Participating Insurance Policy
A Participating Insurance Policy, often referred to as a “par” policy, is a type of life insurance that generates dividends for the policyholder. These dividends are a portion of the insurance company’s profits, which are distributed to policyholders based on the performance of the company’s investments and overall financial health.
Key Features
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Dividends: The primary feature of a participating insurance policy is the payment of dividends. These can be received in several forms:
- Cash payouts.
- Reduction of premium payments.
- Purchase of additional paid-up insurance.
- Accumulation at interest with the insurance company.
- Paid into a term insurance.
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Ownership Rights: Policyholders of participating insurance are considered partial owners of the insurance company. This ownership entitles them to participate in the company’s profitability.
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Cash Value: Many participating policies build cash value over time, offering a savings element in addition to the insurance protection.
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Cost: Participating policies often have higher premiums compared to non-participating policies due to the potential for dividend payouts.
Examples
- Whole Life Participating Policy: This policy not only covers the insured for their entire life but also pays dividends, which can significantly enhance the policy’s value over time.
- Participating Endowment Policy: This type of policy combines both insurance coverage and savings, with dividends being paid periodically, helping in both protection and in gathering a lump sum at maturity.
Frequently Asked Questions
Q1: How often are dividends paid on participating insurance policies?
- A: Dividends are typically paid annually.
Q2: Are dividend payments guaranteed in a participating insurance policy?
- A: No, dividend payments are not guaranteed. They depend on the insurance company’s financial performance and earnings.
Q3: Can I change how I receive my dividends after I have chosen an option initially?
- A: Yes, most insurance companies allow policyholders to change their dividend payment options at any time.
Q4: What happens to dividends if the policyholder passes away?
- A: Dividends accumulate until the policyholder’s death are typically paid out along with the death benefit.
Q5: Is the dividend received from a participating policy taxable?
- A: Generally, dividends paid on a life insurance policy are not subject to income tax. However, if the dividends exceed the total premiums paid, the excess amount may be subject to tax.
Related Terms
- Non-Participating Policy: A life insurance policy that does not pay dividends to the policyholder.
- Cash Value: The amount of money that accumulates in a permanent life insurance policy, which the policyholder can borrow against or withdraw.
- Premium: The amount paid periodically by the policyholder for the insurance coverage.
Online References
- Investopedia on Participating Insurance Policy
- National Association of Insurance Commissioners
- International Risk Management Institute, Inc. (IRMI)
Suggested Books for Further Studies
- “Life Insurance, 15th Edition” by Kenneth Black Jr. and Harold Skipper
- “The Tools & Techniques of Life Insurance Planning” by Stephan R. Leimberg, Kenneth M. Coughlin, and Kate K. Coughlin
- “Personal Insurance: Life & Health” by Julian R. Leimberg and Kenneth M. Coughlin
Fundamentals of Participating Insurance Policy: Insurance Basics Quiz
Thank you for exploring the comprehensive details of participating insurance policies and tackling our relevant quiz questions. This knowledge can be a valuable addition to your understanding of life insurance products and their financial benefits.
