Participating Policy

Participating Policy: Definition and How It Works

A participating policy (also called a “with-profits” policy) is a life insurance contract that shares a portion of the insurer’s profits with policyholders through dividends. These dividends are typically declared annually but are not guaranteed — they depend on the insurer’s financial performance, mortality experience, expenses, and investment returns.

Most participating policies are permanent life insurance (for example, whole life). They often include a final payment when the contract matures and build cash value over time.

How Dividends Can Be Used

Policyholders usually have several options for handling dividends:
* Receive them as cash.
* Apply them to reduce or pay future premiums.
* Leave them on deposit with the insurer to earn interest (grow cash value).
* Use them to purchase paid-up additional insurance (increasing death benefit and cash value).

Participating vs. Non-Participating Policies

Key differences:
* Premiums: Participating policies generally charge higher initial premiums because the insurer anticipates returning some premium as dividends. Non-participating policies (commonly term life) typically have lower premiums and do not pay dividends.
* Profit sharing: Participating policyholders share in insurer profits; non-participating policyholders do not.
* Long-term cost: Because dividends can offset future premiums or grow cash value, participating policies may become comparatively less expensive over the long run, especially for cash-value policies.
* Issuer type: Mutual insurers commonly issue participating policies and distribute profits to policyholders. Stock insurers more often issue non-participating policies and pay profits to shareholders.

How Dividend Formulas Vary

Dividend amounts are influenced by factors such as interest rates, mortality experience, and operating expenses. Whole life dividend rates change infrequently and are adjusted periodically. Universal life dividend credits (if applicable) can vary more frequently, sometimes monthly.

Pros and Cons

Pros:
* Opportunity to share in insurer profits.
* Dividends can reduce net out-of-pocket premiums or build policy cash value.
* Potential protection against insurer insolvency risk through conservative underwriting and pricing practices.

Cons:
* Higher initial premiums than equivalent non-participating policies.
* Dividends are not guaranteed and depend on company performance.
* More complex product features and choices to manage.

Is a Participating Policy Right for You?

Consider a participating policy if:
* You want permanent coverage with a savings/cash-value component.
* You value the potential for dividends to lower long-term costs or increase policy cash value.
* You are comfortable paying higher initial premiums in exchange for profit-sharing potential.

Consider a non-participating or term policy if:
* You need low-cost coverage for a specific period.
* You prioritize simplicity and lower up-front premiums over potential long-term dividend benefits.

Tax Treatment (Overview)

Insurance dividends are generally treated as a return of excess premium rather than taxable income, but tax treatment can vary by situation and jurisdiction. Consult a tax advisor for specifics about your circumstances.

Bottom Line

A participating policy offers the chance to receive dividends from an insurer’s profits, providing flexibility to reduce premiums, receive cash, or grow the policy’s cash value. While participating policies often cost more initially than non-participating alternatives, the dividend benefit and built-up cash value can make them advantageous for those seeking permanent coverage and long-term savings potential.