Here’s how Participating (Par) Whole Life Insurance works, and it’s applications.

Par whole life is dependent on how the life insurance policy is priced. When actuaries price par whole life, they use conservative assumptions for the three main policy expenses: mortality, policy administration costs, and company investment returns. Using those assumptions, we’ll assume that the resulting premium for your par whole life policy is $500/year.

Then once a year, the life insurance company reviews their actual expenses. Because the original assumptions are so conservative, it’s no surprise that the company actually does better than originally assumed when they set the premium to $500. Mortality isn’t as bad as assumed. Administration costs remained stable and low, and maybe they found some ways to reduce costs. And interest earned was a reasonable amount. So they didn’t use the entire $500 – maybe they only used $475 of your premium. That leaves $25 in the company’s hands that wasn’t accounted for when they priced the insurance.

With Par Whole Life, most or all of that $25 is returned to you. Importantly, the amount returned is not guaranteed – it’s decided by the company after each year and there are no requirements to actually pay anything at all.   

So the company gives you back $25 of your own premiums. What can be done with this? Turns out there are 5 choices, normally selected when the policy is purchased. They are:

1. Cash, here’s your $25 back.
2. Reduce premiums, the $25 is applied to pay your next year’s premiums. Possibly over the long term, dividends are high enough to actually pay your premiums.
3. On deposit, leave it with the insurance company to invest at a likely poor rate of return.
4.  Paid Up Additions purchase additional life insurance coverage using the dividend as a one-time premium. No medical requirements for the increased coverage.
5.  Called dividend option 5, this option is integrated with Enhanced Whole Life.

 4 and 5 are the most common choices. Option 5 we don’t recommend (see our article on Enhanced Whole Life). Option 4 is actually a reasonable alternative in some situations because it can increase both your coverage and your cash surrender values.

 Applications of Par Whole Life Using Paid Up Additions

 When a dividend is used to automatically purchase Paid Up Additions (PUA’s), the PUA acts as a mini whole life insurance policy. So the PUA gives you both additional life insurance coverage and additional cash surrender value for your whole life insurance.

 One common use of Par Whole Life is life insurance for children. If PUA’s are selected, the coverage of the whole life policy will increase roughly with inflation over time. Therefore it’s well suited for life insurance for children where we’re dealing with a lifetime of coverage and want the coverage to increase with inflation.

 Secondly Par Whole Life can be beneficial when using whole life insurance as an investment. Strategies of this type often rely on maximizing cash surrender values, so the PUA’s can be very beneficial in achieving that result.   

 Outside of those two applications, we suggest you consider carefully using Par Whole Life for your life insurance purposes as there may be better policy types available.

 If you have any questions about your life insurance coverages, please contact The Term Guy at (416) 642-6820.