{"id":404,"date":"2010-07-31T18:46:58","date_gmt":"2010-08-01T01:46:58","guid":{"rendered":"https:\/\/maysfinancial.local\/"},"modified":"2017-02-26T02:02:05","modified_gmt":"2017-02-26T02:02:05","slug":"participating-nonparticipating-insurance-policies","status":"publish","type":"post","link":"https:\/\/maysfinancial.local\/articles\/participating-nonparticipating-insurance-policies\/","title":{"rendered":"Participating vs. Non-Participating Insurance Policies"},"content":{"rendered":"

This concept primarily related to the topic of life insurance.\u00a0 Both types of insurance policies, term and cash value, can act as either participating or non-participating (par or non-par, respectively).\u00a0 Most policies are par policies.<\/strong><\/p>\n

Par Policies<\/strong><\/h5>\n

Insurance companies will charge higher than necessary premiums with the intent of returning the excess.\u00a0 Excess premiums are charged because the insurance company will operate based on more conservative estimates.\u00a0 For example, they will base premiums on higher operating costs and lower rates of return than are actually expected.\u00a0 This allows the insurance company to better protect against non-diversifiable (highly correlated) risk<\/strong>. In the end, this is better for the individual in that their insurance company bears less insolvency risk, and their expected costs are lower, resulting in lower premiums in the long run.<\/strong> Par policies are essentially a form of risk sharing where the insurance company shifts a portion of risk to policyholders.<\/p>\n

Though the factors and assumptions (interest rates, mortality rates, expenses) that dividend formulas are based on change year to year, the insurance company will not vary dividends from year to year.\u00a0 Instead, they will alter dividend formulas periodically based on experience and anticipated future factors.\u00a0 The previous statements apply to whole life insurance.\u00a0 Universal life insurance policy dividend rates can adjust much more frequently, even monthly.<\/p>\n

Return of excess premiums through dividends to the policyholder are not taxable<\/strong> because, unlike with investments, they are not earnings but return of excess premium payments. There are different ways in which these dividends can be utilized.\u00a0 Two of the most common ways are to apply them towards the cost of the future premiums (lowering premium payments), or to use them to increase the face value of the policy (paid-up additions).<\/p>\n

Non-Par Policies<\/strong><\/h5>\n

Insurance companies charge premiums that are estimated to meet expenses.\u00a0 Non-par premiums are usually lower than premiums for par policies.<\/p>\n

Par policies can end up costing less than non-par policies if maintained long-term.<\/strong> With cash value policies, the dividend will typically increase as the policy’s cash value increases.<\/p>\n

Insurance agents will show “illustrated dividends” when selling policies. Illustrated dividends are current or expected dividend rates.\u00a0 Though these tables may be attractive, keep in mind that they are for illustrative purposes only and actual experience may differ.<\/strong><\/p>\n

There exists an argument on risk bearing with participating whole life policies.\u00a0 In the article detailing whole life insurance I stated that, from the perspective of the policyholder, whole life policies are essentially risk free because the insurance company bears all risk.\u00a0 Above I stated that with participating whole life policies the insurance company shifts some risk to the policyholder.\u00a0 The simple answer is that dividends for whole life policies reflect long-term\u00a0trends in interest rates, costs, and expenses.\u00a0 This long-term affiliation has a dulling effect on changes in these trends, making dividends less volatile.\u00a0 Essentially, with participating whole life policies a risk does exist, but this risk is relatively insignificant.<\/p>\n","protected":false},"excerpt":{"rendered":"

This concept primarily related to the topic of life insurance.\u00a0 Both types of insurance policies, term and cash value, can act as either participating or non-participating (par or non-par, respectively).\u00a0 Most policies are par policies. Par Policies Insurance companies will charge higher than necessary premiums with the intent of returning the excess.\u00a0 Excess premiums are […]<\/p>\n","protected":false},"author":1,"featured_media":3990,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[2,8,11],"tags":[108,127,128,132,133],"_links":{"self":[{"href":"https:\/\/maysfinancial.local\/wp-json\/wp\/v2\/posts\/404"}],"collection":[{"href":"https:\/\/maysfinancial.local\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/maysfinancial.local\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/maysfinancial.local\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/maysfinancial.local\/wp-json\/wp\/v2\/comments?post=404"}],"version-history":[{"count":0,"href":"https:\/\/maysfinancial.local\/wp-json\/wp\/v2\/posts\/404\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/maysfinancial.local\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/maysfinancial.local\/wp-json\/wp\/v2\/media?parent=404"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/maysfinancial.local\/wp-json\/wp\/v2\/categories?post=404"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/maysfinancial.local\/wp-json\/wp\/v2\/tags?post=404"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}