we are now going to talk about uh participating and nonparticipating life insurance and this topic uh still applies to whole life insurance and so when we talk about par and nonpar uh certain whole life plans participating whole life plans in fact make the policy owner eligible for dividends Dividends are as you may or may not know Dividends are coming out of profits of insurance companies companies that have a profit can declare a dividend and certain Whole Life policies participate in dividends and so when we have a whole life policy referred to as a participating whole life policy this means that it participates in dividends from the insurance company a nonparticipating whole life policy does not uh participate in any dividends and so if you think about an insurance company and uh the fact that they have to invest money that you are giving to them each year they're making long-term commitments because your premiums are the same for the next 20 30 40 years and so they have to invest that money for that time uh they tend to be fairly conservative uh in their long-term Investments however if they are good in those investing in investing then uh they can make additional profit and so if I'm running an insurance company where can I make money how do I make money well very simply I have to make certain assumptions over the long term about the number of people that are unfortunately are going to die because when they die I need to pay out their death benefit and so if in fact fewer people die than I expected than I put in my pricing for my policy then I've got a source of some additional profit in addition to that my investment Department if they've had a good year and they in fact have invested properly and had higher returns than uh we would have expected or we planned for that's another source of profit that's good for us in addition to that if our expenses in running the business are lower than we budget Ed for that's another source of profit so insurance companies make money where fewer people die than expected you get higher investment returns from their investment department and they're operating in an efficient business so now when we uh are owning a participating whole life policy those additional profits that the insurance company have earned they in fact are going to be shared with the participating policy holders and so if I own a non-participating policy any of that additional profit or Surplus that the company makes they keep it and so if the company a shortfall in other words they don't make their profit targets then it's up to the company to uh reconcile itself with that so profit or no profit has no impact on nonparticipating policies however participating policies if in fact there is a surplus in fact they've made a profit uh they in fact will share part of that profit with a participating policy holder and that's what a dividend is a participating policy holder can receive a dividend uh as a result of being a participating policy holder now they'll pay a bit more premium than the non equivalent nonparticipating policy but that little additional premium is what the company takes and invests in its business and if it's profitable they will share that through a dividend no different than a publicly traded company when you buy shares in one of the Canadian Banks or large insurance companies if they have a profit they're going to share the dividend with you as a shareholder of that company very similar to a participating policy if you are a participating policy holder and your insurance company makes a profit they will share part of that profit with you now recognize that dividends whether from insurance companies Banks or anywhere else uh are never guaranteed and so uh when someone buys a participating policy they're going on the assumption that this insurance company has a history of paying dividends and will continue to do that in the future so let's talk about dividend options as I said a participating policy I receive a dividend so I've been paying my premiums each year and at the end of the year the company declares a dividend uh on my policy now I can do lots of things there are five different things I can do with that dividend first of all I can receive it in cash I can say please send me a check by mail uh for my dividend uh this year and so receiving cash is one option for my dividend a second option is you know what don't send me my bill for $1200 for example for my annual premium if I have a dividend of $50 just send me a bill for $1,150 next year and so use my dividend to reduce next year's premium the third option is you know what I I don't need that dividend right now can you put it in another policy can you put it in another savings account with uh with your company it's I want to accumulate additional money in a separate plan so I can put that in a side fund uh to accumulate it so I can receive it in cash I can say reduce my next premium or I can say put it aside start another uh investment for me and every year I get a dividend let's build up that side account the fourth dividend option is something called paid up additional insurance now paid up additional Insurance very simply says use the dividend I don't need it I don't need the cash use the dividend to buy me some more Insurance in fact use the dividend to buy me some more of the same kind of insurance that I have and so that dividend will be used as a single premium to buy a sliver of insurance so what Happ happens is my death benefit in fact increases every year I say oh use the dividend to buy me a bit more of insurance it means every year my death benefit on my policy is going to increase each year and that additional coverage means and some people use that as an inflation hedge in addition that addition additional bit of insurance in fact I don't have to provide any any additional medical evidence for that coverage and so if I keep my participating whole life policy for you know a long time and I use the dividends to buy additional Insurance then I have coverage that is building up each year the fifth dividend option is also providing me with insurance but it's not the same insurance as the base plan which is the example the previous example buying paid up a additional Insurance the fifth dividend option allows me to buy term insurance oneyear term insurance so I can use that dividend I buy use it as a single premium to buy additional coverage for one year at the end of that year my additional coverage is gone I may have another dividend at the end of that year and I say okay buy me another uh one-year coverage and so the difference between uh paid up addition and oneyear term is that oneyear term will in fact give me more temporary coverage for one year than paid up additional Insurance paid up additional Insurance gives me the same as the base plan term insurance oneyear term simply buys one-year term for that term so again we need to remember with respect to participating Whole Life policies we have five dividend options and they are cash you know send me a check reduce my next premium cash accumulation in fact accumulate my money in a side fund buy me additional Insurance of the same type I have or buy me additional term insurance and you can change your option every year if you decide oh I want to have cash this year but next year I want to in fact uh buy paid up additions you can do that by notifying the insurance company every year