What Is a Participating Life Insurance Policy?

All life insurance passes a death benefit onto your beneficiaries when you die, and permanent policies also build up a cash value that you can use or borrow against during your life. A participating life insurance policy offers another key benefit that may make it the right choice of coverage for you. 

Non-Participating vs. Participating Life Insurance Policy

A participating life insurance policy is one that pays an annual dividend, a lump sum of money tied to the performance of the life insurance company. Nearly all participating life insurance policies are whole life, a type of permanent insurance.

Non-participating life insurance is a policy that doesn't pay a dividend.

What Is a Participating Insurer?

A participating life insurer is one that offers participating life insurance policies. The company's business model allows life insurance policyholders to benefit when the company has a profitable year. Participating insurers may choose to pay dividends on all their whole life policies or provide the benefit for only select policies. In the latter case, the company's lineup of insurance products would include both participating and non-participating options.

Who Owns Dividends That Are Paid Out on a Participating Life Insurance Policy?

Any dividends paid on your participating life insurance policy go to you. You have the option to:

• Take the dividends as cash payouts
• Use the dividends to pay your monthly premiums
• Add the dividends to an interest-paying savings account
• Buy a second paid-up life insurance policy

What Are Guaranteed Dividends?

Participating life insurance policies may offer one of two types of dividends.

• Guaranteed dividends are paid out annually. With this type of policy, you can count on receiving a dividend payment every year, but the amount paid will vary.
• Non-guaranteed dividends are only paid when an insurance company meets or exceeds preset performance standards.

Before buying a non-guaranteed payment participating life insurance policy, check the company's credit rating. While a good rating doesn't guarantee you'll receive a dividend every year, companies with a history of financial strength are more likely to have financial success and pay out an annual dividend accordingly.

How Are Life Insurance Dividends Calculated?

The actual amount paid as dividends on a participating life insurance policy is usually determined by the company's board of directors. Each year, the board meets to set the dividend rate. Normally, the dividend is a percentage of the value of your life insurance.

For example, if the board sets a 2% dividend and you have a life insurance policy worth $250,000, you would receive a dividend payment of $5,000. If the following year your life insurance policy was worth $255,000 and the dividend was 4%, you would receive $10,200.

Do I Have to Pay Taxes on Life Insurance Dividends?

In most cases, the IRS treats dividends from participating policies as a refund of premiums you paid. Because the money isn't considered income, you normally don't have to pay taxes on it.

Are There Any Drawbacks to Participating Life Insurance Policies?

The downside to participating life insurance policies is that they often have higher premium rates than non-participating life insurance.

When Do I Get Life Insurance Dividend Payments?

Generally, when the board of directors sets a dividend, you will receive the payment on the next anniversary of your policy. As an example, if the board establishes a premium in December 2023 and your policy went into effect in March 1999, you'd get the 2021 dividend payment in March 2024.