I think for some insurance newbie this word “participating” can be quite intruding. The would rather it be known as insurance policy rather than particpating.I assure you that it is appropriate name for a good reason that not all insurance policy do particpate in a participating fund. Travel insurance is an insurance policy but there is no cash value to it.
I was gonna do some scuttlebutt on this but realise that the Life Insurance Association (LIA) have a really good FAQ on this
Key features of a participating policy are:
Premiums are pooled with those of other participating policies in a specially designated ‘participating fund’.
The fund is invested in a range of assets such as government and corporate bonds, equities, property and cash. The proportion invested in each type of asset (often referred to as the investment mix) may change over time, in line with the insurer’s investment strategy.
The assets are used to pay benefits to you and other policyholders of the participating fund and to meet the expenses incurred in running the participating fund.
In addition to the guaranteed benefits provided by the policy, non-guaranteed benefits in the form of bonuses will be added to your
Bonuses are determined on an annual basis and most commonly expressed in the form of an addition to the sum assured. (Please refer
to the section on “What are the types of non-guaranteed bonuses” for an example of how bonuses are added to sum assured.) Once the bonuses have been added to your policy, the insurer cannot later reduce them or take them away.
What is the aim of a participating policy?
The aim of a participating policy is to provide stable medium to long-term returns through the combination of guaranteed benefits and non-guaranteed bonuses.
Although bonuses are not guaranteed, insurers generally try to avoid large fluctuations in the bonus declared from year to year. Insurers aim to achieve this stability by smoothing bonuses over time. This means that bonuses may be held back in years when the performance of the fund has been good so that they can be maintained when conditions are less favourable.
The net effect is that bonuses will not necessarily follow the rises and falls in the investment markets. In addition, when the future
outlook of fund performance continues to be unfavourable, it may be necessary for insurers to reduce the estimates of future bonuses accordingly.
Participating funds can invest in a range of assets, including equities, in search of potentially higher returns. This freedom to adopt a broadly based investment strategy arises from:
a) the long term investment horizons of the fund mean that the risk of short-term fluctuations in investment conditions pose less of a
b) the fact that the investment policy does not have to be as conservative as would be the case if all of the benefits were guaranteed.
How does this differ from investment-linked policies?
Unlike investment-linked policies (“ILP”), where the assets for each ILP policyholder are separately identifiable in the form of units held, assets are not separately maintained for each participating policyholders.
The smoothing of bonuses means that the returns from your policy will not necessarily reflect volatility in investment markets. By contrast, the returns under investment-linked policies will be more directly linked to the value of the underlying assets.
A part of the cash benefits under a participating policy will be guaranteed.
Under an investment-linked policy, cash benefits depend upon the value of investments allocated to the policy and are not guaranteed.