Exploring Participating Insurance Policies: A Financial Guide


Participating insurance policies offer unique opportunities for policyholders. This comprehensive guide explores every aspect of these policies, from dividends and premiums to tax implications and suitability. Uncover the benefits, drawbacks, and answers to frequently asked questions for a well-rounded understanding of participating policies.

Understanding participating policies

Participating insurance policies, often referred to as “with-profit” policies, represent a distinctive class of insurance contracts. They are known for their ability to pay dividends to policyholders, setting them apart from their non-participating counterparts. Let’s delve deeper into the key aspects of these policies:

Dividends and their origins

Dividends are at the heart of participating policies. Unlike non-participating policies, which do not pay dividends, participating policies share a portion of the insurance company’s profits with policyholders. These dividends are not guaranteed and vary based on the insurance company’s annual performance.

Dividend utilization

Policyholders have several options for utilizing dividends:

  • Offsetting premiums: Dividends can be used to pay insurance premiums, reducing the out-of-pocket expenses for policyholders.
  • Generating interest: Alternatively, policyholders can leave the dividends with the insurance company, allowing them to accumulate interest, similar to a regular savings account.
  • Cash payments: Policyholders also have the choice to receive dividends in cash, providing them with additional income, much like receiving dividends from stocks.

This flexibility makes participating policies a valuable financial tool for many individuals.

Participating policies vs. non-participating policies

The distinction between participating and non-participating policies goes beyond the payment of dividends. It has significant implications for policy premiums, tax treatment, and long-term financial benefits.

Premium differences

At first glance, non-participating policies tend to have lower premiums compared to participating policies. The reason behind this discrepancy is the dividend expense. Participating policies charge higher premiums with the intent of returning the excess through dividends. This initial premium difference influences how these policies are taxed.

Tax implications

One crucial aspect of participating policies is their tax treatment. The Internal Revenue Service (IRS) classifies the payments made by the insurance company as a return on excess premium, not as a dividend payout. This unique classification makes the dividends received from participating policies generally tax-free.

Understanding these tax implications is vital when assessing the overall cost and benefits of your policy.

Risk sharing

Participating policies can also be viewed as a form of risk sharing between the insurance company and policyholders. While these policies initially have higher premiums, the potential for dividends can make them cost-effective in the long term. This approach helps offset the risk of insolvency on the insurance company’s part, ultimately leading to lower premiums for policyholders over time.

Dividend formulas

Insurance companies do not frequently adjust dividends. Instead, they periodically update dividend formulas based on their experience and anticipated future factors. Whole life insurance policies follow this practice. However, universal life insurance policies may have more frequent adjustments in dividend rates, sometimes even on a monthly basis.

Understanding how dividend formulas work can help policyholders make informed decisions regarding their participating policies.

Long-term cost savings

Over time, participating policies can potentially cost less than non-participating ones. As the cash value of the policy increases, so does the dividend. This means policyholders with participating policies may have more cash value available to cover ongoing premiums compared to those with non-participating policies.

Is a participating policy right for me?

The decision to opt for a participating policy over a non-participating one depends on your unique financial needs and goals. Here are some key considerations:

Term life vs. permanent life insurance

Term life insurance policies are typically non-participating and come with lower premiums. This may be a suitable choice if you aim to provide for your beneficiaries with minimal premium payments.

On the other hand, permanent life insurance can be either participating or non-participating. Non-participating policies may initially have lower premiums but do not share profits or pay dividends to policyholders.

Premium vs. dividends

Participating policies typically come with higher initial premiums. In return, they enable policyholders to share in the profits of the insurance company through regular dividends. This extra income can be used to offset the long-term policy cost or build savings, depending on your preference.

Choice of insurance company

The type of insurance company you work with also matters. Mutual life insurance companies usually offer participating policies in most states. These policies allow a portion of the company’s premiums to be paid out in the form of policy dividends as refunds, which makes those funds nontaxable as income. Conversely, stock life insurance companies generally issue non-participating policies and distribute profit dividends to their stock shareholders.


Here is a list of the benefits and drawbacks to consider.

  • Opportunity to receive dividends
  • Potential for long-term cost savings
  • Ability to use dividends to offset policy expenses or build savings
  • Tax advantages, with dividends often being tax-free
  • Risk sharing with the insurance company
  • Higher initial premiums compared to non-participating policies
  • Dividends are not guaranteed and may fluctuate
  • Not suitable for short-term coverage needs
  • Policyholders may have limited investment flexibility


In conclusion, participating policies offer a unique way to manage insurance costs and savings by allowing policyholders to share in the profits of the insurance company. While they may come with higher initial premiums, the potential for dividends and long-term cost savings can make them a suitable choice for individuals with specific financial goals. It’s essential to carefully assess your needs and consider the tax implications when deciding between participating and non-participating policies.

Frequently asked questions

Are participating policies suitable for short-term coverage?

Participating policies are typically designed for long-term financial planning and may not be the best choice for short-term coverage needs. Term life insurance policies are better suited for short-term coverage, as they offer lower premiums and do not involve dividends.

Do participating policies guarantee dividends?

No, participating policies do not guarantee dividends. The dividends paid to policyholders depend on the annual performance of the insurance company, and they are not guaranteed. Policyholders should be aware that dividend amounts may fluctuate over time.

How often can I change my dividend option?

The frequency of changing your dividend option may vary depending on the insurance company and the specific policy. Some insurance companies allow policyholders to change their dividend option annually, while others may offer more frequent changes. It’s essential to review your policy documents and discuss this with your insurance provider.

Are participating policies a good investment choice?

Participating policies should not be considered traditional investments. While they offer the potential for dividends and long-term cost savings, they primarily serve as insurance coverage with added financial benefits. If you’re looking for investment opportunities, other financial instruments like stocks, bonds, or mutual funds may be more suitable.

Key takeaways

  • Participating policies pay dividends to policyholders, sharing insurance company profits.
  • These dividends can be used to pay premiums, generate interest, or received in cash.
  • Initially, participating policies may have higher premiums but can prove cost-effective over time.
  • Your choice between participating and non-participating policies depends on your needs and goals.
  • Mutual life insurance companies usually offer participating policies, while stock life insurance companies issue non-participating ones.
  • Dividends from participating policies are often tax-free, providing a unique tax advantage.
View Article Sources
  1. Glossary Of Life Insurance Terms – Department of Financial Services
  2. MSU Denver Mandatory Participation Verification Policy – Metropolitan State University
  3. Cal. Code Regs. Tit. 10, § 2503 – Participating Workers’ Compensation Policies – Required Provisions – Cornell Law School
  4. Finance Department Faculty Publications – University of Nebraska Lincoln
  5. Understanding the Labor Force Participation Rate – SuperMoney
  6. What Is A Participation Mortgage? – SuperMoney