Yield

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, universal life, or variable 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:

1. 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.
2. 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.
3. Investment-Linked Policies: In variable life and certain universal life insurance policies, the cash value can be invested in a range of investment options, such as mutual funds. The yield in these cases depends on the performance of the selected investment options.
4. 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.
5. Tax Implications: The growth of the cash value in a life insurance policy, including yield from interest, dividends, or investments, is generally tax-deferred under Canadian tax law. Taxes may be due upon withdrawal, depending on the amount withdrawn relative to the policy's adjusted cost basis.
6. 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.
7. 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.

Understanding the yield of a life insurance policy's cash value or investment component is crucial for policyholders who view their life insurance not only as a means of financial protection but also as a component of their investment strategy. It's important for individuals to consider their long-term financial goals, risk tolerance, and the specific features of their life insurance policy when evaluating the potential yield and its role in their overall financial planning.