A participating life insurance policy is a type of whole life insurance. While whole life provides lifelong insurance coverage, a participating policy also guarantees to build the policy’s cash value. In addition, a participating life insurance policy gives you access to the insurance company’s profits, this helps you earn dividends which can potentially increase your cash value and death benefit amount over time.
What is Participating Life Insurance?
A participating life insurance policy pays out a fixed sum of money if you pass away. In addition, it enables you to earn a share of the insurance company’s profits. It means that whenever the company earns excess profits, your policy earns a share of that. This added benefit is included with all the other usual benefits of whole life insurance, this provides you with lifelong coverage with the addition of a guaranteed cash value.
Participating vs. Non-Participating Whole Life Insurance
Whole life insurance policies do not include the benefits of participating policies, which means you will not have a claim in the company profits and won’t earn any dividends from the policy. Non-participating policies are usually suited for people looking for lower monthly premiums. They are also preferred by those who are simply looking to cover their end-of-life expenses.
The earnings are not usually guaranteed in a participating policy. The financial performance of your company plays a role in if you earn them or not. The dividends are also considered a return on your premium payments, which means that they are not considered taxable. This makes them a smart tool for people interested in accumulating cash value.
What Dividends Options are Available?
Depending on the finer details in your contract, a few options may be available to you regarding dividend pay-outs. The most common options available are:
Premium Deductions – You can opt for this and reduce the company’s dollar amount you have to pay in premiums. For example, let’s assume you pay $500 per year in premiums. Let’s also assume that your policy makes you $200 in dividends that year. In this case, the company will only charge you the difference of $300 in premium payments that year.
- Cash Payment – You may choose to receive an annual check from the company depending on your dividend amount.
- Pay off a Policy Loan – If you have an outstanding loan taken out against your policy, this option can help you pay it off.
The Advantages of Participating Whole Life Insurance
There are many advantages to buying a participating policy. It can be especially helpful if you are young. This is because your monthly premium payments are much lower compared to someone over the age of 40. Not to mention that the accumulated cash value may help you in things like buying a house or getting married later.
Here are some of the advantages of opting for participating whole life insurance:
- Create an additional stream of income – A participating policy is a great alternative source of passive income. The policy guarantees an annual payment depending on the financial performance of your company. While this does not mean that you will get a payment every year, the chances remain high.
- Increase The Policy’s face amount – You have the option to use your dividends to buy another already paid life insurance policy. This is a great option for increasing the death benefit and generating more cash value. This option is flexible to your needs compared to a whole life policy. It allows you to increase your benefits while avoiding the underwriting process.
Opting for a participating policy is recommended if you want to generate an additional source of income in addition to getting lifelong life insurance coverage. It also offers you more flexibility in terms of improving your death benefit. However, these policies can be more costly and complicated. It’s recommended to speak with a licensed life insurance advisor when considering participating or non-participating in life insurance.