Participating policy

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Participating Policy

In insurance, a policy (usually a whole life policy) that pays dividends. The dividends are a portion of the insurance company's profits and are paid to the policyholder as if he/she were a stockholder. However, the policyholder has a variety of options on what to do with the dividends. He/she may take the payment in cash, just like a stock. Alternately, he/she may apply the dividends to the policy premium, reducing his/her cost. Finally he/she may place the money with the insurance company, which treats the dividends like a savings account, accruing interest for the policyholder. Most participating policies pay a final dividend at the policy's maturity, and some have a guaranteed dividend, which is determined in the insurance contract. More recent participating policies have more complicated structures, such as including market value reductions on dividend withdrawals. This has led critics to complain that participating policies are overly complicated without providing the policyholder much he/she cannot have in other investment vehicles. In the United Kingdom, participating policies are called with-profits policies, and their dividends are called bonuses.

Participating policy.

When policyholders have what is called a participating policy from a mutual insurance company, they are eligible to receive dividends based on the company's financial performance.

When claims are low and the company's investments perform well, dividends tend to rise. On the other hand, when claims are high and investment returns slump, dividends are likely to fall.

The dividends on a participating policy aren't guaranteed, so they may not be paid every year. Unlike the dividends paid to a company's shareholders, participating policy dividends are considered a return of premium. As a result, the dividends are not taxed as income.

Dividends may typically be paid out as cash, as additional insurance coverage, or may be used to reduce policyholders' premiums or repay policy loans. Rules vary from company to company.

References in periodicals archive ?
Like traditional participating policies, the pure protection and savings components are not segregated or stated separately.
I]n a year of market volatility and low interest rates, consumers may view the simplicity of whole life, combined with the potential to earn dividends on participating policies, as a positive.
It also maintained that its closed block dividend scale in eight out of the thirteen years since its demutualisation and the cumulative adjustment over that period, is consistent with adjustments to other companies' closed block participating policies.
3) Both term and permanent insurance are available as participating policies, which offer the opportunity for dividends that may be used to: reduce the premium outlay; purchase paid-up additions (which accrue their own cash values); enhance the amount of available death benefit through a combination of oneyear term insurance and paid-up additions (the fifth dividend option); or augment the cash values by being left to accumulate at interest.
The law placed a limit on the amount of surplus that domestic mutual life insurers and domestic stock life insurers that issue participating policies are permitted to maintain.
Participating policies pay dividends based on deviations of actual claims, interest, and expenses from the assumptions built into the premium, thus allowing policyholders to share in the insurer's aggregate profits (Black and Skipper, 2000).
However, like many participating policies in the market today, most AL policies are "indirect recognition interest sensitive" or "indirect recognition current assumption" policies.

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