Participating policy


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Related to Participating policy: reversionary bonus

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 ?
Pottier, 2001, Agency Theory and Participating Policy Usage Evidence From Stock Life Insurers, Journal of Risk and Insurance, 68(4): 659-683.
The article addresses in particular the issue of a fair contract design for a complex type of participating policy and analyzes in detail the feasible set of policy design parameters that would lead to a fair contract and the trade-offs between these parameters.
An inspection of the "building blocks" of such a participating policy reveals that we can regard these contracts as a sequence of embedded options written on the asset portfolio A (which, from now, we call the reference portfolio), whose market value can be determined within the classical contingent claim pricing framework.
Massachusetts Mutual Life Insurance Company (MassMutual) announced that its board of directors has approved an estimated dividend payout of $1.6 Billion for 2015, marking the third consecutive year the company has paid a record dividend to entitled participating policy owners and members.
Of the estimated $1.6 billion dividend payout, an anticipated $1.55 billion has been sanctioned for entitled participating policy owners who have purchased whole life insurance.
As part of a participating policy, the amount that can be paid out when there is a chronic illness can increase should the buyer purchase additional insurance (i.e., paid-up additions) with the base policy dividends.
In this article we deal with the problem of pricing a guaranteed life insurance participating policy, sold in the Italian market, which embeds a surrender option.
The innovation in this article is that the authors allow for an endogenous level of participation, whereby the insured can choose a convex mixture of a fixed-premium contract and a participating policy. This variable participation contract allows the individual to selectively hedge both the diversifiable and nondiversifiable risk components.
Consider now a fully participating policy with a premium equal to the ex post average indemnity paid by the insurer.
The authors' results are consistent with the argument that participating policy usage is dictated by the trade-off between the mitigation of the contracting costs of risk shifting and underinvestment, and the exacerbation of the incentive conflicts between managers and shareholders.
By a participating policy we refer to a contract where the insured is entitled to a share of the surplus if the realized interest rate during the insurance period is above the assumed interest rate.
There exists a participating policy such that the incentive compatibility and financing conditions are jointly satisfied.(18) Shareholders are able to credibly precommit themselves to selecting portfolio 1, and policyholders will rationally price their policies to reflect this fact.

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