What is a Non-Participating Policy?
A non-participating policy does not share the surplus earnings, and therefore does not receive a dividend payment. That is profits are not invested in non-participating programs, so no distributions are paid out to policyholders. This form of policy is often referred to as a charity or non-par policy. In the case of a non-participating policy, the policyholder is not paid a bonus or dividend.
What is the Payment Guarantee of a Non-Participating Policy?
In non-participating policies, there are no payments because the profits are not shared. The rates are far less than active plans. For example, a term insurance policy or fixed life insurance policy is a policy which is not involved in returning cash value.
How is a Participating Policy Different from a Non-Participating Policy?
Typically, participating policies are life insurance contracts, such as the participating policy for a whole life. The dividend the policyholder receives may be used in various ways. First, the policyholder may apply the dividend proceeds to the premium payment provided by the insurance policy. Additionally, the dividend can be held as a deposit with the insurer to produce interest much like a daily savings account.
Insurance companies are charging premiums which are estimated to cover their costs. Usually, non-participating premiums are lower than participating policy premiums. Insurance companies, based on conservative projections, charge higher premiums on participating policies to return the excess.
Policy participation can, in the long term cost less than non-participating policies. The dividend will typically rise with cash-value policies as the cash value of the policy increases.
From the policyholder’s perspective, life-long policies are essentially risk-free, because the insurance company carries all risk – although the insurance company shifts some risk to the policyholder with participating life-long policies.
