Understanding the Key Differences Between Par and Non-Par Insurance Policies

When shopping for life insurance, you may come across the terms ‘par’ and ‘non-par’ to describe different policy types. But what do these abbreviations mean and what are the key differences between par and non-par insurance plans?

Read on for an in-depth overview comparing participating (par) and non-participating (non-par) life insurance policies.

What is a Participating (Par) Life Insurance Policy?

A participating or par life insurance policy allows policyholders to share in the profits of the insurance company. Here’s an overview of how par policies work:

• The insurance company invests the premiums it collects in order to generate investment income and profits.

• A portion of these profits are shared with participating policyholders in the form of annual dividends.

• Dividends are typically declared each year and can be taken as cash, used to pay premiums, or left with the company to earn interest.

• Dividends are not guaranteed – the amount will vary each year based on the insurance company’s financial performance.

• Par policies pay dividends in addition to the guaranteed death benefit and cash value.

Examples of common par policies include participating whole life, universal life, and variable life insurance plans. Dividends provide an extra incentive for customers to hold these long-term permanent life insurance policies.

What is a Non-Participating (Non-Par) Life Insurance Policy?

In contrast, a non-participating or non-par life insurance policy does not pay dividends. With a non-par policy:

• Policyholders do not share in the insurer’s profits or investment income.

• There are no annual dividend payouts.

• The policy only provides the guaranteed benefits such as the death benefit and cash value.

Non-par policies include term life insurance and some forms of permanent life insurance such as indexed universal life. These policies emphasize guaranteed coverage rather than dividends.

Key Differences Between Par and Non-Par Life Insurance

Now that you understand the basics of par and non-par policies, let’s look at some of the major differences:

Profit-Sharing

The biggest distinction is that par policies allow the policyholder to share in the insurance company’s profits while non-par policies do not.

Dividends

Par policies pay non-guaranteed dividends based on profits while non-par plans do not pay dividends.

Guarantees

Non-par policies only provide guaranteed benefits specified in the policy such as the death benefit. Par policies may offer guaranteed cash values in addition to non-guaranteed dividends.

Premiums

Par policies tend to have slightly higher premium costs than comparable non-par policies without dividends.

Policy Types

Most term life insurance plans are non-par while permanent life insurance is often par, but not always.

Control

With par policies, dividend amounts are controlled by the insurance company. Non-par policies give more predictable, guaranteed benefits.

Participating Policy Pros and Cons

Par policies provide unique advantages along with some potential drawbacks:

Pros

• Dividends provide added returns on top of the guaranteed benefits.

• Dividends can be used to lower premium costs each year.

• Interest earnings on accumulated dividends build cash value.

• Dividends may offer returns comparable to fixed income investments.

Cons

• Dividends are not guaranteed and can decrease during years when the insurer’s profits decline.

• Par policies have higher premium costs than comparable non-par policies.

• Policyholders don’t control how dividends are determined or when they are paid.

Non-Participating Policy Pros and Cons

Non-par life insurance policies also have both benefits and disadvantages:

Pros

• Benefits and premiums remain fixed over the life of the policy.

• Guaranteed benefits are stated upfront in the policy terms.

• No investment risks associated with fluctuating dividends.

• Typically lower premium costs than par policies with similar benefits.

Cons

• No potential to share in insurance company profits via dividends.

• Lacks the upside potential of par policy dividend returns.

• Some forms have lower cash value growth than par policies with dividends.

Which Type of Policy is Right for You?

There are good reasons to consider both par and non-par life insurance policies depending on your priorities:

• If guaranteed benefits and low, fixed premiums are your top concern, non-par insurance offers stability and predictable costs.

• If you want the upside potential of sharing profits via dividends, a par policy may better align with your growth objectives.

• Compare costs of par versus non-par policies with identical death benefit and cash value amounts to see the premium difference.

• Assess your need for guaranteed lifetime coverage versus temporary term insurance without dividends.

• Match the type of policy to your time horizon, budget, risk tolerance, and coverage goals.

Work With an Independent Agent

Since par and non-par policies have distinct advantages and limitations, make sure to discuss your needs with a qualified insurance agent.

An independent agent can provide quotes from multiple insurers to compare par and non-par policies side-by-side. This allows you to weigh the trade-offs and select the right type of insurance for your situation.

Key Takeaways

• Par policies offer non-guaranteed dividends, while non-par plans provide guaranteed benefits without dividends.

• Weigh the pros and cons of profit-sharing dividends versus predictable premiums and benefits.

• Compare costs and features between specific par and non-par policies to choose what aligns with your budget and goals.

• An independent agent can assess your needs and provide policy quotes to identify the best par or non-par life insurance solution.

Getting the right kind of insurance protection provides peace of mind. Learning the differences between participating and non-participating life insurance policies allows you to make an informed decision.