Are you looking into life insurance policies and come across the term “participating life insurance”? If so, you are probably wondering, “What is a participating life insurance policy?”
To understand this term, there are a few key things about life insurance to know first. First is that life insurance policies pay your beneficiaries a “death benefit” if you pass away. In addition, permanent or whole life insurance policies will also accrue a cash value.
This cash value is usually invested so that some of the money you pay for your policy can grow over time if the investment performs well. A benefit of this type of policy is that you can use or borrow this cash during your lifetime.
A participating life insurance policy is a type of whole, or permanent, policy. But what makes them different? Keep reading to find out!
What Is A Participating Life Insurance Policy?
A participating life insurance policy is any policy that is eligible to earn dividends that are paid out by the insurance company that issued the policy.
It is possible to have a participating life insurance policy that pays an annual dividend. An annual dividend is a lump sum of money tied to the life insurance company’s performance.
Almost all participating life insurance policies are whole life insurance policies, a type of permanent insurance.
When Life Insurance is Considered “Participating”
Companies that offer these life insurance policies are referred to as participating life insurance providers.
When the company has a profitable year, the company’s business model allows life insurance policyholders to benefit from the company’s success.
Insurers can choose whether or not to pay dividends on all of their whole life policies or whether or not to offer the benefit on only a select number of policies. In this case, the company’s insurance product lineup may include participating and non-participating options.
Although a policy may have participating status, it is not guaranteed to receive dividends in the future.
How Do Dividends in Participating Life Insurance Policy Work?
According to many financial resources, participating in an insurance policy entails earning dividends, which isn’t the case.
That is entirely incorrect. In reality, participating means that the policy has the potential to earn dividends if the policy block generates enough profits to pay dividends.
Participating and non-participating life insurance policies are the two broad categories of life insurance policies. As previously stated, dividends are payable to policyholders enrolled in the program.
In contrast, non-participating policies will never earn dividends, regardless of how profitable the block of the insurance business is to the life insurer. In a nutshell, non-participating life insurance is a policy that does not pay dividends.
What Is the Most Common Participating Life Insurance?
A whole life insurance policy is the most common type. This product is commonly associated with dividends, although there are several non-participating whole life insurance policies on the market.
Whole life insurance policies that pay dividends typically do so once a year, on the policy’s anniversary. Using a formula established once a year, the insurance company will determine the dividends paid to each policyholder.
Although universal life insurance products are more commonly found in the non-participating category, many mutual life insurance companies also offer to participate in universal life insurance policies. Unpredictable dividend payments by participating in universal life insurance policies are standard.
Like universal life insurance, term life insurance is much more commonly issued as non-participating life insurance than as participating life insurance.
However, some mutual life insurers offer participating term life insurance, and a few of them have even been known to pay dividends on older term life insurance policies in the past.
