What is Participating Life Insurance?
A participating life insurance policy is when your insurance company invests in the premiums of all its clients. Once the investments lead to more money, the policyholders receive a dividend. Basically, you ‘participate’ in the company’s earnings. This type of insurance policy has guaranteed premiums, death benefits and cash values. More often than not, the pitch that your agent will give you will be something similar to, “when the company makes enough surplus money, we will share some of that money with you in the form of dividends!” This kind of pitch would be attractive to individuals who are looking for investment options.
The dividend that will be given is determined by how much amount of profit is left over after the insurer has gathered its premiums, paid claims and taken care of other costs (including providing insurance to customers). Typically, these dividends are paid out yearly. Premiums for this type of policy are usually higher than for non-participating policies.
This kind of policy has been more popular over the last decade. Policyholders see it as a convenient choice as they receive money while they are still living. This type of policy costs more than traditional life policies because of the benefit that you may gain more money along the way. Though other types of policies may pay dividends at times, there exists down times when no dividends are paid. Unlike participating life insurance, other types of insurance have no guarantee of a dividend payment.
Policyholders have various options for putting the dividends into use
Payment may be received in cash, similar to stock dividend payments. Also, you may opt not to claim the cash, so that it may build up even more interest as time goes by. Another option that your insurance company may offer you is that you can purchase more benefits for your whole life policy using these dividend payments. This puts more value into your policy, and adds additional insurance to you, the policyholder.
Finally, the dividends can be used for premium payments, which may reduce over time. There is also a chance that as you continue to use the dividends to pay for the premium payments, the payments will be covered completely by the accrued interest.
How does it differ from non-participating life insurance?
A non-participating life insurance policy is also known as a traditional life insurance policy. This kind of policy has a specific pay out amount. Guaranteed premiums and death benefits are declared, as well as a designation of guaranteed values. No dividends exist. No investment options exist. Also, your premium amount will not change over time.
Those who would find this type of policy agreeable are those who have other forms of investments. Fortunately, those who opt to purchase a non-participating life insurance policy will always have the option of changing it to a participating life insurance policy.
If you are not sure about what type of policy is the right one for you, then it is best to inquire with an insurance agent first. They can analyze your situation and tell you what policy type would be the right one for you. As you should know, before you purchase a policy, always make sure that it will be the smart choice.