What Is a Nonparticipating Loan? Straightening up the Confusion

You probably have heard about the term nonparticipating loan and you are wondering what is a nonparticipating loan all about. If you think that this is a kind of loan that you are familiar with, then you are hugely mistaken, because it is actually about the insurance policy. In the event you are interested in knowing more about this kind of insurance, read on. Who knows? Maybe you would be interested in making some investment in it in the future. It’s also a good idea to learn more thoroughly about the name.


Life Insurance and the Details

You probably think that life insurance is just the same in different providers and agents, but they can be different. Plus, life insurance itself falls into different categories of different groups, and they are all based within different parameters too. So, what is a nonparticipating loan and how is it connected to the life insurance?

As it was mentioned before, the loan is basically a general term that is actually about life insurance. As you are well aware of, insurance is a type of investment, which is related to the financial subject. And one thing that differentiates the insurance plan is about the profits. Whether the policy would pass the profits on to the policyholder or not, that’s what makes it different. In this case, there are two major types of life insurance policies: the participating and non participating (life insurance) policies.


About Participating Policy

To understand what is a nonparticipating loan, you need to be able to differentiate it first from the participating one. Also known as par policy, this insurance plan allows the (policy) holder to take part (or participate) within the life insurance company’s profits. The company is basically an organization, right? And all organizations get profits within a financial year course. In the participating insurance plan, benefits (from these profits) would be passed on to the holder. The paid out is usually in the form of dividends or bonuses. The payment is generally made each year, so it’s an annual thing. If you have the participating policy, you can get or make use of the dividends or bonuses, and you can have it various ways, such as:

  • You are able to deposit the dividends with your insurer, and then allow the money to get interest
  • You are free to use the payouts for your policy’s premium
  • You are able to get payouts when (and as) the insurer make them

What are the benefits that you can get? Aside the extra dividends or bonuses, you can also enjoy the regular maturity (benefits) guaranteed by the insurance plan. If you are looking for an example, you can take a look at LifeIncome ABSLI Vision Plus Plan. This is the perfect example for participating insurance plan paying you (accrued) terminal bonus and paid up bonus (if any) upon the maturity.


About the Non Participating Policy

If you have a question about what is a nonparticipating loan, now it’s time to get into the details. Also popular as the non par plan, this one is quite different from the participating type. It doesn’t offer any dividends or bonuses. In another word: the policy holder isn’t taking part in the provider’s profits. Despite the fact that it doesn’t pay out the dividends or bonus, it does pay guaranteed benefits out on maturity. Basically, this type of insurance is the contrast of the previously described participating type.

If you want a perfect example, you can take a look at Milestone ABSLI Guaranteed Plan. This is a non participating policy giving you (fully) guaranteed payouts that can help you fulfill the non negotiable life purposes or goals. The policy would also offer guaranteed additions that would accrue on the monthly basis until maturity, but you need to make sure that all premiums have been paid off.


The Key Differences

In order to know more about what is a nonparticipating loan, you have got the details about the two policies. There are some points that play significant differences on the insurance plans. The first one is the share in profits. In participating policy, you are allowed to take part in the (life insurance) provider profits. In non participating policy, there is no such a thing. If you read the previous description, then you’d know that you will get dividends or bonus in the participating type, and you get none for the non participating one.

Moreover, there is also the so called the guaranteed and the non guaranteed benefits. This is one thing you should also learn in what is a nonparticipating loan about. The non participating plan would provide guaranteed benefits only to the (policy) holder. It refers to the assured amount of money that can be paid on the holder’s demise or the maturity benefits that can be paid when the plan matures. On the contrary, in participating policy, you can expect to get guaranteed benefits as well as the non guaranteed bonuses that are based on the profits of the insurer.

So, if you have to sum it off, there are several key areas that you need to focus – and their differences.

  • In terms of meaning, the participating policy gives you the ability to share the company’s profits as the policy holder. These profits are generally shared in the form of dividends or bonuses. In some companies, it may be known as the with-profit policy. In the non participating policy, on the other hand, the profits won’t be shared. The policy holders won’t get any dividends or whatsoever. This is also known as the non par policy or without-profit policy.
  • In terms of non guaranteed payments, the participating policy gets dividends or bonuses that are paid out in annual basis. For the non participating policy, there would be no ‘non guaranteed’ payments because there won’t be any shared profits.
  • In terms of guaranteed payments, the participating policy may get bonus, but it isn’t guaranteed. The bonus depends on the insurance company’s performance. For the non participating policy, there is no dividend or bonus, but the policy holder can get guaranteed benefits on the policy maturity and/or the life insured’s death and/or her/his survival.

In the event that you are interested in the investment, especially related to life insurance, it would be a good idea to contact your provider or browse around further for detailed information.


The Common Confusion

Not many understand what is a nonparticipating loan or the concept because the term is often ‘mixed up’. If you browse the net, you won’t find any explanation about the nonparticipating loan or whatsoever because it actually refers to insurance plan.

However, the life insurance plan seems to have more names than expected. Some people call it the participating and non participating fund. Others may refer it as the wash loan. But if you look up the search engine, the description can be unclear and a bit shady. In the general case, the participating plan is about the life insurance and the dividends that come along with it, and the non participating plan is quite the opposite of it.

But then again, there are some providers that offer the participating and non participating loan. Maybe it’s just the name of the financial service they provide, but then again, the general term usually refers to the insurance plan. If you find the name in any loan provider, and you are interested in getting one, you should find out the details. Contact the provider to get the details of it, and you can learn more about it. But if there is any loan having this term, the schemes would likely apply like the following situation.


The Example Scheme of Non Participating Loan

According to many people, the non participating (or the participating) loan is a common feature that usually found within UL (Universal Life) insurance. Let’s take an example (hypothetically speaking), that you have around $100,000 in cash and you need $10,000. When you take the non participating loan, the insurance provider would put a lien on your cash value with the amount of the loan (which is not too much different from mortgage lien on home equity loan) and then put the cash within the so-called collateral account. That cash would get interest (the fixed rate one). The loan itself would be charged a different interest rate, which could be variable or fixed.

In the meanwhile, the remaining cash value (the $90,000) would continue earning whatever interest it normally gets. In this example, the $90,000 would get hypothetically 5% while the $10,000 cash in the collateral account would get 3%, and the loan itself ($10,000) will charge 4% interest.

So, what’s the difference between the non participating loan and the participating loan? In the participating loan, the account for cash collateral won’t exist. The loan interest rate itself would be variable. In participating loan, the cash collateral (the $10,000) will continue getting interest just like the remaining of the cash value. In UL insurance, the earned interest would be generally tied to the stock market index. In this example, the loan charges 4% variable, but the overall $100,000 value would get interest (based on underlying index). In some years ahead, the total $100 can get hypothetically 10% meanwhile the loan itself will charge 4%. It can create a positive (loan) arbitrage. However, when the index declined, it’s possible that the $100,000 earns 0 while the loan still charges interest of 4%.

Which loan should you take? It depends on your needs and preference, really. The participating loan may seem promising, but let’s not forget about projection or insurance illustration. Many agents have unintentionally run a projection using 1% of positive loan arbitrage. It can give you somehow a ‘false’ illustration that the plan is doing well and you can get tons of money (in cash value). The non participating loan has a more standard and realistic projection. So, instead of getting sweet promises, you end up with a realistic expectation.


Final Words

So, what is a nonparticipating loan, anyway? Again, it needs to be stressed out that it usually refers to the insurance plan related to life insurance. However, like I mentioned before, it’s also possible that some lenders may use the terms as a part of their financial products or services. But in the event you want to know more about the schemes of such a loan, there has been an example case for it. So, if you are ever interested in getting one, you know what you can get – and the proper steps that you need to take if you want to do it right.

All in all, these things may seem complicated and confusing. Don’t be. Financial products are plentiful so you want to really dig deeper into each one of them. Once you completely understand about the concept of what is a nonparticipating loan, you should be able to choose the right product for you.

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