A participating policy lets you share in the insurance company's profits through dividends, but costs more upfront than a non-participating policy

A participating life insurance policy is one where you, as the policyholder, receive a share of the insurance company's profits in the form of dividends. The company declares these dividends annually if it has surplus earnings after paying claims, operating costs, and building reserves. You do not have to do anything to receive them — the insurance company decides whether to pay dividends and how much, based on how well the company performed that year.

Non-participating policies do not pay dividends. The premiums you pay are calculated to cover claims and expenses with a built-in profit margin for the company. With a participating policy, the premiums are typically higher because the company is pricing in the possibility of returning some of those profits to policyholders.

Dividends are not may provide. The company can reduce or skip dividend payments if claims are higher than expected, investment returns fall, or expenses rise. This is different from a bond or stock dividend — there is no legal obligation to pay, and the amount changes year to year.

Key Takeaways

  • Participating policies charge higher premiums than non-participating policies because you may receive annual dividend payments.
  • Dividends are not may provide and depend on the insurance company's actual financial performance each year.
  • You can use dividends to reduce your premium, buy additional coverage, or take them as cash, depending on what the policy allows.
  • Participating policies are more common among mutual insurance companies, which are owned by policyholders rather than shareholders.
  • The actual dividend amount varies widely by company and year, so comparing policies requires looking at both the base premium and the company's historical dividend track record.

How dividend options work

When your insurance company declares a dividend, you typically have several choices for what to do with it. The most common option is to use the dividend to reduce your next premium payment — this lowers your out-of-pocket cost. Another option is to take the dividend as cash, though this is less common because most people prefer to keep the money working within the policy.

You can also use the dividend to purchase additional paid-up insurance, which increases your death benefit without requiring you to pass a new medical exam. Some policies allow you to leave the dividend on deposit with the company, where it earns interest. A few policies let you use the dividend to pay down a policy loan if you have borrowed against the cash value.

The policy document spells out which options are available to you. You typically choose your preferred option when you buy the policy, but you can change it later by contacting your insurance company.

Participating versus non-participating policies

The main trade-off is cost now versus potential savings later. A non-participating policy has a lower initial premium because you are not paying for the possibility of dividends. If you want the lowest monthly cost and do not care about sharing in company profits, a non-participating policy is simpler and cheaper.

A participating policy costs more upfront, but if the company performs well and pays consistent dividends, your net cost over time may be lower. However, you cannot count on this — dividends are discretionary, and some companies pay more generously than others. If you are considering a participating policy, ask the insurance company for its historical dividend record over the past 10 to 20 years, not just a projection of future dividends.

Participating policies are more common among mutual insurance companies, which are owned by policyholders rather than by outside shareholders. Stock insurance companies (owned by shareholders) typically offer non-participating policies because profits go to shareholders, not policyholders. Some large companies offer both types.

Who issues participating policies

Mutual insurance companies are the primary source of participating life insurance. Well-known mutual companies include Massachusetts Financial Services Company, New York Life, Guardian Life, and Northwestern Mutual. These companies have been around for decades and have published dividend histories that you can review.

Some stock-based insurance companies also offer participating policies, though this is less common. The company's structure is usually stated clearly in its marketing materials and policy documents. If you are unsure, ask your insurance agent or call the company directly.

Dividend history matters more than the company's size. A smaller mutual company with a strong 20-year dividend record may be a better choice than a large company with an inconsistent one. Request the company's annual dividend declarations for the past decade before you commit.

What dividends actually cost you

The higher premium on a participating policy is the real cost, not the dividend itself. If a participating policy costs $150 per month and a non-participating policy costs $120 per month for the same death benefit, you are paying an extra $30 per month ($360 per year) for the dividend feature. Whether that extra cost is worth it depends on whether the company's historical dividends have been large enough to offset it.

For example, if the company has historically paid annual dividends of $200 to $300 per year on a policy like yours, the extra $360 per year in premiums might break even or come out slightly ahead over time. But if historical dividends are only $50 to $100 per year, you are losing money by choosing the participating policy.

This is why asking for a 10 to 20-year dividend history is essential. Do not rely on projections or illustrations of future dividends — those are estimates, not promises. Look at what the company actually paid in the past.

Participating policies and cash value

If you have a permanent life insurance policy (whole life, universal life, or variable universal life), it builds cash value over time. Dividends can be used to accelerate the growth of that cash value or to reduce the premium you pay, which also preserves more cash value in the policy.

Some participating whole life policies allow you to use accumulated dividends to pay up the policy early — meaning you stop paying premiums but keep the death benefit and cash value. This option is called a paid-up insurance dividend option and can be valuable if your financial situation changes and you can no longer afford the premiums.

With term life insurance, which has no cash value, dividends are typically used only to reduce your premium or buy additional coverage. Term policies are less commonly offered on a participating basis because the lower cost of term makes the dividend feature less attractive to buyers.

Questions to ask before buying

Before you commit to a participating policy, ask the insurance company or agent for the following information in writing: the company's dividend history for the past 10 to 20 years, the average annual dividend amount for a policy like the one you are considering, and whether dividends have been paid every year or if there have been years with no dividend.

Also ask what happens to dividends if you take out a policy loan or if you stop paying premiums. Some companies reduce or suspend dividends in these situations. Finally, confirm which dividend options are available under the specific policy you are looking at, because not all participating policies offer all options.

Compare the total cost of a participating policy (premium minus average historical dividend) against a non-participating policy from a different company. The participating policy is only worth the extra cost if the math works in your favor over the long term.

Frequently Asked Questions

Are life insurance dividends taxable?

Generally, no. The IRS treats dividends on life insurance as a return of part of your premium, not as income. However, if your dividends exceed the total premiums you have paid, the excess may be taxable. Dividends taken as cash are more likely to trigger tax consequences than dividends used to reduce premiums or buy additional coverage. Consult a tax professional if you receive large dividends.

Can an insurance company stop paying dividends?

Yes. Dividends are not may provide, and a company can reduce or eliminate them if its financial performance declines. This is why historical dividend records matter — a company with a consistent 30-year history of paying dividends is lower risk than one with a shorter track record. However, even stable companies occasionally skip or reduce dividends during economic downturns.

Is a participating policy better than a non-participating policy?

Not necessarily. It depends on the specific companies and policies you are comparing. A participating policy is only better if the historical dividends are large enough to offset the higher premium. If you find a non-participating policy with a much lower premium and you do not need the dividend feature, that may be the smarter choice.

Can I switch from a non-participating to a participating policy?

Yes, but you would need to apply for a new policy and pass underwriting again. Your age and health at the time of the new application will affect the premium. Switching makes sense only if the new participating policy's total cost (after historical dividends) is lower than keeping your current non-participating policy.

What if the insurance company goes out of business?

State insurance may provide funds protect policyholders if an insurance company becomes insolvent. These funds cover death benefits and cash value up to a limit (usually $250,000 to $300,000, depending on your state). Dividends that have already been declared and paid are protected, but future dividends are not may provide if the company fails.