A participating policy is commonly featured in long term insurance products, such as whole life insurance, endowment insurance or critical illness insurance products that have a savings element. It provides policyholders with life protection, as well as non-guaranteed benefits by distributing dividends or bonuses, which allow policyholders to share the product profits.
Non-guaranteed benefits (also known as dividends or bonuses) are not guaranteed to be paid by insurers. They may not be the same as the insurer’s investment returns. The payout is affected by the insurer’s investment strategy and performance, claim experience, operational expenses, etc. The final payout may be higher or lower than the projected payout illustrated in the benefit illustration. Under extreme circumstances, the amount of non-guaranteed benefits may be zero.
In general, there are three types of dividends or bonuses, which are all non-guaranteed. The type of distribution is subject to the terms of a specific policy. Following are some common features:
| Annual dividend | This is a cash payout. Insurers declare and pay out the dividend annually. In general, the amount is fixed once declared. Policyholders may either withdraw the dividend or leave it with the insurer to accumulate non-guaranteed interest according to the policy terms. |
|---|---|
| Reversionary bonus | This is a bonus of which the face value is a permanent addition to the sum assured in the policy and payable upon the death of the insured. The cash value is paid at a discount upon policy termination that does not result from the death of the insured (e.g. policy surrender). |
| Terminal dividend | This is a one-off entitlement and is payable upon policy termination, such as death of the insured, policy surrender or maturity. The amount may change for each declaration. The actual amount is determined only when it is payable. |
Not all life insurance products in the market are participating. Following are the main differences between a participating policy and a non-participating policy.
| Participating Policy | Non-participating Policy | |
|---|---|---|
| Objective | To achieve both protection and long-term savings through the accumulation of potential returns by sharing the product profits in the long run. | Mainly to obtain life protection or also a foreseeable stable income instead of potential returns. |
| Potential returns and risks | The amount of cash value is affected by the actual payout of non-guaranteed benefits distributed by the insurer. In general, the higher the proportion of the non-guaranteed benefits is, the higher the potential returns, together with higher volatility, which means a higher investment risk. | For purely protective products, there is no accumulated cash value. Some products with savings elements may provide some guaranteed benefits without any additional potential returns. However, the claimable amount will not be affected by insurers’ investment performance. It is normally a fixed amount prescribed in the policy. |
| Premium level | It is normally higher than that of a non-participating policy with the same insured amount. | It is normally lower than that of a participating policy with the same insured amount. |
| Common products | Whole life insurance, endowment insurance, and critical illness insurance with a savings element. | Term life insurance and short-term endowment insurance. |
The above classification does not include the investment-linked assurance scheme (ILAS) or universal life insurance because of the relatively complicated design of those products. For the features of those two products, refer to the webpage about life insurance on the Insurance Authority's thematic sitelet.
Learn more about the product features and application procedure before taking out a participating policy. Refer to the following information to enhance your understanding: