There are different forms of Whole Life insurance serving different purposes. Participating (PAR) Whole Life insurance is a type of insurance that shares in the profits of the policyholders (same as policy owners), through a policy dividend. In the United States, the mutual company is favored for this type of insurance for the fact that the participating policyholders share in all profits of the company. In this structure, there are no shareholders to the company so in essence the participating policyholders own the company.
In Canada, following a wave of de-mutualizations in the late 1990s, most companies are now stock corporations (ie publicly traded companies on the stock market). These companies are completely accountable to the shareholders.
In these “public” companies, the Participating Whole Life policyholders have all of their premiums and corresponding reserves held in a segregated account separate from the company’s general reserves and operating accounts, as mandated by industry and government regulations. As such, all monies paid into a Participating Whole Life policy are held in this segregated account, and consequently all returns and gains from investing this money, or the efficiencies of managing life expectancy projections, remain in this account and become eligible to be paid out to the policyholders as dividends. It is this “participating” nature that creates the dividends to be paid out to policyholders.
If investments go bad in this segregated account, dividends may decrease or stop altogether, hampering future growth. But it is the responsibility of the company, not the policyholders, to ensure that the proper capital reserve requirements are met to ensure proper and timely payouts of all death benefits when they are due. The values in your Whole Life policy can never decrease as long as you maintain your premiums as scheduled and do not withdraw money from the policy by cash withdrawals or premium offset. The losses are owned by the insurance company who is responsible for re-establishing reserves, but the gains in this account are shared with policyholders through policy dividends.
It is pretty nice to have the downside protection against losses, yet be able to participate in the gains and future profits of the segregated account.