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What Is a Participating Policy?

Participating policies are insurance contracts that pay dividends to the policyholder. Dividends come from the insurance company's profits and are generally paid annually throughout the life of the policy. Most policies also include a final or terminal payment when the contract matures. Some participating policies include a 'guaranteed dividend' provision established when the policy begins. A participating policy is also known as a "with-profits policy".  

Participating Policies vs. Nonparticipating Policies

  • Premiums for nonparticipating policies are generally lower than those for participating policies because of the cost of dividends: participating policies charge more for the promise of generating value from the money received, which, in turn, has implications for the policy's tax treatment.
  • Insurance companies base premiums on projections of their operating costs and the rates of return on the money they invest in the market. These projections are conservative and aim to better protect against risk and protect the individual policyholder. Ultimately, this is better for individual policyholders because it helps offset the risk of their insurance company becoming insolvent, resulting in lower premiums over the long term. Participating policies are essentially a form of risk sharing in which the insurance company transfers a portion of the risk to policyholders.
  • Regardless of market changes, increases in interest rates, mortality rates, and expenses, an insurance company will not change its dividend rate as frequently. Instead, it will periodically modify its dividend formulas based on experience and anticipated future factors. The same applies to other life insurance based on the standard whole life policy. Universal life insurance policy dividend rates may be adjusted much more frequently, even monthly.
  • Over the long term, participating policies are less expensive than nonparticipating policies. With cash value policies, the dividend generally increases as the policy's cash value grows. From the policyholder's perspective, whole life policies are essentially risk-free because the insurance company assumes all the risk, although with participating whole life policies, the insurance company transfers some of that risk to the policyholder.
  A participating policy allows you, as the policyholder, to share in the insurance company's profits. It is also known as a with-profits policy. Nonparticipating policies do not distribute profits or pay dividends to policyholders.   Mutual companies can issue only participating policies, allowing a portion of the company's premiums to be paid as policy dividends in the form of refunds, so those funds are not taxed as income.

Why Choose Participating Life Insurance Instead of Nonparticipating Life Insurance?

A participating policy allows the policyholder to share in the insurance company's profits through a dividend. The dividend can be used to pay the insurance premium; it can be left with the policy to earn interest like a regular savings account; or the policyholder can accept a cash payment, as with a stock. Nonparticipating policies do not distribute profits or pay dividends to policyholders.  

Might a Participating Policy Be Wrong for You?

Whether participating policies are superior to nonparticipating policies depends largely on individual needs. Life insurance should first be considered protection for the policyholder's beneficiary—or beneficiaries—and then as an investment vehicle from which both the beneficiary and the policyholder can benefit. Term life insurance is generally a nonparticipating policy with low premiums. It may meet the needs of someone interested in providing for their beneficiaries at a lower cost. However, people interested in receiving regular dividends from their policy during their lifetime may choose a participating policy.