In the context of life insurance in Canada, “yield” refers to the rate of return or income generated by the cash value component or investment accounts within certain life insurance policies, such as whole life or universal life insurance policies. Yield is an important consideration for policyholders who are looking at the investment aspect of their life insurance as a means to grow their savings or as part of their broader financial strategy.
Key aspects of yield in this context include:
Cash value growth
Many permanent life insurance policies have a cash value component that accumulates over time. The yield represents the growth rate of this cash value, influenced by interest rates, dividends, or investment returns, depending on the type of policy.
Interest rate-based policies
For policies where the cash value grows based on a credited interest rate (such as in some whole life and universal life insurance policies), the yield is directly related to the interest rate credited by the insurer. This rate may be guaranteed or may vary within certain parameters.
Investment-linked policies
In universal life insurance policies, the cash value can be held in investment accounts that follow the performance of the options you choose, such as market indexes or funds. The yield in these cases depends on the performance of the selected investment options.
Dividend-paying policies
Some whole life insurance policies are “participating,” meaning they may pay dividends based on the insurer’s financial performance. While not guaranteed, dividends can enhance the policy’s yield when they are reinvested into the cash value.
Tax implications
The growth of the cash value in a life insurance policy that is an exempt policy under the Income Tax Regulations, including yield from interest, dividends, or investments, is generally tax-deferred under Canadian tax law. If a policy isn’t exempt, the growth is taxed each year. Taxes may be due upon a withdrawal or policy loan, depending on the amount relative to the policy’s adjusted cost basis.
Policy loans and withdrawals
Policyholders can often access the cash value through loans or withdrawals, which may impact the yield by reducing the amount of cash value available to earn returns.
Impact on benefits
The yield on the cash value component can impact the overall benefits of the policy, potentially increasing the death benefit or allowing for reduced premiums, depending on the policy’s structure and terms.