Participating Policy Australia 2025: Benefits, Risks & Updates

Participating policies, long considered a cornerstone of traditional life insurance in Australia, are facing fresh scrutiny and renewed interest as we move through 2025. With regulatory shifts, market volatility, and Australians seeking more from their insurance and savings vehicles, it’s time to revisit how these policies work and whether they still deserve a spot in your financial toolkit.

What Is a Participating Policy?

A participating policy—often called a ‘with-profits’ policy—combines life insurance protection with a savings or investment component. Policyholders not only receive guaranteed benefits (like a sum insured) but also participate in the profits of the insurer’s participating fund. These profits are usually distributed as bonuses or dividends, declared annually and added to the policy’s value.

For example, if you take out a participating whole of life policy with a major Australian insurer, your annual premium goes into a pooled fund with other policyholders. The insurer invests this pool in assets such as bonds, shares, and property. After deducting management expenses and claims, the insurer distributes a portion of the profits back to policyholders. The end result: your policy’s value grows over time, potentially outpacing non-participating policies that offer only fixed returns.

2025 Policy Updates: What’s Changed?

The Australian life insurance landscape has shifted since the Royal Commission and with ASIC’s continued focus on transparency and fair outcomes. In 2025, several notable updates are affecting participating policies:

• Greater Disclosure: Insurers are now required to provide clearer breakdowns of how bonuses are calculated and what portion of investment profits is distributed to policyholders versus shareholders.

• Investment Strategy Tweaks: With ongoing market uncertainty, many insurers have diversified participating fund portfolios, shifting some assets into ESG (Environmental, Social, Governance) investments to boost long-term returns and align with consumer values.

• Bonus Rate Volatility: Rising interest rates and inflation in late 2024 have impacted the returns on participating funds. While some policies have seen slightly higher declared bonuses, others have adopted a more conservative approach, prioritising capital stability over aggressive growth.

For example, AMP and TAL have both announced updated bonus projections for new and existing policies, reflecting their revised asset allocations and the broader economic outlook.

Pros and Cons: Should You Consider a Participating Policy?

Like any financial product, participating policies have strengths and weaknesses. Here’s what to weigh in 2025:

Pros:

  - **Long-term Stability:** The smoothing of returns via annual bonuses can help policyholders avoid the sharp ups and downs of direct market investments.

  - **Dual Benefit:** Offers both life insurance protection and a savings/investment component, often with tax-deferred growth.

  - **Potential for Extra Returns:** When the insurer’s participating fund performs well, your policy may outperform non-participating or term products.

Cons:

  - **Opaque Performance:** Despite improved disclosure, it can still be tricky to understand exactly how bonuses are set or why they change year-to-year.

  - **Lower Flexibility:** Participating policies often come with higher upfront costs and restrictive terms if you need to surrender early.

  - **Returns Not Guaranteed:** While there’s a guaranteed sum insured, bonus rates can fluctuate and past performance is no guide to the future.

Consider the case of Sarah, a 40-year-old Melbourne professional. She’s weighing a participating policy against a term life policy plus a separate investment account. While the participating policy offers appealing potential for long-term bonuses and automatic reinvestment, she finds the term policy with a low-cost ETF investment gives her more flexibility—and potentially higher returns if she’s comfortable with risk.

Choosing and Reviewing Your Policy in 2025

If you’re considering a participating policy (or already hold one), here’s how to approach the decision this year:

• Review updated bonus rates and policyholder communications from your insurer. Compare these with market benchmarks and inflation.

• Ask about the insurer’s participating fund asset mix, risk profile, and long-term strategy—especially in light of 2025’s economic uncertainties.

• Weigh the total cost (premiums, fees, potential surrender penalties) against other insurance and investment options.

• Assess whether you value the policy’s built-in discipline and smoothing, or if you’d prefer more hands-on control over your investments.

In 2025, some insurers are also offering hybrid products that blend participating features with more transparent, flexible investment-linked options. These may suit Australians who want a degree of capital protection but don’t want to fully commit to a traditional participating policy.