This is the third of a series of popular articles on life insurance.
A. M. ALLANFebruary11924
NON-PARTICIPATING AND PARTICIPATING POLICIES
This is the third of a series of popular articles on life insurance.
BUSINESS & INVESTMENTS
A. M. ALLAN
THERE are two main classifications of life insurance policies—“nonparticipating” and “participating.” In non-participating policies, the insured buys a certain amount of insurance at a fixed premium. Both the insurance and the premium are definitely guaranteed and a fixed scale of cash surrender values is worked out and clearly stated, year by year, in the policy. Should the insured die, payment of the claim, amounting to the face value of the policy, is made by the company. The insured is not entitled to receive any other benefits than those expressly set forth in the contract.
Participating policies require a higher premium than is necessary to meet the company’s liability.underthe contract. In return for this higher premium, the insured has the right to share in the surplus earnings of the company, over and above the face amount of the insurance and the cash surrender values. The surplus from which the participating policies draw dividends is that sum which the company has on hand after paying its current expenses and death claims, and after the reserve value of its policies has been deducted.
Three Sources of Profits
THERE are three sources from which a company may derive a surplus: a lower death rate than anticipated; a saving in operating expenses, and a higher interest rate than the rate assumed for premium and reserve computations. Surpluses are also made from surrendered, or lapsed, policies.
In estimating premiums, companies calculate on a certain death rate, indicated by a mortality table; on a certain interest rate—usually three or three and a half per cent.—and on an estimated loading charge, or the cost of acquiring and handling the business.
If the deaths at any given age are less than those expected, and on which premium rates have been calculated, the company will make a saving. For instance if at age thirty-five the expected mortality is 1,000 in 100,000, and only 600 deaths occur, the company is making a saving on the 400 who did not die in that year. As mortality may fluctuate from year to year, the company may not distribute in dividends all of the savings made in any one year, but may retain a portion to offset a smaller saving in a later year.
Savings From Investments
AS ALREADY stated, premiums are calculated at a given rate of interest. This rate, under Canadian law, cannot be more than three and a half per cent, for an old line company. Many companies use a rate of three per cent. If a company has calculated its premiums on the assumption that it will earn three and a half per cent., but actually earns four and a half, this extra one per cent, represents a saving which, if considered advisable, may be returned to the policyholders. This saving would, of course, be proportionate to the reserves of the different policies. It should be explained here that the reserve of a policy is that sum which, together with premiums yet to lie paid, will enable the company to pay estimated future death claims.
Insurance companies, by careful management are frequently able to make their expenses less than the amount calculated in estimating the loading charge in the premium. When this is the case they are able to credit a considerable saving to surplus which can be used for furnishing
a fund out of which returns may bê made to the policyholders.
Gains are also made by insurance companies from policies that have been surrendered, or lapsed. However, the sums thus gained áre sometimes treated as an offset to expenses rather than as a fund from which returns to the policyholders may be paid.
As in the case of the non-participating policies, the death of the insured results in the payment of the claim, amounting to the face value of the policy. Similarly, as in the case of the non-participating, there is a scale of cash surrender values worked out and definitely stated in the participating policy year by year.
Participating insurance shows no saving during the first few years of the policy’s life, but the longer it remains in force, the greater the net returns, proportionate to non-participation, becomes.
How Dividends May Be Taken
THE insured usually has several options as to the manner in which he may take his returns. He can take them annually, quinquennially, or he can leave them wit! the company until the end of the policj term. He has also the option of taking them in cash when they become due, or he can use them for the reduction of premiums, or to purchase paid-up insurance or to convert the policy into an endowment, or to shorten the endowment term The following Twenty Pay life policies both taken out in the same Canadian company in 1903, at age thirty-five, fo: $1,000, illustrate the participating and non-participating policies: The partici-
pating policy, the premium on which was $36.98, was taken out on the quinquennial plan—taking dividends every fiv years—and dividends were used for th reduction of the premium. The first five yearly cash dividend amounted to $21.08 the second to $37.74, the third to $52.73 and the fourth to $69.70; making a tota return to the policy-holder of $181.25 This amount, deducted from the tota premiums of $739 due by contract, leave: $557.75, the total net cost of the insurance The cash surrender value of this policy al the end of twenty years was $609.
The annual premium of the non-pa rticipating policy was $29.85, or a total ne1 cost of $597, at the end of the twentj years. The cash surrender value at th end of the term was $609, the same as ir the case of the participating policy. If th policies remain in force, the non-partici pating policy will not appreciate in value while on the other hand, the participating policy will continue to participate unti the death of the insured.
This individual case shows a participat ing policy which returned approximate]} twenty-four per cent, of the premiums paie to the policy-holder. Other policies whicl lapsed through non-payment or wen surrendered or where the insured die( during the premium paying period, woulc not show a pro rate profit result.
For instance, a large United State company, whose individual results oi participating policies are similar to tb illustration given here, on the total pre miums collected on all policies in force for : period of twenty years returned to polie; holders 9.75 per cent. In 1920 the premiun income of the same company was mon than $28,000,000, and the dividends t policyholders a little in excess of ten pel cent. Similar figures are not availabli regarding Canadian companies.
In the case of a participating policj where the dividends are deferred until th end of the premium paying period, should the. policy be surrendered, or allowed to lapse, or should the insured die before the policy matures, the dividends, which would have been received under the annual dividend plan, are lost. Such dividends revert to those policy-holders who continue their payments to the end of the deferred-dividend period.
If profits are taken on the quinquennial plan, should the insured die, say, after the fourth premium has been paid, it is the custom of a number of insurance companies to pay four-fifths of the dividends together with the face value of the policy.
The fourth article in this series will deal with special classes, such as Double Indemnity and Disability.
The story you want is part of the Maclean’s Archives. To access it, log in here or sign up for your free 30-day trial.
Experience anything and everything Maclean's has ever published — over 3,500 issues and 150,000 articles, images and advertisements — since 1905. Browse on your own, or explore our curated collections and timely recommendations.WATCH THIS VIDEO for highlights of everything the Maclean's Archives has to offer.