Participating policy

A participating policy entitles its owner to share in the insurer's divisible surplus through policy dividends. The premium is set conservatively, and when the company's actual mortality, investment returns and expenses turn out better than those assumptions, the board can declare a dividend. Participating whole life is most associated with mutual insurers, though some stock companies sell it too.

Owners choose how to use dividends: take cash, reduce premiums, leave them on deposit to earn interest, or buy paid-up additions, which increase both the death benefit and cash value. Say, hypothetically, a policy pays a $1,200 dividend this year; used for paid-up additions, it might add $4,000 of coverage that itself earns future dividends. For tax purposes, dividends are generally treated as a return of premium and aren't taxable until they exceed what you've paid in.

Dividends aren't guaranteed. Insurers set the dividend scale each year, and an illustration that assumes today's scale for 40 years will almost certainly be off in one direction or the other. Compare a company's dividend history and the guaranteed values, not just the illustrated ones. See whole life dividends: how participating policies pay and life insurance dividend options: cash, paid-up additions and more.