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What is a “participating” insurance policy?

Since life insurance contracts are long term in nature, it is difficult to accurately forecast interest rates, mortality experience and expenses and consequently the amount of premium to be charged. Historically, companies have levied higher premiums than necessary. As a way of distributing this surplus that has accumulated, some companies have paid policyholders a “dividend” and referred to this type of insurance as participating life insurance. Dividends vary with the type of plan, entry age and the length of the policy. In a way, these dividends are a refund of the premiums that have previously been paid.

According to the Insurance Company Act, the policy concerning the payment of dividends must be established by the directors of the insurance company . Such a policy must specify frequency of dividend determination, which policies are eligible for dividends, the source of funds from which the dividend distribution is to be paid, the method of distribution, the measure of equity between different classes of policy holders and compliance with regulatory and statutory requirements.

Greater surplus is available the lower the expenses, the more favourable the mortality rates and the higher the return on investments.

Policies in which the policyholder does not share in the surplus are called “non-par” policies. Premiums on non-par policies tend to be lower because companies that issue non-par policies tend to have less conservative assumptions concerning mortality rates, rates of investment return and expenses. It is difficult to determine whether a participating or non-par policy will be more costly over the long run because dividends are never guaranteed.

Dividends can be paid in cash or left on deposit to collect interest. Dividends can also be used to offset premiums, purchase additional term life insurance and to purchase paid-up additions.