Life Insurance Policies According to Participation in Profits

Policies according to participation in profits may be

(i) without profit policies, and
(ii) with profit policies.

(i) Without Profit Policies or Non-participating Policies

The holders of without profit policies are not entitled to share the profits of the insurer. These policy-holders get only the sum assured and no bonus is given to them.

(ii) With Profit Policies or Participating Policies

The holders of the with profit policies are entitled to share the profit of the insurer. Since the policy-holders can share the profit and not the loss, they can not be treated as co-owner of the insurance business.

If there is loss, the policy-holders cannot get bonus, i.e., the share in profit.

They are entitled to get the share of profit, i.e., the bonus only when there is profit. The amount of bonus depends on the profit after deducing provision for taxes, contingency, etc. In participating policy there is no guarantee that the insured will get something by way of profit every year.

The only law is that the corporation has to distribute 95 per cent of its profits among the policy-holders. Thus, if there is no profit in a year, no amount can be distributed to the participating policy-holders.

However, the Corporation has decided that at least bonus rate of previous years should not decrease while declaring bonus in the present year.

The Corporation issues both types of policies, i.e., participating and non-participating. Since the participating policies share profit the premium rate is higher in this case. The difference between the premiums of participating policies and non-participating policies is called ‘bonus loading’ because the additional premium in participating policies is charged for allowing bonus.

The amount of insurance to be paid is certain in non-participating policies but it is not certain in participating policies due to accrual of bonus, the rate of which is not constant.