Participating Insurance and Dividend Calculation

Sources of Surplus

Participating (par) life insurance policies share insurer surplus with policyholders through dividends. Surplus arises from three sources: mortality savings (actual deaths fewer than expected), interest surplus (earned rate exceeds pricing rate), and loading surplus (actual expenses less than assumed). The contribution principle allocates surplus in proportion to each policy's contribution. The three-factor dividend formula is: Div_t = (q_{x+t-1}^p minus q_{x+t-1}^a) * (b minus t-1_V) * v + (i^a minus i^p) * (t-1_V + P-bar) + (e^p minus e^a).

Dividend Options

Policyholders choose how to receive dividends: cash payment, premium reduction, accumulate at interest, paid-up additional insurance, or one-year term insurance. Paid-up additions use the dividend to purchase a single-premium whole life insurance at net rates, which increases the total death benefit and cash value. Exam LTAM tests the dividend calculation formula, the impact of experience deviations on dividend amounts, and the mechanics of paid-up additions including their effect on reserves and death benefits.