When an insurance company sets out to determine pricing on an insurance policy, values are based on long term assumptions regarding three main factors:
- Mortality costs (claims payable under all policies that the insurer issues)
- Administrative costs (Costs that are associated with maintaining the policy – Staff salary, Commissions etc..)
- Investment return (net of premiums received from policy holders)
While most policies carry fixed premiums as well as pre-set cash surrender values, all determined at policy issue, the insurance company can choose one of two methods of issuing whole life (permanent) policies. The more administration required, the higher the cost.
One method allows policy holders to benefit from the “good” performance of the insurance company in terms of making good investment and risk related decisions. The second method does not allow for said participation in company performance.
With participating whole life policies, policy holders are paid a dividend annually as long as the company has made good risk and investment decisions. In most cases, participating policies come with a guarantee of some percentage gain in dividend payments, usually 1.5%. The excess profit gained by the company is shared with the participating policy holders. The possible result is that the policy holder can be paid cash earnings yearly from the policy. Alternatively, all dividends earned can be paid into the death benefit amount thereby increasing the value of the policy while premium costs never increase.
In the case of a non-participating policy, there are no additional dividends paid. The benefit amount payable at policy issue will never increase. For this reason some might view a participating whole life policy as a form of a secure low risk/low return investment vehicle.
Ultimately, the choice of what type of permanent policy is more beneficial is based primarily on the needs of the client. A participating policy might make sense to a client who is willing to pay a bit more in premiums for the prospect of a higher benefit payment, as well as growing cash value that can be borrowed against. A non-participating policy on the other hand might make sense if the client simply wants to have coverage for life with cheaper set premiums.
Reach out to me directly and I will guide you through the process of choosing a plan that suits your needs and the needs of your family.