The Compound Effect: Grow Your Money with Whole Life Insurance

The secret is something called dividends. But… what is a dividend, and what does it have to do with the compound effect?

If you are covered under participating whole life insurance, or if you’ve ever done any research about the financial benefits of this type of policy, you would have likely come across the term “dividend” a few times. And, like many Canadians, you may have found yourself scratching your head at this term.

Doing a Google search doesn’t do much to minimize the confusion – and no wonder, it’s a complicated concept! So we’ve taken it upon ourselves to define what a dividend is, and help you better understand how it can help your money grow over the long term, thanks to the compounding effect (learn more about this concept¹) of this sort of investment.

(Warning: We’re going to use a lot of pizza analogies to get the point across, so don’t read this if you’re hungry!)

When you think “dividend,” think of a slice of pizza.

Imagine you own a small piece of a big company – where the company is like a large pizza and you own a slice. When that company makes money, they will typically share some of those earnings with you, the slice owner. The money that they share is called the dividend. It’s basically a little bonus payment that some companies give to their shareholders as a way of saying, “Thanks for being part of our team!” The bigger the slice of pizza, the better the bonus.

At Serenia Life, we provide a slice of pizza to any member that owns a participating whole life policy. And as a member-based organization, we also share a portion of our profits with Serenia Life members, meaning they get to enjoy some free “sides” too. One great example is a growing collection of benefits we offer to members – to help them support their family, their community, and the causes they care about.

But it’s life insurance. Do I really get to enjoy the pizza while I’m still alive?

Absolutely! A participating whole life insurance policy offers both the traditional death benefit (i.e., a payment made to designated family members or other loved ones after you die) as well as an investment component (cash value + dividends) that you can dip into during your lifetime. Here’s how it works:

1. There’s a cash value component that grows over time. The total cash value is a combination of the dividends² (non-guaranteed) and the cash value³ (guaranteed). It’s like having a savings account within your insurance policy, one that allows your investments to accumulate interest (that, by the way, isn’t taxed until you withdraw your earnings) over the years. That’s the compound effect. Plus, you can access the money if and when you want to.
2. You choose how to use your dividend payments. As noted above, these dividends are a share of the company’s profits, and you can choose how you wish to use them. Options include withdrawing your money via a cash payout⁴, using them to reduce or cover the cost of your regular insurance payments, buying additional coverage, or leaving them to accumulate, with interest.
3. Take advantage of tax advantages. The great thing about the dividends is that you won’t have to pay taxes when you withdraw them – you will only ever pay taxes on the interest earned. Additionally, the guaranteed death benefit is typically paid out, tax-free, to your beneficiaries (i.e., the persons you choose to receive your life insurance payment in the event of your death). In short, it’s a tax-efficient way to build wealth and provide for your loved ones at the same time.
4. Breathe easy with creditor protection. In some provinces, the cash value and death benefit proceeds of a life insurance policy may be shielded from any debt owing to creditors if you designate an irrevocable beneficiary (i.e., designated beneficiaries who cannot be easily changed or removed without their consent). This provides an added layer of financial security at no added cost.
5. Enjoy lifetime coverage and costs that never go up. Whole life insurance provides coverage for your entire life, as long as you continue to make your payments. And those payments? They’ll stay the same, up to age 100 when payments stop. It’s like having a financial safety net for your loved one that extends throughout your lifetime, and beyond.

It’s important to note that while participating whole life insurance may have its advantages, it is not always the right fit for everyone. It’s crucial to carefully consider your financial goals and your tolerance for risk (i.e., a non-guaranteed investment) before making a final decision. As a first step, consult a trusted advisor who understands your specific situation and can help answer any questions you may have.

How you use your dividends is like toppings on a pizza – you have a lot of choice.

When it comes to where dividends may fit into your larger financial plan, you have a lot of options to consider. You can…

1. Re-invest them.

Reinvesting dividends means buying more shares with the dividends you’re being paid. This can lead to a compounding effect over time, potentially increasing your overall investment.

This option may be best for: Individuals who don’t need immediate access to these funds

2. Save for something specific.

If you have specific financial goals, like buying a house or funding a child’s education, you can use your dividends to help you reach these goals.

This option may be best for: Gen Z, Homebuyers, Parents of Young Children

3. Opt for a cash payout.

You can choose to withdraw⁴ the dividends as cash, which can be useful if you have an immediate need for cash or simply prefer cash on hand.

This option may be best for: University Students, Homebuyers

4. Supplement your income.

For some people, especially retirees or those living off a single salary, dividends can be a source of regular or supplementary income.

This option may be best for: Single Parents, Retirees

5. Turn it into your emergency fund.

Consider setting dividends aside to use as an emergency fund. This fund can act like a cushion in the event unexpected expenses come up – due to things like job loss, illness, car or home repairs, or the death of a wage-earner.

This option may be best for: Homeowners, Families, Retirees

6. Donate your dividends.

Some people may choose to donate their dividends to a charitable cause that means something to them. It’s a great way to leave a legacy and make a positive impact at the same time.

This option may be best for: Individuals with extra wealth to share

With dividends, you’re “freezing” your money – to enjoy it in future.

Making money with dividends is a long-term commitment – like that huge batch of pizza sauce you’ve frozen for the future. It takes some planning and a lot of patience to take advantage of the compounding effect.

1. Set a long-term goal. First decide why you want to grow your money (e.g., help pay for child’s education), when you need it (e.g., when your child is 18 years old) and how many years it will take to reach that goal.
2. Purchase a whole life policy for yourself or your child. If, like the example above, your goal is to support of your child’s financial future, you may want to consider a 20-pay whole life policy for your little one. It is the most affordable option when your child is young and healthy – and payments stop after 20 years (but coverage lasts their whole life).
3. Re-invest your dividends. Instead of pocketing the dividend cash, consider re-investing it. If you opt to go this route, the insurer will place your earned dividend in a savings account, where you will earn a pre-determined amount of interest (i.e., accumulated dividends⁵). This will result in a compounding effect that will also help speed up growth.
   1. Once you’ve reinvested, opt for Paid-Up Additions (PUA)⁶. This is a great little hack that won’t cost you a thing, but will help speed up growth significantly. Simply use your dividends to pay for an extra layer of coverage, and watch your money grow.
   2. To maximize your PUA, go for the Additional Deposit Option (ADO)⁷. This step will cost you extra, but if you pay as little as $27 extra each month, your earnings have the potential to almost double in growth in the long run.
4. Be patient. Growing your money takes time. The longer you keep your money invested, the more it can grow.

This bar graph illustrates how your money can grow exponentially⁸ when you maximize your PUA with ADO.

With compound interest, you can enjoy the compound effect.

Compound interest is like a magical force that helps your money grow faster over time – like your pizza dough grows in size when you leave it to rise overnight – it’s just that compound interest takes a bit longer than one night. (Remember, we mentioned patience above?)

If you have the time and the patience, reinvesting your dividends becomes a brilliant idea, thanks to the compounding effect. Here’s how it works:

• Grow your investment base: As you reinvest your dividends, you’re not just earning interest on your initial investment; you’re also earning interest on your interest – plus your initial investment. This creates a compounding effect, much like a snowball rolling down a hill and getting bigger as it goes.
• Enjoy long-term growth: Over the long term, the compounding effect of reinvesting your dividends can significantly boost your investment. It’s like a snowball turning into a snow boulder – the larger your investment base, the more substantial the dividends become.

In sum, compound interest is a cycle of growth that, over time, can make a significant impact on the overall value of your investment.

A final – but important – thing to consider: Dividends are dependent on the market, so like other higher risk investments, there are no guarantees. This is why dividends are a long-term investment – the longer you wait, the more your money has the potential to grow… and grow… and grow. Yes, because of the compound effect. (Note: While dividends are considered “higher risk,” Serenia Life has consistently paid out dividends members since launching this product in 1972.)

Now that you know what dividends can do for you, are you ready to start growing your wealth? Speak with your Serenia Life advisor today to learn more! Don’t have an advisor? Fill out this short form to get the ball rolling.

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¹External links are for informational purposes only; they do not constitute an endorsement by Serenia Life Financial. Serenia Life Financial bears no responsibility for the accuracy, legality, or content of the external site or for that of subsequent links. Contact the external site for answers to questions regarding its content.

²Dividends are not guaranteed and are paid based on the overall experience of Serenia Life Financial, considering all risk factors. Dividends may be subject to taxation. Dividends will vary based on the actual investment returns in the participating account as well as mortality, expenses, taxes, lapses, withdrawals, and other experience of the participating block of policies. These factors have the potential to increase the value of your policy above the guaranteed amount, depending on the dividend option selected.

³Cash values are accessible via a withdrawal, policy loan, or surrender. These may be subject to taxation and a tax slip may be issued. Accessing the policy’s cash value will reduce the available cash surrender value and death benefit.

⁴Policy withdrawal is an option to withdraw money from the accumulated cash value of the policy if Paid-up Additions or Accumulated Dividends is the selected dividend option. Withdrawals reduce the total cash value, affects future growth, and reduces the death benefit. If the withdrawal is only up to the amount that is paid in premiums (known as the adjusted cost basis), there won’t be taxes. Otherwise, there would be taxes on the portion that is more than the adjusted cost basis.

⁵Accumulated Dividends: With this dividend option any dividend credited to your policy will be left on deposit with us and credited an interest rate determined by us. The dividends left on deposit will increase the total death benefit payable and increase the total cash value on the policy. The annual dividend credited may be subject to taxation, and any interest earned on the dividends left on deposit will be reported annually for income tax purposes.

⁶Paid-up Addition: With this dividend option any dividend credited to your policy will be used to purchase Paid-Up Additions. These Paid-Up Additions create an additional layer of permanent Whole Life insurance which increases the death benefit. The additional permanent insurance also has a cash value which can accumulate on a tax-preferred basis.

⁷Paid-up Addition with ADO: Additional Deposit Option allows you to take advantage of the tax preferred savings room within a Serenia Life Financial Whole Life policy. By choosing this option you can pay additional premiums over and above the required premium for your policy. Each of these premiums will be used to buy Paid-Up Additions, which increase the permanent protection available to you. These additional layers of coverage are combined with the Paid-Up Additions purchased with dividends to potentially accelerate your death benefit growth. Paid-Up Additions also have a cash value, which will also be increased when Paid-Up Additions are purchased with the Additional Deposit Option.

⁸Illustration only, as of December 2024. Age 0, male regular rates with $50,000 insurance coverage and using current dividend scale. Future performance will be different than illustrated due to the variability of the dividends. Dividend options used are Accumulated Dividends, Paid-up Additions and Paid-up Additions with Additional Deposit Option of $27.08 per month. All numbers in CDN $. The policy is “paid up” at Age 20.