Whole life insurance is a type of life insurance policy that offers coverage for the entire lifetime of the policyholder. It is designed to provide financial security and peace of mind to policyholders and their families in the event of the policyholder’s death.

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Participating whole life insurance is a specific type of whole life insurance that allows policyholders to participate in the company’s profits. This means that policyholders may be eligible for dividend payments based on the financial performance of the insurance company.

Key Features of Participating Whole Life Insurance

Purchasing a participating whole life policy from a mutual insurance company rather than a traditional whole life policy from a stock company will help the policyholder accumulate more wealth (cash value) for retirement.

 

The key features of participating whole life insurance include:

  1. Guaranteed Death Benefit: Policyholders’ beneficiaries will receive a specified amount of money in the event of the policyholder’s death, regardless of the financial performance of the insurance company.
  2. Cash Value Accumulation: The policy accrues cash value over time, which can be used to help pay premiums or to be taken as a loan against the policy.
  3. Premium Stability: The policyholder’s premium remains the same over the life of the policy, providing a predictable cost for coverage.
  4. Potential for Dividend Payments: Policyholders may receive additional money in the form of dividends, based on the financial performance of the insurance company. This can help offset the cost of the policy and provide an additional source of income for the policyholder.
  5. Estate Planning: Whole life insurance can be used as part of an overall estate plan, providing a tax-free source of funding for final expenses, estate taxes, or other costs associated with transferring wealth to beneficiaries.

 

How does Participating Whole Life Insurance Work?

Participating whole life insurance is a type of permanent life insurance that combines a death benefit with a cash value component. Policyholders have the potential to earn dividends which are determined by the insurance company’s financial performance. 

These dividends can be used to purchase additional insurance coverage, reduce the policy’s premium payments, or be taken as cash. Over time, the cash value component can grow and provide a source of savings for retirement or as collateral for personal banking.

Most mutual insurers will provide multiple premium payment options such as 10-pay, 20-pay, pay to age 65, or payments for life.

There are four primary methods to accept insurance dividends earned by your participating whole life insurance policy:

  1. Cash payment: Policyholders can receive their dividends in cash, which can be used for any purpose.
  2. Premium reduction: Policyholders can choose to apply their dividends towards reducing their premium payments, which can lower their overall cost of insurance.
  3. Purchase paid-up insurance: Policyholders can use their dividends to purchase additional insurance coverage, which will also earn interest and dividends.
  4. Reinvestment: Policyholders can reinvest their dividends back into the policy, which can help the cash value component grow over time.

It’s important to note that insurance companies do not guarantee the payment of dividends. You can, however, ask your insurance professional to provide a list of historical dividend payments paid out by each company you are considering.

Stock Insurance Company versus Mutual Insurance Company

A stockholder-owned insurance company, also known as a stock insurance company, is owned by its shareholders who have purchased stock in the company. The company’s profits are distributed to the shareholders in the form of dividends.

A mutual insurance company, on the other hand, is owned by its policyholders. The company is managed for the benefit of its policyholders, and its profits are returned to policyholders in the form of dividends.

Mutual insurance companies may pay dividends on some types of life insurance they offer, but it depends on their specific policies and the type of life insurance product. Dividends are typically paid on participating life insurance policies, which means policyholders are eligible to receive a portion of the company’s profits.

Non-participating policies, on the other hand, do not offer the opportunity for policyholders to receive dividends.

It’s best to check with the specific mutual insurance company for information on whether dividends are paid on the type of life insurance policy you have or are considering.

 

Pros and Cons of Participating Whole Life Insurance

Like other types of life insurance products, individuals who are considering buying participating whole life insurance should compare the advantages and disadvantages according to their needs and circumstances: 

 

participating whole life insurnace

Frequently Asked Questions

Does whole life insurance earn dividends?

Yes. A participating whole life policy purchased from a mutual life insurance company does earn dividends but they are not guaranteed each year.

How much does participating whole life cost?

Like other types of life insurance, participating whole life premiums are based on various underwriting aspects. The primary aspects would be your age, your gender, your health, and the amount of the death benefit.

Can I borrow money from my participating whole life policy?

Absolutely! Once your cash account is sufficient to support your loan, you can take out a loan with no credit check, for any reason, and pay it back on your terms. Additionally, since the money in your cash account is not being withdrawn but used as collateral instead, that money continues to earn interest and dividends.

What are paid-up additions?

Paid-up additions are increases in coverage that you can purchase using dividends generated by a participating whole life policy. Since the additional coverage is paid in full, your insurance premiums will not increase and the paid-up additions will also earn interest and dividends.

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Curt Gibbs