Canadians who own a whole life insurance policy often buy in with the expectation that policy dividends will eventually cover their entire premium amount. This “premium offset” scenario is useful for Advisors looking to manage cash flow within their client’s financial plan, yet there’s a potential roadblock that many fail to consider: What if dividend scales fall over time?
Remember, policy dividends are forecasted with major assumptions about key risk factors, including longevity, expenses, taxes, inflation, lapses and investment returns. So when economic conditions change, so do insurers’ dividend scales. For example, Sun Life Financial reduced its scale to 6.00% from 6.25% this past April 1,1 citing lower interest rates and improvements in mortality, following Canada Life’s downward revision in July 2020.2
These shifts can often disrupt a policy owner’s expected cash flow by adding years to the out-of-pocket payment schedule. Case in point: If a client had anticipated paying premiums for the first 10 years – with the policy dividend taking over from there – the reduced dividend scale could push their timeline to 13 years, adding a greater burden to the client than previously anticipated.
What options are available to manage this risk? Some holders can simply choose to access a policy loan, but given the high interest rates involved, we believe a safer option would be to borrow against the cash surrender value (CSV) of the policy.
How to limit out-of-pocket expenses
Equitable Bank’s CSV MAX offers an innovative and efficient solution to this problem. Consider the example above: a client whose premium offset timeline changed from 10 to 13 years. They may have expenses starting in Year 11 that make it impossible to continue covering the premium amount, such as school fees for children or a new business that requires start-up funds. To bridge the gap, the CSV MAX helps them borrow against the CSV value held within the policy – tax-free.
These funds can be used to meet ongoing payments until the premium is covered by the policy dividend. Add to this, the solution does not report to the credit bureau after the initial screening. The process is hassle-free, designed to use the CSV value as a solitary source of collateral. No other assets are required and interest is serviced monthly, at rates much lower than those available for policy loans, and far below the cost of paying the premium itself.
The CSV MAX is also a revolving facility, so borrowed amounts can be repaid and made available should circumstances change. Best of all: the policy continues to grow uninterrupted, and the outstanding balance on the loan is taken directly from the death benefit, with any remaining proceeds directed to the beneficiaries in question.
Canadian residents who are the age of majority and have:
- A whole life insurance policy with one of Equitable Bank’s insurance partners
- Adequate cash surrender value available in their policy
- Met financial qualifications to ensure interest payments can be made
Ready to apply? Get in touch with your financial advisor or insurance broker today to discuss how you can balance coverage and cash-on-hand.