to it when the insurer declares them. A universal life contract is a container: an account you fund, charges deducted from it, and crediting options you select. The first builds value by contract; the second builds it by result.

Inside a participating contract, the premium is set at issue on your age, sex, smoking status, health and underwriting class, and it does not rise as you get older. The guaranteed cash value for each policy year is printed in the policy. Premiums go into a participating account of the insurer. For a life insurer incorporated under the federal Insurance Companies Act, section 456 requires the accounts for participating policies to be kept separately from those for its other policies, with further rules on what may be allocated or transferred. Depending on its history, an insurer may keep more than one participating account, and your policy belongs to the one the insurer identifies (OSFI, Guideline E-16, section 2, read 24 September 2026). That is accounting and governance: the account is not a pool of assets you own. An insurer incorporated under provincial law answers to that province's legislation instead.

Investment results on the participating account, claims and expenses together decide what the insurer has available to distribute. The asset mix varies by insurer, and each publishes its dividend policy. Each year the board declares a dividend scale, and the dividend it produces is never guaranteed. Many insurers also publish a dividend scale interest rate. It is one of the assumptions behind the scale, not the return on your policy, and OSFI's guideline lists it separately from the participating account's investment rate of return (section 4). OSFI expects the insurers it supervises to report both, for the current year and as 5, 10 and 20 year averages, in their annual financial statements, and to post their dividend policy, or a summary, on their public website. Read both before comparing insurers. Nor can it be set beside a universal life crediting rate, which is applied to an account after the charges are taken. The mechanics, and the discretion behind the dividend, are set out on participating life insurance and in how the dividend scale works.

What you do with a dividend is your choice under the contract. The dividend options usually include taking it in cash, reducing the premium, leaving it on deposit, or buying paid-up additions: small amounts of fully paid permanent insurance with their own cash value. Once an addition is bought, it and its cash value are guaranteed under the terms of your contract. The next dividend is not. That is how a participating policy's guaranteed values can grow beyond the original schedule over time.

Inside a universal life contract, you deposit within the limits the contract and tax law allow. The insurer deducts a cost of insurance and administration charges, and credits the rest according to the options you chose. Those options usually range from a daily interest account to guaranteed interest for a set term, to accounts whose credited amount is linked to a market index or to funds the insurer offers. The account value follows that linked performance, less charges; you do not own the index or the underlying fund. Some insurers also offer managed options whose credited rate is smoothed. Check which options your contract offers, what each charges, and what each guarantees.

Who carries the investment and mortality risk?

Neither contract puts all the risk on one party. In a participating contract the insurer carries the risk of meeting the guaranteed values. Results above or below what the dividend scale assumes are passed to participating policyholders as a group, through changes to the scale. In universal life you carry the result of the crediting options you choose, except where the contract guarantees a rate or a charge.

On the participating side, much of an illustrated value above the guaranteed column depends on dividends. A weak decade for the participating account reaches you as a lower dividend scale and lower values above the guarantee, not as a loss of the guarantee itself. Mortality works the same way: the insurer is bound by the guaranteed values whatever its claims experience, while better or worse experience moves the scale. That is why the guaranteed column deserves your attention first.

On the universal life side, a market-linked option passes the linked result, less charges, straight into the account, so a poor decade shows up as quickly as a strong one. A guaranteed interest option moves that risk back to the insurer for its term. Mortality risk depends on the cost of insurance terms: where the rates are guaranteed, the insurer carries it; where the contract lets the insurer adjust them within a maximum, you carry part of it.

Behind either promise stands the insurer's own solvency. The guarantees are the insurer's obligations, not a government's, and CDIC does not cover insurance policies. If an Assuris member insurer fails, Assuris protects your death benefit up to $1,000,000 or 90%, whichever is higher, and your cash value up to $100,000 or 90%, whichever is higher, calculated net of policy loans (Assuris, whole life, read 24 September 2026). For universal life, the same limits apply, also after policy loans. Separate protection for an accumulated value applies only where the policy has a separate associated (side) account; check how Assuris treats your actual policy before adding categories together (Assuris, universal life, read 24 September 2026). Protection applies only to member insurers, so check that yours is one.

What is guaranteed, and what is only illustrated?

A participating contract guarantees a death benefit, a schedule of cash values and a premium that does not rise, and guarantees no dividend. A universal life contract states its own guarantees, which vary by design: commonly a death benefit formula that stays payable only while the account value or your payments meet the charges, and a maximum cost of insurance. Coverage in either one still depends on paying what the contract requires.

Every illustration has two halves, and they must be read separately. In a participating illustration, the guaranteed column shows what happens if no dividend is ever declared again; the illustrated column assumes the current scale continues for decades, which is an assumption and not a forecast. Ask also for the same illustration with the dividend scale reduced.

In universal life, the useful stress test is a projection at the contract's guaranteed minimum credited rate, or a low rate, using the guaranteed maximum charges. That projection is not a contractual floor; it is a way to see how much the policy depends on good results. Ask for it beside the illustrated rate, on both a level and a yearly renewable cost of insurance.

Compare the actual guarantee pages of each contract, not the product labels. Two policies sold under the same name by two insurers can guarantee quite different things, and the policy you sign, not the illustration, is the document that binds the insurer.

How is the cost of insurance charged in universal life?

A participating premium is level and is not broken into a mortality charge on any statement. A universal life contract charges an explicit cost of insurance on one of two bases: level for life, or yearly renewable, recalculated each year on the insured person's age. Whether a yearly renewable charge can later be changed to a level one, when, and at what charge, depends on the contract; ask for the conversion rule and an in-force projection before you choose.

A level cost of insurance costs more in the early years and then stays flat. That removes the rising mortality charge, but not the need for adequate deposits: other charges and weak crediting can still drain an underfunded account.

A yearly renewable cost of insurance starts lower and rises every year. Early on it leaves more of each deposit in the account, which makes an illustration look stronger. Late in life, when the charge is at its steepest, it is deducted from the account whether or not the account grew as assumed. If the account is large enough, the rising charge is absorbed. If it is not, you may be asked for much larger deposits at an age when income may have stopped, or the policy can lapse.

Illustrative example. Assume a universal life account holds $60,000, you stop depositing, the account is credited nothing (a stress test, not a forecast), and the yearly charges start at $4,000 and rise by $400 each year. After ten years the charges total $58,000 ($4,000 times 10, plus $400 times the 45 step increases). In year eleven the charge is $8,000 and only $2,000 is left, so the account runs out that year. These figures are invented for the arithmetic; they are not an insurer's rates. Your own projection is the only place to see your own year.

How can you reach the cash, and who is the lender?

There are three common routes, and the lender is different in each. The table names who lends, who receives the interest and how each route is taxed when you take the money.

A policy loan is an advance from the insurer. You owe the insurer the principal and the interest; the interest is a real cost, paid to the insurer. Repaying the loan restores what you can borrow next time. Whether a loan changes your dividends depends on the insurer: OSFI expects its dividend policy to say whether policyholder behaviour, such as taking policy loans, is reflected in dividends. Read it, and ask the insurer to confirm in writing how it applies to your contract. The mechanics are covered on policy loans, and the comparison with other credit on a policy advance and other credit.

If you expect to use a policy loan to help a relative, name every debt before you start, because there are two of them. You own the policy. The insurer lends to you under the policy's terms, and you owe the insurer the principal and the interest. If you then lend that money to your relative, that is a second and separate loan: your relative owes you, on terms the two of you set, and you still owe the insurer whether or not your relative repays. If you give the money instead, nothing is owed back to you, and the insurer's loan still stands.

A family loan deserves the same care as any other: the amount, any interest, the repayment dates, what happens after a missed payment, and what happens if either of you dies. Have a lawyer or notary put it in writing and an accountant review the tax facts, and keep the insurer's loan statement beside the family agreement. How families arrange lending between generations is covered on private family capital.

Universal life contracts often allow both policy loans and partial withdrawals. A withdrawal removes value for good and usually lowers the death benefit; a loan leaves the value in the policy as security. Section 148 applies to both contracts; the taxable amount depends on each policy's own adjusted cost basis.

What happens if either contract is underfunded?

Either contract can end if its terms are not met. A participating contract offers ways to keep some coverage when the premium stops, and each carries a cost. A universal life contract keeps going while its account can pay the charges, and lapses when it cannot, unless you deposit more or reduce the coverage.

In a participating contract, an automatic premium loan, where the contract offers one, pays the premium by lending it to you against the cash value. Interest on that loan is owed to the insurer. If the debt and accrued interest approach the maximum the policy permits, the insurer may require payment, and coverage can terminate if the contract's conditions, notices or grace provisions are not met. A termination or surrender with debt outstanding may create a taxable policy gain even if you receive little cash (s. 148(1)). The non forfeiture choices, meaning the options that apply when premiums stop, are the other routes: reduced paid-up insurance shrinks the coverage to the permanent amount the cash value fully pays for, and extended term, where the contract offers it, keeps the full face amount for as long as the value will buy it.

In a universal life contract, the charges are deducted whether or not deposits arrive. If crediting disappoints while a yearly renewable charge climbs, the account is drawn toward zero, and at zero the contract lapses. Before that, you can often reduce the face amount to lower the charges, or deposit more. A lapse can also have tax consequences: where policy loans are outstanding, it can produce taxable income even though no cheque arrives, so ask the insurer and your accountant before you let a contract with a loan lapse.

Before you surrender either contract, ask the insurer for two figures. The first is the cash surrender value under the contract, after any surrender charge it applies (surrender charges are more common in universal life). The second is the net amount the insurer would actually pay you, after any outstanding policy loan and unpaid interest. They are not the same number, and the tax calculation works from its own figures, so it can differ from the cheque. Early surrender can return substantially less than the premiums paid, so compare what you have paid with the guaranteed and illustrated surrender amounts at years 1, 3, 5 and 10 rather than assuming a break-even year. On a full surrender, the policy gain is generally the proceeds above the adjusted cost basis (s. 148(1)); a partial surrender prorates the basis to the part given up. Ask the insurer for the current adjusted cost basis before taking any money out. More is on cash surrender value.

Ask for the loan limit, termination, reinstatement and non forfeiture clauses of both contracts before you compare them, and for the notices each insurer sends when the account or the loan approaches a limit. Do not rely on a warning arriving early enough to repair inadequate funding.

How do the exempt test and the tax rules apply to each?

The same federal exempt policy and disposition rules apply to both designs, but their funding, charges and access methods can produce different taxable amounts and timing. Compare the insurer's current adjusted cost basis and the proposed loan, withdrawal or surrender with an accountant before treating tax as neutral. A policy that satisfies the exempt test in section 306 of the Income Tax Regulations is generally not taxed each year on its growth. The current version of the test applies to policies issued from 1 January 2017. Both contracts are designed to stay inside it.

The exempt test limits how much value can accumulate relative to the policy's coverage. Insurers typically set funding limits and administer each policy with the exempt test in mind. Ask what happens to a payment above the limit, and whether a change you are considering would affect the policy's exempt status. A policy that stops qualifying can lose its tax treatment, so get policy-specific tax advice before changing the funding or the coverage. More is on the exempt test and what happens when a contract fails it.

Taking money out follows section 148 of the Income Tax Act. A disposition, meaning an event the Act treats as giving up some or all of the policy, includes a surrender, a partial withdrawal and, under paragraph (b) of the definition, a policy loan (s. 148(9), "disposition"). The part of the proceeds above the adjusted cost basis, roughly the premiums you have paid, less the net cost of pure insurance (a tax figure the insurer calculates each year under the regulations, not the insurance charge on a universal life statement), and less amounts already taken out, is included in your income (s. 148(1)). Assigning the policy as security for a loan from a third-party lender is not a disposition (para (f)). If you repay a loan that was taxed, paragraph 60(s) generally allows a deduction up to the amount included.

Illustrative example. Assume your policy's adjusted cost basis is $30,000 and you take a policy loan of $50,000. The $20,000 above the basis is included in your income for that year, as ordinary income. If you later repay the loan, paragraph 60(s) generally allows a deduction of up to that $20,000. If you had instead borrowed $50,000 from a third-party lender with the policy assigned as security, the assignment itself would not be a disposition. These are round numbers for the arithmetic, not a client's figures.

A death benefit paid to a named beneficiary is generally received free of income tax under either contract. The corporate rules are the same for both as well. When a private corporation is the beneficiary and receives the death benefit, its capital dividend account is generally credited with the proceeds minus the policy's adjusted cost basis immediately before the death (subsection 89(1), "capital dividend account"). Owning the policy does not by itself create that credit, and paying the amount out to shareholders as a capital dividend requires an election filed with the Canada Revenue Agency. None of this is tax advice. How the rules apply to your contract is a question for your accountant, with the insurer supplying the figures.

What does universal life do better?

Three things, and each one is real. It lets you vary the deposit. It shows you what it charges, line by line. And it lets you choose how the account is credited, including options the participating account would never offer. A participating contract gives you less of all three.

Flexibility of deposits. Within the contract and tax limits, you can deposit more in a strong year, less in a weak one, or nothing while the account covers the charges. A participating base premium is set at issue and owed; relief exists, through dividends, premium loans and the non forfeiture options, and many contracts accept extra deposits through a paid-up additions rider, but the design assumes the premium arrives. For a business with uneven receipts, the universal life range is worth something. It is also the exposure: deposits that are allowed to stop can stop.

Visible charges. A universal life statement itemises the cost of insurance, the administration charges, the amount credited and the account value, and each can be set against last year's figure and against another insurer's. Your participating statement does not itemise mortality or expense charges, because the parts were priced together. You can measure its cost by outcome but not inspect it line by line. That is the strongest cost criticism of the participating product, and it is fair. It sits alongside the risks and failure modes.

Control over crediting and the death benefit. If you want market-linked crediting inside a permanent contract and accept the consequence, universal life offers it. The unbundled design also allows a death benefit set as the face amount plus the account value, which can serve estate objectives a participating contract meets less directly.

What goes wrong with each of these contracts?

Both fail, in different ways. Universal life fails through underfunding and a rising cost of insurance that outruns the account. Participating whole life fails through a premium you cannot sustain, an early exit that can return less than you paid in, loans that outgrow the cash value, and expectations built on a dividend scale that then moves.

What goes wrong with universal life. A policy funded on an optimistic credited rate that does not arrive. A yearly renewable cost of insurance chosen for the low early charge and never revisited. Deposits that stopped because stopping was allowed. An owner never told the policy needed monitoring, who learns late in life that the account is projected to run out. The flexibility that makes the product attractive is also how it fails.

What goes wrong with participating whole life. The premium is a long commitment and much higher than term life insurance for the same death benefit. The result above the guarantees depends on a dividend scale you do not control, and an illustration assumes today's scale lasts for decades.

What goes wrong with how either is sold. On 22 December 2022 the Financial Services Regulatory Authority of Ontario issued a compliance order against Greatway Financial Inc., an insurance agency, which consented to it (FSRA). FSRA alleged that agents trained by Greatway "may provide consumers with information and advice which is inappropriate, inaccurate or misleading regarding the terms, benefits or advantages of certain insurance policies, including universal life policies sold under an insured retirement plan strategy" (read 24 September 2026). The order required revised training for its agents, information to the universal life policyholders about suitability, and help for those who raised concerns with their insurers. The lesson applies to both contracts, and to anyone selling them, this practice included: the same policy can be described accurately or misleadingly, and the description is what you rely on when you sign.

When does each tend to fit, and who should choose neither?

A participating contract tends to fit you if you have a permanent need for coverage, a surplus that holds up through an ordinary year and not only a good one, a horizon measured in decades, and a preference for guaranteed values over control of crediting. The test is whether you could pay the premium through a poor decade without regret.

Universal life tends to fit you if you want to decide your deposits and your crediting options, accept the result of those choices, have income uneven enough that deposit flexibility is worth paying for, and will review the policy every year. The test is whether you will still be reading the annual statement at 75.

Neither fits a temporary need, which term insurance is built to cover, or anyone buying either as an investment. Life insurance is insurance, and measured against a portfolio on growth alone it usually compares poorly, which is the wrong test rather than a hidden flaw. Before buying participating insurance, the AMF, Quebec's regulator, suggests checking whether less expensive insurance plus TFSA, RRSP, RESP or pension plan contributions would serve you better; that comparison belongs with someone licensed to advise on those plans.

The strongest case against both deserves a plain hearing. If you have no lifelong need for coverage, may need the money within a few years, or carry expensive debt, either contract asks for a long commitment in exchange for early values that can sit below what you have paid, interest owed to the insurer on any loan, and results above the guarantees that nobody promises.

Before asking for a quote, answer these for yourself:

• Do I have a need for coverage that lasts for life, not only for some years?
• Can I be insured on acceptable terms?
• Do I have an emergency reserve, and have I cleared expensive debt?
• Would the premium or deposit survive a year when income falls?
• Might I need this money back in the first several years?
• Would I be content with the guaranteed values alone, if nothing above them came?
• How many years before the guaranteed cash value reaches what I have paid in? Only an illustration for my contract shows it.
• Is the surplus mine personally, or does it sit in a corporation? The owner, the payer and the tax picture change with the answer.

If an answer is "unknown", the result is "find out", not "buy". Two people with the same income can reach opposite answers here and both be right.

What should you request from each insurer?

A fair comparison uses the same person and the same money in both contracts. The worksheet below is for you to fill in: request each item in writing from each insurer and copy it from the dated illustration and contract pages you receive. No premium or value is given here.

Read the guaranteed rows first. If the policy only works in the illustrated rows, you have learned how much it depends on things no one has promised. The adverse cases are illustrations of risk, not promises or forecasts. For help reading what comes back, see how to compare two illustrations.

Questions to ask before you sign

Different people answer different questions, and asking the right one saves time and mistakes.

• The advisor: Do I need permanent coverage at all? Which design fits, and why? Can I see guaranteed and adverse projections? Are you licensed in my province?
• The insurer: What is the loan rate, how is it set, and how can it change? How does a loan affect dividends or crediting? What is my current adjusted cost basis? What notices will I receive when the account or a loan nears a limit?
• A third-party lender: What are the approval terms, the margin on the policy's value, the rate, and when can the loan be called?
• An accountant: What is my adjusted cost basis, how would a loan or surrender be taxed under section 148, is any interest deductible on my facts, and how does the capital dividend account apply if a corporation owns the policy?
• A lawyer or notary: Who should own the policy, who should be the beneficiary, and how should any family loan be documented? In Quebec only, the designation of a married or civil union spouse as beneficiary, made in a writing other than a will, is irrevocable unless the contract stipulates otherwise (Civil Code of Québec, art. 2449; see the Civil Code and the contract).

Take the answers home and compare them side by side. A decision this size can wait a week.

Where this practice stands

Canadian Wealth Creation Centre Inc. is the firm that publishes this educational website. It provides its services through licensed representatives in Quebec, Ontario, Alberta, British Columbia, Manitoba and New Brunswick. It mainly places participating contracts. These are the contracts used in the approach Nelson Nash described and named The Infinite Banking Concept®, a registered trademark of Infinite Banking Concepts, LLC. The name describes a strategy, not a product offered by a bank: the owner may borrow from the insurer against the policy's value, and the loan bears interest that the owner owes the insurer. The approach uses those loans to pay for things over a lifetime. From 2020 to 2024 the author was a member of the Nelson Nash Institute and an IBC (Infinite Banking Concepts™) Authorized Practitioner. That is a private certification, not a regulatory licence. Neither Canadian Wealth Creation Centre Inc. nor Jose Salloum is affiliated with, sponsored by, or endorsed by Infinite Banking Concepts, LLC or the Nelson Nash Institute.

That preference is a reason to check everything here against the contracts, and it is why the case for universal life is stated in its own terms. These are two different products, not two versions of one. They have different guarantees, different risks and different behaviour when the money stops. Which one you should own depends on the permanence of your need, the durability of your cash flow, and your willingness to look after a contract for decades.

Everything here is written by someone paid by commission from the insurer when a policy is issued, as stated on the author page and at the foot of every page. It describes how the law and the contracts work, not what you should do; your own situation needs your own review.