Participating Life Insurance Policy: What Is It? How Does It Work?

Shawn Plummer

CEO, The Annuity Expert

Like most people, you probably have a few life insurance policies. But do you have a participating life insurance policy? If not, you may want to consider one. A participating life insurance policy is a type of policy that allows the policyholder to participate in the profits of the company. So let’s take a closer look at what this means and why it might be a good option for you.

What is a Participating Life Insurance Policy?

A participating life insurance policy is an insurance contract that pays dividends to the policyholder. Dividends are paid out annually throughout the policy’s life from the profits of the insurance company that sold it.

A final or terminal payment is often included in insurance policies to ensure that the insured person gets compensated when the contract matures. Some participating insurance plans may provide a guaranteed dividend amount, determined at the start of the coverage. A “with-profits” life insurance policy is another name for one that participates in gain sharing.

Understanding Participating Life Insurance Policies

Participating life insurance policies are typically whole-life participating policies. The dividend received by the policyholder can be used in three different ways:

  • You can use the money that has come in from any dividends to pay your insurance premium.
  • The money from the dividend can be kept with the insurance to make more interest like a high-yielding savings account.
  • The policyholder can receive the dividend payment in cash as a stock would.

What Is A Dividend In A Life Insurance Policy?

A dividend in a life insurance policy is a distribution of surplus funds paid by the insurance company to the policyholder. Dividends are typically paid on participating life insurance policies such as whole life, universal life, and some endowment policies. The surplus funds are generated by the insurance company when the actual claims experience is lower than projected and the company has invested the premium paid by the policyholder favorably.

Dividends can be used to buy additional coverage, minimize premium expenses, or pay directly to the policyholder in cash. However, be aware that dividends are never certain; their amounts and frequency differ according to the insurance company’s financial success and how well a specific policy performs.

Participating Life Insurance Policies vs. Non-Participating Policies

  • Non-participating life insurance premiums are usually cheaper than participating policies.
  • Insurance providers impose higher premiums on participating plans based on conservative assumptions to make a profit.
  • As a result of this, the policy’s tax treatment is altered. The IRS has categorized the payments made by the insurance company as a return on excess premiums rather than dividend payments.

Insurance companies will not change the dividends that often. Instead, they will change the formula based on experience and what they think might happen. This is true for whole life insurance.

The dividend rates of universal life insurance policies can often change, even monthly.

Participating policies may cost less in the long run than non-participating policies. This is because the dividend on cash value plans is frequently enhanced as the policy’s cash value rises.

Whole life insurance is risk-free since the insurance company assumes all risk, but with participating whole life policies, the insurance company transfers some risk to the policyholder.

A participating life insurance policy allows you to share in the insurance company’s profits. In non-participating policies, profit sharing is unavailable, and policyholders do not receive dividends.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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