Participating vs. Nonparticipating Life Insurance

Definition and Overview

• Participating (Par) Life Insurance: Includes certain whole life plans that make the policy owner eligible for dividends.
  • Dividends are profits from the insurance company shared with policyholders.
  • Policyholders can receive dividends if the company performs well financially.
• Nonparticipating (Non-Par) Life Insurance: Policyholders do not receive dividends.
  • Additional profits remain with the insurance company.

Sources of Profit for Insurance Companies

• Fewer deaths than expected lead to surplus profits.
• Higher investment returns than planned.
• Lower operating expenses than budgeted.

Impact on Policies

• Participating Policies: Share profits through dividends with policyholders.
• Nonparticipating Policies: Company retains all profits and bears any shortfalls.

Dividend Concept

• Dividends are not guaranteed; they depend on company's profit performance.
• Similar to dividends from publicly traded companies.

Dividend Options for Participating Policies

1. Receive in Cash:
   • Policyholder receives a check for the dividend amount.
2. Reduce Next Year's Premium:
   • Use dividend to decrease the following year’s premium payment.
3. Cash Accumulation:
   • Invest dividends in a separate fund or savings account within the company.
4. Paid-Up Additional Insurance:
   • Use dividends to purchase more of the existing type of insurance.
   • Increases death benefit without additional medical evidence.
5. Purchase One-Year Term Insurance:
   • Use dividends to buy additional, temporary one-year term insurance.

Flexibility in Dividend Options

• Policyholders can change their dividend option each year by notifying the insurance company.
• Options offer flexibility in managing benefits based on personal financial needs and goals.