Participating vs Nonparticipating Policy
Participating policies (typically mutual insurers) pay dividends from favorable mortality, expense, and interest experience. Nonparticipating policies guarantee all values with no dividends.
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Practice This Concept
Which statement correctly describes a nonparticipating life insurance policy?
It does not pay dividends to the policyowner — A nonparticipating policy does not pay dividends to the policyowner. Dividends, which reflect favorable mortality, expense, and investment experience, are a feature of participating policies typically issued by mutual insurers. Because a nonparticipating policy's premium is set with the assumption that no dividends will be returned, its cost is generally more predictable, and the policyowner has no share in the insurer's surplus. Nonparticipating policies are commonly issued by stock insurers, although any insurer may offer them. The absence of dividends means the policyowner neither benefits from nor shares in the insurer's favorable experience.
National insurance concept
Which statement about a nonparticipating life insurance policy is correct?
The policyowner does not receive dividends because policy performance is not shared with the company's surplus — A nonparticipating (non-par) policy does not pay dividends; the premium is based on more conservative assumptions and the policyowner does not share in the insurer's divisible surplus. Because there are no dividends to fluctuate, non-par policies often carry lower base premiums than participating policies, which charge higher premiums and return a portion of surplus to policyowners as dividends. Non-par policyowners are not shareholders, and the absence of dividend participation does not depend on the company's actual profit in a given year.
National insurance concept