What Is Participating Life Insurance?
Participating life insurance is a permanent life insurance policy that earns dividends from the insurance company’s profits. These policies are typically whole life insurance contracts offered by mutual insurance companies, meaning the policyholders are also part-owners of the company.
Dividends can be used in several ways:
- Reinvested into the policy to increase the cash value and death benefit
- Taken as cash
- Used to pay premiums
- Left to accumulate interest
Dividends are not guaranteed, but many mutual insurers have long histories of paying them consistently—even during economic downturns.
How Participating Life Insurance Works
- You pay fixed premiums for permanent coverage.
- The insurer pools profits from investments, expenses, and mortality experience.
- A portion of the profits may be returned as dividends to policyholders.
- Dividends enhance the value of the policy through accumulation or paid-up additions.
What You Need to Know About Participating Life Insurance
- Participating Policies Pay Dividends (But They’re Not Guaranteed)
A participating whole life insurance policy allows policyholders to receive dividends, which are a share of the insurer’s profits. These dividends can be taken as cash, used to reduce premiums, buy additional coverage, or reinvest for cash value growth. However, dividends are not guaranteed and depend on the insurer’s financial performance. - It’s More Expensive Than Non-Participating Whole Life
Participating policies typically have higher premiums than non-participating policies because they offer dividend opportunities and greater flexibility. If budget is a concern and guaranteed benefits are enough, a non-participating whole life policy may be a better fit. - You Can Use Dividends in Multiple Ways
Dividends offer options such as:- Cash payout – Receive your dividends directly.
- Premium reduction – Use dividends to lower future payments.
- Paid-up additions – Buy additional life insurance that increases the death benefit.
- Accumulate interest – Leave dividends with the insurer to earn interest.
- Guaranteed Cash Value Growth Makes It a Wealth-Building Tool
Unlike term life insurance, which only provides a death benefit, whole life insurance builds cash value. The cash value grows tax-deferred and can be accessed via policy loans or withdrawals. - It’s Ideal for Estate Planning and Wealth Transfer
High-net-worth individuals and families often use participating life insurance to pass down wealth efficiently. The death benefit is tax-free for beneficiaries, and cash value can be used for retirement income, business planning, or emergency funds.
Pros and Cons of Participating Life Insurance
| Pros | Cons |
|---|---|
| Potential for dividend income | Dividends are not guaranteed |
| Builds cash value faster with dividends reinvested | Higher premiums than term or non-participating life |
| Can result in a fully paid-up policy over time | Complex compared to simpler coverage |
| Offers long-term guarantees | May underperform if dividends are low |
| Ideal for legacy, estate planning, or permanent coverage | Slower early cash value growth than some universal life policies |
Who Should Get Participating Life Insurance?
- Families seeking lifelong coverage with a growing death benefit
- High-income earners who want tax-deferred growth and potential dividends
- People using infinite banking or private banking strategies
- Individuals focused on estate planning, business succession, or trust funding
- Those wanting stable premiums with conservative, long-term growth
Who Should Avoid It?
- People seeking low-cost, short-term protection (term life is better)
- Individuals with tight budgets who can’t afford higher premiums
- Anyone who doesn’t plan to fund the policy long enough to benefit from dividends
- Those prioritizing maximum early cash value may prefer indexed universal life (IUL)
Alternatives to Participating Life Insurance
- IUL with no-lapse guarantee riders for lower-cost permanent coverage with upside growth
- Fixed indexed annuities for conservative retirement income with principal protection
- Single premium life insurance for efficient legacy transfer
What Happens at Death?
Your beneficiaries receive the death benefit, which includes the base policy amount plus any dividend additions. This is paid income-tax-free in most cases. If you used dividends for paid-up additions, this can significantly increase the payout over time.
What Happens After Paying Off the Policy?
Once the policy is paid-up, no more premiums are due. Dividends can continue to grow the policy or be taken as income. The cash value continues to grow based on guaranteed interest and dividend performance.
Key Tip: Always Compare Before Buying
Not all participating policies are created equal. Dividend histories, insurer financial strength, and internal policy costs vary widely. Compare policies side-by-side before buying. Ask for illustrations using guaranteed and non-guaranteed values.
Find the Best Policy for You
Choosing between participating and non-participating whole life insurance comes down to your goals—talk with a participating whole life broker or non-participating whole life agent at The Annuity Expert to compare options and get free quotes with no-obligation guidance. Book a call with The Annuity Expert for free quotes and no-obligation advice.
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Questions From Our Readers
What is the difference between participating and non-participating whole life insurance?
Participating policies allow policyholders to receive dividends, while premiums are typically lower with non-participating plans. Furthermore, these do not award any dividend payments. So take your pick: a potentially lucrative investment or an affordable way of protecting you and your family for years to come!
Which is better, participating or non-participating insurance?
When considering which type of insurance is best – participating or non-participating – it’s essential to understand the key differences. For example, a non-participating policy will not provide any bonus or dividend payments but guarantees death and maturity benefits. Conversely, a participating policy offers more than just protection; you’ll also receive rewards in the form of bonuses! Thus, investing in a participating plan may be worth exploring if you want long-term returns from your policy provider.
What does a participating insurance policy do?
With a participating insurance policy, the insured can access dividends not seen as taxable distributions by the IRS. Instead, these returns of profits are considered “returns of premium” and therefore don’t have any income tax implications.
What is participating preferred vs. non-participating?
Participating preferred stockholders can receive investment and dividends on their shares if the company is liquidated. On the other hand, non-participating preferred shareholders may only be entitled to their initial investment or pro-rata sales proceeds – whichever amount is higher.
Are participating premiums higher than non-participating premiums?
Compared to non-participating policies, participating policy premiums tend to be higher due to the dividend expense. This additional cost is a refundable excess and can have legal implications for taxes owed on the policy.