The key is something known as dividends. But what exactly are dividends, and how do they relate to compound growth?

If you have participating whole life insurance or have researched its financial benefits, you’ve probably encountered the term “dividend” more than once. Like many Canadians, you might have found this term a bit confusing.

A Google search won’t do much to clear up the confusion—no surprise since it’s a complex idea! That’s why we’ve decided to explain what a dividend is and how it can accelerate your money’s growth over time through the power of compounding.

(Heads up: We’ll be using plenty of pizza analogies to explain things, so you should avoid reading this on an empty stomach!)

Picture a slice of pizza when you hear “dividend.”

Think of owning a small piece of a large company like owning a slice of a big pizza. When the company makes a profit, it usually shares a portion of those earnings with you, the slice owner. This shared money is called a dividend. It’s essentially a bonus that companies give to their shareholders to say, “Thanks for being with us!” The bigger your slice of pizza, the larger your bonus.

An insurance company gives a slice of pizza to every member who owns a participating whole-life policy. This means the company shares part of its profits with members, allowing them to enjoy some extra benefits for free.

But it’s life insurance. Can I actually enjoy the pizza while I’m still alive?

Certainly! A participating whole life insurance policy provides two main benefits: first, a traditional death benefit that pays out to your designated family or loved ones after you pass away, and second, an investment component (cash value + dividends) that you can access while you’re alive. Here’s how it operates:

1. The policy includes a cash value component that increases over time. This total cash value comprises the guaranteed cash value and the dividends (which are not guaranteed). Think of it like having a savings account within your insurance policy, where your investments can grow with tax-deferred interest over the years—that’s the compound effect. Moreover, you can access this money whenever you need it.
2. You have the flexibility to decide how to utilize your dividend payments. These dividends represent a portion of the company’s profits, and you have several options for their use. You can withdraw them as cash, apply them towards reducing or covering your insurance premiums, purchase additional coverage, or let them accumulate with interest.
3. Enjoy tax advantages with peace of mind. One of the benefits of dividends is that when you withdraw them, you don’t have to pay taxes immediately—taxes are only applicable to the interest earned. Moreover, the guaranteed death benefit is usually paid out tax-free to your chosen beneficiaries. Essentially, it’s a tax-efficient method to grow wealth and ensure financial security for your loved ones.
4. Have peace of mind with creditor protection. In certain provinces, the cash value and death benefit proceeds from a life insurance policy can be protected from creditors if you designate an irrevocable beneficiary—those whose designation cannot be changed without their consent. This offers an extra level of financial security at no additional expense.
5. Experience lifelong coverage with guaranteed premiums. Whole life insurance ensures coverage for your entire life, with payments that remain fixed until age 100, when payments cease. It’s akin to providing a lasting financial safety net for your loved ones that endures throughout your lifetime and beyond.

It’s worth mentioning that participating whole life insurance has benefits, but it may not suit everyone. Before deciding, it’s essential to consider your financial goals and how comfortable you are with potential risks (like non-guaranteed investments). Start by talking to a knowledgeable advisor who understands your situation and can provide answers to any questions you have.

Choosing how to use your dividends is like picking toppings for a pizza—you have plenty of options.

When thinking about where dividends might fit into your broader financial plan, just like pizza toppings, you have many options to explore. You can…

1. 1. Reinvest them.

Reinvesting dividends involves using the dividends you receive to purchase more shares. This can compound over time, potentially boosting your total investment.

This option is most suitable for individuals who do not require immediate access to these funds.

1. 2. Save for a particular purpose.

If you have specific financial goals, such as purchasing a house or funding a child’s education, you can utilize your dividends to help achieve these objectives.

This option may be most suitable for Generation Z, prospective homebuyers, and parents of young children.

1. 3. Choose to receive cash.

You can receive the dividends as cash, which is beneficial if you need immediate funds or prefer having cash readily available.

This option may be beneficial for homebuyers and university students.

1. 4. Supplement your income.

Dividends can provide regular or additional income for certain individuals, such as retirees or those relying on a single income.

This option is particularly beneficial for retirees and single parents.

1. 5. Use it as your emergency fund.

Think about allocating dividends to create an emergency fund. This fund can serve as a safety net for unexpected expenses such as home or vehicle repairs, job loss, illness, or the loss of a wage earner.

This option is ideal for retirees, families, and homeowners.

1. 6. Donate the dividends.

Some individuals may opt to donate their dividends to a charitable cause that is meaningful to them. This is a meaningful way to create a lasting legacy and make a positive impact.

This option is ideal for individuals who have surplus wealth to share.

With dividends, you’re setting aside your money to enjoy it in the future.

Earning money through dividends is a long-term commitment, similar to preparing a large batch of pizza sauce for future use. It requires careful planning and patience to benefit fully from the compounding effect.

1. Set a long-term goal. Begin by determining the purpose for growing your money (e.g., funding your child’s education), when you need it (e.g. when your child turns 18), and the number of years until you reach that goal.

2. Buy a whole life policy for yourself or your child. For instance, if you aim to secure your child’s financial future, a 20-pay whole-life policy might be suitable. It’s cost-effective when your child is young and healthy, with payments ending after 20 years while coverage lasts for their entire life.

3. Reinvest your dividends. Rather than taking the cash, consider reinvesting your dividends. By choosing this option, the insurer will place your earned dividends into a savings account where they earn a predetermined amount of interest (known as accumulated dividends). This can accelerate growth through the compounding effect.

a. After reinvesting, consider opting for Paid-Up Additions (PUA). This intelligent strategy can accelerate growth without additional costs. Use your dividends to purchase extra coverage and see your funds grow.

b. Consider the Additional Deposit Option (ADO) to enhance your PUA benefits. Although this will incur additional costs, even a modest increase of as little as $27 per month could nearly double your long-term earnings potential.

4. Be patient. Building wealth is a gradual process that requires time. The longer your money remains invested, the more potential it has to grow.

With compound interest, you can harness the power of compounding growth.

Compound interest works like a special magic that accelerates your money’s growth over time—similar to how pizza dough expands when left to rise overnight. However, compound interest works its magic over a more extended period (remember the importance of patience we discussed earlier?).

If you’re willing to invest the time and patience, reinvesting your dividends is a savvy move, capitalizing on the potential of the compounding effect. Here’s a breakdown of how it unfolds:

• Expand your investment base: Reinvesting dividends means earning interest on your initial investment and on your accumulated earnings. This creates a compounding effect, similar to a snowball gaining size as it rolls downhill.
• Experience sustained growth: Reinvesting your dividends over the long term can substantially enhance your investments through compounding. It’s akin to a snowball growing into a snow boulder—the larger your investment base, the more significant your dividends become.

In essence, compound interest is a growth cycle that, over time, can substantially impact the total value of your investment.

One final, essential consideration: Dividends are subject to market fluctuations, making them, like other higher-risk investments, inherently unpredictable. This underscores the importance of viewing dividends as a long-term investment—patience allows your money to grow steadily through the compounding effect. (Note: Despite their higher-risk nature, some insurance companies have consistently paid members’ dividends since 1972.)

Now that you understand the potential of dividends, are you prepared to begin growing your wealth? Contact PB Bankers today to explore your options further!