Many advisors don’t realize that Whole Life insurance policies can be either participating (par) or non-participating (non-par).
Yet your prospects and clients own both, and rely on you to answer questions about their policies. So let’s correct this common misconception.
When a WL policy is participating, it means the owner shares in both the surplus profits and the risk of the company’s participating insurance line of business. Those surplus profits are issued in the form of dividends. As for risk, it’s possible that there will not be any surplus profits to share.
Many advisors discount this risk because most insurance companies have paid dividends each year – even during the Depression and the World Wars. (In some cases, the dividends may have been lower than originally anticipated.)
But there is still risk to the par policy owner.
Insurance product pricing is based on mortality assumptions, long- and short-term interest rates, and expenses. Actuaries usually use conservative assumptions to improve the chances of surplus profits going back to policy owners. Even so, they’re still assumptions, and much of today’s in-force par WL insurance was priced and bought in 1960s, 1970s and 1980s, when market conditions were markedly different. Those assumptions may not have been conservative enough.
Non-par WL policies
By contrast, the insurance company shoulders all the risk in a non-par WL policy – but also keeps all the profits. For publicly traded companies, this means profits from the non-par insurance business, and the rest of the company’s non-par business (e.g., mortgages, real estate, re-insurance, private placement, annuities, segregated funds, group insurance, pension plans, etc.) go to the shareholders. Non-par premiums tend to be lower than par premiums as a result.
The distribution of par profits is legislated according to the company’s size. The largest companies must distribute 97.5% of their surplus profits to par policy owners. The remaining 2.5% is kept by shareholders as a management fee. On the other hand, the non-par business makes no monetary contribution to the par fund.