A Participating Policy, also known as a “Par Policy,” is a type of insurance coverage where policyholders receive dividends from the insurance company based on its earnings. These dividends can be used in several ways, such as reducing the amount of the premium that must be paid, enhancing the cash value of the policy, or taken as cash. This type of policy is common in life insurance but can be found in other types as well.
Types of Dividends in Participating Policies
Cash Dividends
Policyholders may choose to receive their dividends in cash, which provides immediate liquidity.
Premium Reductions
Dividends can be applied directly to reduce future premium payments, making the policy more affordable over time.
Purchase Paid-Up Additions
Dividends may be used to purchase additional insurance coverage, increasing the policy’s death benefit and cash value.
Accumulate at Interest
Dividends can be left with the insurer to accumulate and earn interest, which can provide a return on investment.
Special Considerations
- Mutual vs. Stock Insurance Companies: Participating policies are generally offered by mutual insurance companies, which are owned by the policyholders rather than shareholders.
- Dividend Variability: Dividends are not guaranteed and can vary based on the insurer’s financial performance and mortality experience.
- Policy Cost: Participating policies often have higher premiums than non-participating policies due to the potential for dividend payments.
Examples
- Example 1: John holds a participating whole life insurance policy. His insurer declared a dividend based on the company’s favorable performance. John chooses to apply his dividend to reduce his annual premium.
- Example 2: Maria receives dividends from her participating policy and opts to use these dividends to purchase paid-up additions, thereby increasing her life insurance coverage without additional premium payments.
Historical Context
Participating life insurance policies have a long history dating back to the 19th century when mutual insurance companies were formed to provide coverage and share profits with policyholders. The concept of paying dividends to participating policyholders was a means of showing financial health and rewarding policyholders’ trust.
Applicability
- Life Insurance: Predominantly found in whole life insurance policies.
- Other Insurance Types: Rarely found in other insurance types, but some disability and health insurance policies may offer participating options.
Comparisons
- Participating vs. Non-Participating Policies: Non-participating policies do not provide dividends. They typically have lower premiums but lack the potential for returning part of the premiums as dividends.
- Mutual vs. Stock Companies: Mutual companies tend to offer participating policies, whereas stock companies usually do not.
Related Terms
- Premium: The amount paid periodically to the insurer by the insured for coverage.
- Dividends: A portion of the company’s earnings returned to policyholders.
- Cash Value: The amount available in cash upon cancellation of a policy.
- Death Benefit: The amount paid to the beneficiaries upon the death of the insured.
- Paid-Up Additions: Additional coverage purchased with dividends that requires no further premium payments.
FAQs
Are dividends from participating policies guaranteed?
Can I spend dividends received from a participating policy however I want?
Are participating policies more expensive than non-participating policies?
References
- “Life Insurance: A Handbook” by Solomon S. Huebner
- “Principles of Insurance” by William Franklin Gephart
Summary
Participating policies offer a unique blend of life insurance coverage combined with the potential for earning dividends based on the insurer’s profitability. Understanding the types of dividends, special considerations, and historical context can help policyholders make informed decisions about their insurance needs. This form of policy is particularly beneficial for those seeking both coverage and an investment component with the potential for financial returns.
