Participating/Non-Participating WL

When setting premiums on a WL policy, insurance company must estimate:

Mortality Costs

Expenses

Investment Return

Insurance company must be very conservative!
The investment return must be estimated on the low-side and expenses on high side
Better safe than sorry

If the actual results are better than anticipated and the insurer has a surplus, does the policy holder benefit?

Depends on whether the policy was a:

Non-participating policy: the policy holder does NOT participate in the surplus :(

Participating policy: the policy holder does participate in the surplus

All else being =, a participating policy cost more $ vs. a non-participating policy

dividend: the sharing of a surplus with participating policy holders

*Dividends are NEVER guaranteed!!!

Advantage to Participating Policy:

What can be done with the dividends

Dividend Options:

EXAMPLE: Assume Michael’s policy is participating and he receives a $100 dividend this year.

His Dividend options are:

Dividend Option	Desc. & Examples
Cash	the dividend is sent to Michael in cheque form
Premium Reduction	the dividend is applied to the next premium ex. if his premiums is $162 and he receives a $100 dividend → only pays $62
Accumulation	dividends accumulate in a separate accumulation account (“side account”) that can be invested in interest bearing deposits or seg funds
Term Insurance	dividend is used to purchase additional coverage in the form of 1 year term insurance cheap when life insured is young → allow him to add a lot of coverage in early years may be appropriate if Michael needs a lot of additional insurance in early policy years
PUA	the dividend is used to purchase fully paid-up perm coverage perm insurance is $ vs term, this option doesn’t result in a lot of additional coverage being added in early policy years