Par Policies: Savings rather than investments

It's important to realize that putting money in a par policy is saving, rather than investing in the true sense, because the capital is not at risk. It is closer to saving in a GIC.

While it is true that a participating policy dividend is not guaranteed, Great West and London Life have not missed a dividend in a hundred years, including wartime and depression. More importantly though, once a policy dividend is declared, it IS guaranteed not to lose value, unlike an equity or even a bond.

The reason that par policy dividends have been able to return 2 points over GICs on any given year in the last 100 years is:

• it has a small equity component that may provide growth. That being said, Great West's equity position is very small relative to many pension funds (e.g. CPP has 40% in equities: Great West life's participating fund has 10%, the average participating fund has a maximum of 20% in equities)
  
• it can smooth its results over 10-15 years. Gains and losses need not be immediatey recognized. If interest rates decline, for example, the gains on the long bond portfolio are not paid out immediately. Investment dispositions are rather laddered.
  
• people are living longer, so policies are paying out later than expected
• operating costs are reducing
• a small percentage is not distributed immediately and is instead used as a contingency fund to smooth results in case of a bad year.