What Is Participating Whole Life Insurance?

Participating whole life insurance is a type of permanent life insurance that offers a death benefit, builds cash value, and provides policyholders with the opportunity to receive dividends. This coverage allows policyholders to share in the insurer’s financial performance, combining the security of traditional whole life insurance with potential additional financial benefits.

Fundamental Elements of Whole Life Insurance

Whole life insurance provides coverage for the entire lifetime of the insured individual, distinguishing it from term life insurance which covers a specific period. A guaranteed death benefit, a set amount paid to beneficiaries upon the insured’s passing, is a core feature.

Whole life insurance includes a cash value component that grows on a tax-deferred basis over time. A portion of each premium contributes to this cash value, which is guaranteed to increase at a predetermined rate. Policyholders can access this cash value during their lifetime.

Premiums for whole life insurance policies are fixed, remaining level throughout the life of the policy. While whole life premiums are higher than term life, they offer lifelong coverage and the cash value component.

Policyholders can access the cash value through policy loans or withdrawals. A policy loan uses the cash value as collateral; while interest accrues, the policy remains in force. Unpaid loans, including accrued interest, reduce the death benefit paid to beneficiaries. Withdrawals permanently reduce both the cash value and the death benefit.

The Concept of Policy Participation

A participating whole life policy offers policyholders the opportunity to receive dividends, which are a share of the insurance company’s profits. These policies are offered by mutual insurance companies, which are owned by their policyholders, unlike stock companies owned by shareholders.

After a mutual company covers its claims, operating expenses, and maintains sufficient reserves, any remaining earnings may form a “divisible surplus.” The board of directors determines how much of this surplus will be distributed to eligible policyholders, reflecting the company’s financial performance.

Policyholders of participating policies are eligible to receive a share of this divisible surplus as policy dividends. These dividends are not guaranteed; their payment and amount depend on the insurer’s financial performance. Dividends are considered by the IRS as a return of unused premiums and are not taxable unless they exceed the total premiums paid into the policy.

Dividend Distribution and Application

Policyholders with participating whole life insurance have several options for how they can receive and utilize their policy dividends. They can receive the dividend as a direct cash payment, sent via check or direct deposit.

Another option is to use dividends to reduce future premium payments. The dividend amount can offset part or all of the upcoming premium. If the dividend is less than the full premium, the policyholder pays the remaining balance.

Policyholders can also leave their dividends with the insurer to accumulate interest. The interest earned on these accumulated dividends is considered taxable income, differing from the tax-deferred growth of the policy’s cash value.

Dividends can be used to purchase Paid-Up Additions (PUAs). PUAs are small, single-premium increments of additional whole life insurance coverage. These additions immediately increase both the policy’s death benefit and its cash value, contributing to faster cash value growth and potentially higher future dividends. Purchasing PUAs does not require additional medical underwriting, allowing policyholders to increase coverage even if their health has changed.

Policyholders may also use dividends to repay outstanding policy loans. This reduces the loan balance, preserving the policy’s death benefit which would otherwise be reduced by any outstanding loan amount at the time of death.