Participating Vs Non-Participating Whole Life Insurance

While there are seven different types of whole life insurance, there is a difference between them all. Two of these types of whole life insurance are quite different and can impact how your life insurance works for you.

Whole life insurance is just what the name implies—insurance for your whole life. There is a guarantee of a minimum cash value and growth that is included in the insurance policy. The biggest advantage of a whole life insurance policy is a guaranteed death benefit. There is also a guaranteed cash value, fixed and annual premiums, accessible cash values.

The downside to whole life insurance is that the premiums are not flexible. Also, the internal rate of return isn’t very competitive with other savings alternatives.

It’s important to remember that while whole life insurance comes in both non-participating and participating, not all insurance companies offer these two types of whole life insurance, or any of the seven types. It’s important to check with the insurance company you are dealing with to see if they offer the specific type of whole life insurance that you are interested in. Likewise, if you are using an insurance agent or broker, they can find an insurance company for you that offer the type of whole life insurance you want.

Non participating life insurance is very inflexible. Everything is determined when the policy is issued and after that, nothing can be changed. The death benefits, the premiums and the cash surrender values are all determined when you are setting up the policy. Once the insurance company issues you the whole life insurance policy, you can not make any alterations.

However, this also means that the insurance company is taking the risk of the future and the performances of the policy in comparison to the estimates made by the actuaries. (Actuaries determine risk levels of the client.) If the future claims are underestimated by the actuary, the insurance company must pay to make up the difference. However, if the estimates made by the actuary are too high, then the insurance company gets to keep the difference. This leads one to believe that the actuaries “aim high” on their risk estimates so that the likelihood of the insurance company needing to pay if the estimates are too low are greatly reduced.

Participating whole life insurance means that if the estimates of the actuary are too high, the insurance company shares the profits with the policy holder (you)—the greater the company’s success the better the profit and surplus. It is in the best interest of the insurance company to ‘aim high’ so they can retain a share of the profits with you. However, insurance company actuaries are very skilled at their jobs and are usually dead-on the money with their estimations.

In short, the choice between these two types of whole life insurance is yours to make—a decision not to be made lightly as your future may depend on it.