Demystifying whole life insurance: Tap into the power of predictability
Participating or non-participating? Learn what’s guaranteed and what’s not. Article includes a real-world example and insights on reframing advisor-client conversations.
Updated 
7 min. read
Pierre Ghorbanian, MBA, CFP, TEP
Vice-President, Advanced Markets Business Development, BMO Insurance
In a world where financial products can often feel like a maze of jargon and fine print, whole life insurance stands out as a cornerstone of long-term planning. But even within this category, not all policies are created equal. For advisors, understanding the nuances between participating and non-participating (or par and non-par) whole life insurance isn’t just helpful; it’s essential to guiding clients with confidence and clarity.
This article breaks down key differences between these two types of policies, helping you navigate their structures, benefits, and risks. While both offer permanent protection, non-participating policies provide a level of predictability that many clients value, especially in today’s uncertain economic climate. Participating policies, on the other hand, offer potential upside through dividends, but with added complexity and exposure to market and operational changes.
Let’s explore how each works.
It’s important to periodically remind clients about the guaranteed versus non-guaranteed (or variable) features of a whole life plan. The more knowledge we pass on, the more value we provide, while managing client expectations.
Structural differences
| Attribute/feature | Participating whole life | Non-participating whole life |
|---|---|---|
| Guaranteed crediting rate formula | No | Yes |
| Guaranteed mortality/lapse/expense rates | No | Yes |
| Hurdle rate (minimum return insurer must achieve before sharing profits) | Yes | No |
Participating policies include a dividend-paying component, where policyholders share the insurer’s profits. These dividends are not guaranteed, and they depend on the insurer’s investment and operational performance. They can be used to purchase paid-up additions (PUAs), reduce premiums, be paid out in cash or accumulate interest.
Non-participating policies, by contrast, do not pay dividends, but rather they pay a bonus. Their cash value grows at a predetermined rate, making them more predictable and often simpler to understand. Similar to a dividend, the bonus in a non-participating policy can be used to purchase paid-up additions (PUAs).
Reaction to external factors
| Scenario | Participating whole life | Non-participating whole life |
|---|---|---|
Worsening mortality experience | Cost to purchase PUA increases, dividend decreases | Cost to purchase PUA increases, no impact on credited rate |
Rising expenses | Cost to purchase PUA increases, dividend decreases | Cost to purchase PUA increases, no impact on credited rate |
Higher lapse rates (more people keep policies) | Dividend decreases | No impact on credited rate |
Increase in provincial premium tax | Dividend decreases | No impact on credited rate |
Participating policies are more sensitive to changes in the insurer’s experience. For example, if mortality rates worsen or expenses rise, dividends may decrease and the cost of PUAs may increase. This makes them more dynamic but also more complex.
Non-participating policies are largely insulated from such fluctuations. Their credited rates and policy values remain stable regardless of changes in mortality, expenses or tax rates. Effectively, in a non-participating policy, the policyholder transfers most of the risk to a life insurance company, while in a participating policy they would share the risk with the insurer.
Risk and suitability
Choosing between par and non-par whole life insurance depends on a client’s financial goals, risk appetite and planning horizon. Participating policies offer potential upside through dividends but come with exposure to external risks. Non-participating policies provide stability and predictability, making them a strong choice for those who prefer a straightforward approach and stronger guarantees.
If insurers and advisors can clearly explain how these products function and manage expectations effectively, they can better recommend customer-centric solutions that align with Canadians’ long-term financial and estate planning needs.
Why some older whole life policies aren’t living up to expectations
One of the toughest jobs for financial advisors is managing client expectations, especially when it comes to older whole life insurance policies. These plans, often decades old, can behave very differently from what clients originally anticipated.
Consider a participating whole life policy issued in 1977 to a 34-year-old non-smoker. The policy had a $10,000 death benefit and a $200 annual premium. The client chose to reinvest dividends into paid-up additions (PUAs), which increase the policy’s value over time. No loans were taken, and premiums were always paid on time.
It doesn’t allow additional deposits, and it was never put on premium offset – a feature that stops out-of-pocket premiums but also reduces the ability to buy PUAs.
The problem with projections
Back in the 1970s, policy illustrations weren’t as detailed as they are today. Clients relied on guaranteed value tables and general descriptions. Fast forward to today, and the client, now 82, has been reviewing updated in-force illustrations. These show a troubling trend: the death benefit is shrinking.
In 2012, the projected death benefit was over $29,000. By 2019, it had dropped to just over $27,000 – a 6% decline. Worse, projections show it could fall another 23% by age 90. By 2025, it is projected to slightly improve to just over $28,500. At a dividend scale of -1%, the death benefit stops growing altogether due to the hurdle rate (or minimum return an insurer must achieve before sharing profits), making the policy resemble a Term-100 plan with cash value.
This same client had purchased another policy in 1981 for the same initial death benefit. In the 2025 inforce illustration, the hurdle rate was set even higher. At current scale, the death benefit will stop growing after age 92. This is a drastically different projection from the 2012 inforce illustration at current scale. What this demonstrates is that the amount of the upsides that policyholders can participate in will depend on the cohort or generation of policies, even if the two policies were only issued six years apart.
Why the growth stalls
The dividend scale consists of the dividend scale interest rate plus the insurance company’s actual mortality, lapse, tax and expense experience. But there’s another lesser-known factor: the hurdle rate. This is the minimum return needed for dividends to buy more PUAs. If the dividend scale falls below this rate, growth slows or stops. Furthermore, the death benefit and cash surrender value have their own respective hurdle rates. While the guaranteed cash value would still increase as noted in the contract, the non-guaranteed portion wouldn’t.
The policy wasn’t built for this kind of interest rate environment. Interest rates in the mid-to-late 1970s were in the low double-digit range and have now dropped to low single digits. No one in the 1970s could have predicted that interest rates in 2025 would be this low. The hurdle rate built into this par whole life plan is not disclosed in the contract or product guide. It is aligned with the actual interest rate environment and mortality experience at the time the policy was priced, with some conservatism built in. The pricing interest rate in the ’70s was very different from the current pricing rate, which could be different in another five years.
How to reframe the conversation
Despite the disappointing projections, there are positives to highlight:
- Guaranteed cash value is still increasing.
- The policy has already delivered decades of tax-advantaged growth.
- It still provides a meaningful death benefit.
- Rising interest rates in the post pandemic period are starting to help stabilize the projected death benefits.
Advisors should help clients understand that while projections may change, the core value of the policy remains intact. Managing expectations means focusing on what the policy still offers – not just what it no longer can.
Finally, it’s always valuable to take steps to ensure clients understand what elements of their policy are guaranteed, and how dividends or the performance bonus works, depending on the type of policy they purchase.
What’s guaranteed? | BMO Insurance Whole Life | Traditional “par” policies |
|---|---|---|
Investment returns | X(payable as performance bonus) | X(payable as dividends) |
Mortality experience | ✓ | X |
Lapse experience | ✓ | X |
Company expenses | ✓ | X |
| Resources: For help explaining BMO Insurance Whole life, check out a new pdf created to explain how the performance bonus rate works, or visit our whole life microsite. |
|---|
Disclaimer
Information contained in this article is general in nature and should not be construed as legal or tax advice. You are encouraged to seek the advice of other professionals such as legal and tax experts. Please consult the appropriate policy contract for details on the terms, conditions, benefits, guarantees, exclusions and limitations. The actual policy issued governs. Each policyholder’s financial circumstances are unique, and they must obtain and rely upon independent tax, accounting, legal and other advice concerning the structure of their insurance, as they deem appropriate for their particular circumstances. BMO Life Assurance Company does not provide any such advice to the policyholder or to the insurance advisor.
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