A participating life insurance is an insurance that is entitled to earn dividends to be paid by the insurance company that issued the insurance. Although a policy may have a participating status, it is not necessarily guaranteed a dividend. Many financial resources confuse the definition of participation by claiming that it means that the policy will earn dividends. This is incorrect. Participation only means that the policy has the ability to earn dividends if the policy bloc has profits generated to pay dividends. I will explain the nuances of this through this article, especially in relation to the three main types of life insurance. I can assure you that all three can participate. <! – ->
Participation versus non-participation
Life insurance covers all two major categories, participation and non-participation. As we covered, participating insurances can receive dividends. Alternatively, non-participating insurances will never pay dividends no matter how profitable the insurance business is for the life insurer.
Life insurers reveal participant status in the insurance contract. You can also check before you buy to determine which insurance you plan to buy is participatory or non-participatory.
Participating full life insurance
The most common type of participating life insurance is full life insurance. This product is usually synonymous with dividends – although there are several non-participating comprehensive policies available. <! – ->
Entire life policies that earn dividends generally do so annually at the policy day. The insurance company determines the dividend to each policyholder based on a formula that it determines once a year. Some insurance companies publish a large variable in their formula, the dividend interest rate, when the board approves the dividend plans for the coming year.
Participating in the entire life policy can also receive terminal dividends. These are dividends that are paid out after an insurance has ceased for its cash value or at the death of the insured.
Participating Universal Life Insurance
While universal life insurance products more often fall into the category of non-participating, there are several mutual life insurers issuing participating universal life insurance policies. As a reminder, participation status does not necessarily mean that the insurance owner will receive a dividend. <! – ->
It is common for participating universal life insurance companies to pay irregular dividends. A dividend is usually due to higher profitability than expected during a certain period of time.
Participatory term Life insurance
Like universal life insurance, life insurance is much more often issued as non-participating life insurance. However, some mutual life insurers issue participatory term insurance and some even have a history of paying dividends on older life insurance policies.
Is the dividend policy always better?
Owning a participating insurance policy can result in a lower net cost of purchasing the insurance policy. The value created by the dividends can lower your deductible significantly. Older full life insurance policies can earn enough dividends to pay the full premium, effectively reducing the policyholder's cost to zero.
It is extremely unlikely that a participating universal or life expectancy will earn dividends that are sufficient to cover the entire premium. That being said, dividends paid for any of these policy types really lower the net cost of the policy.
However, you will generally pay more for a participating policy in previous years. Whether it is worth paying the extra cost for a participating policy and then letting the dividend reduce the cost depends on the buyer's unique circumstances.
Some policies never pay Dividends
Some insurance companies issue participating insurances that never pay dividends. The reasons for this vary but usually involve mutual insurance companies that have the practice of issuing almost all insurances with the possibility to one day receive a dividend – no matter how unlikely.
It is important to understand that if the company issues a type of life insurance that it pays dividends on, it does not necessarily mean that it will pay dividends on all other types of insurance that it issues.
Reviewing something I mentioned at the beginning of this blog post, delta simply means that politics has the ability to earn dividends. Just being a participating policy does not guarantee that the policy will ever pay dividends. <! – ->
If you're wondering about the likelihood that a policy you review will ever pay dividends, here's how to find out.
First, you can simply ask about the dividend-paying history of the specific policy you are considering. The insurer can verify that it pays dividends on this type of insurance and can usually give you an approximate estimated amount through the sales illustration that insurers create to help potential buyers better understand the policy before they buy it.
Remember that having paid dividends in the past does not guarantee that the insurer will pay dividends in the future. It is unknown for an insurance company to stop paying dividends to a policy to which it previously paid dividends, but the possibility exists.