PAR is Only One Type of Whole Life
For most of the last four decades, the name whole life insurance has been synonymous with one specific type of whole life insurance policy – PAR whole life. As life insurance products in Canada have evolved, PAR whole life has become just one of many different products that fall under the banner of whole life. So, what is a whole life policy?
A whole life policy is a permanent policy, meaning that as long as premiums are paid, the life insurance policy will remain in force for the insured’s lifetime. The whole life policy that compares directly to a PAR whole life policy also has several plan design features such as:
- Guaranteed Death Benefit
- Guaranteed Cash Surrender Value
- Guaranteed Premiums
- Paid Up Additions
- Smoothed Investment Return
There is one plan design feature that defines a PAR whole life policy – this is the participating (PAR) feature. A PAR whole life policy allows the insured to participate in a share of the annual profits of the insurance company (the participating account keeps a portion of the profit and shareholders receive a portion of the profit). If the profit is more than the insurance company expects, a profit is paid as a dividend to the policy. The profit comes from the participating account which is an account managed by the insurance company comprised of policy premiums, investment returns, taxes, policy withdrawals, policy loans and insurance claims.
The participating feature is in contrast to a non-PAR whole life policy where the annual return/profit to the policy is based solely on the investment return.
Aside from the participating feature, what makes a PAR whole life policy different from the other types of whole life policies?
With a PAR whole life policy, the insurance costs are not guaranteed, whereas the costs are guaranteed with a non-PAR whole life policy. Also, the cost of paid-up additions is not guaranteed with PAR whole life. The minimum premium, in most cases, is lower with a non-PAR whole life policy and higher with a PAR whole life policy. The trade-off with a higher PAR whole life policy premium though is higher dividends. A non-PAR whole life policy does provide more transparency and accountability for the client.
So why would a client choose a PAR whole life policy when newer, cheaper, and more transparent whole life policies are available? This is a good question and one we have wrestled with as well.
We believe that the higher premium is preferred as a method of forced savings. And the potential higher dividends compound the savings. Another reason may be the lack of desire for guarantees. Insurance companies and insurance advisors may put more onus on the importance of guarantees than clients who are okay with the lack of a guarantee if it has the possibility to result in higher dividends, higher cash values and higher insurance benefits.
When selecting a whole life policy, it’s important to compare the plan design features as well as the guaranteed amounts of a PAR and non-PAR policy. From there a decision can be made on the most appropriate product for the situation. Book a meeting today to help get you started.