What is a participating life insurance policy?

We might be biased, but we firmly believe buying life insurance coverage should be part of nearly everyone’s long-term financial plans. That’s because life insurance is a way of providing financial protection to your loved ones in case the worst should happen — and procuring peace of mind for yourself, knowing that protection is in place.

When shopping for life insurance, you will encounter many different types of life insurance, including something called a participating life insurance policy. This type of life insurance is eligible to receive dividends over the life of the policy, while also paying a death benefit to your beneficiaries in the event that you die.

Sounds great, right? But it’s not right for everybody, and many insurers do not offer it. Read on to learn more, including whether a participating life insurance policy makes sense for you and your family.

Participating life insurance policies, defined

A participating life insurance company policy is usually designed similarly to other types of life insurance, in which you pay a monthly premium for coverage. When you die, your beneficiaries receive a death benefit — that is, money that can be used to make up for the loss of your income, pay expenses (including future ones like college tuition), or for any purpose your beneficiary chooses. The amount of coverage you’re eligible for, how much you pay, and whether you qualify will depend on many factors, such as your age and overall level of health.

Term life insurance, whole life insurance and universal insurance policies can all be participating policies — to be a participating policy, it needs to be eligible for dividends, generated from the insurer’s investment, expense and mortality experience and typically paid out over the life of the policy.

The average cost of a participating life insurance policy

Life insurance premiums are based on your health and life expectancy. For example, if you’re in your mid-20s and in excellent health, you’ll likely pay less for life insurance than someone in their mid-40s with below-average health.

For a participating life insurance policy, the premiums might be higher than those that don’t pay dividends to the policyholder. There are also tax implications if you receive dividends in cash, potentially adding to your out-of-pocket costs for the policy if you select this dividend option..

How a participating life insurance policy pays out

If you receive a dividend from a participating policy, you have several options for how it’s paid to you.

Paid-up additions

A paid-up addition is when you receive a dividend and use it to purchase additional life insurance. This added insurance can then also generate dividends. If these dividends are added to the value of the addition, your life insurance investment compounds and grows.

Insurance premium payments

You can choose to apply the dividend to your premium amount. Depending on the size of the dividend, this could significantly reduce the amount you pay for your policy. If you receive dividends and apply them to your annual premium and the company manages to pay dividends for the entire time you have the policy, you could save money in the long run.

Direct cash payments

If you prefer to get your dividends and do something else with them, you can choose to have them paid to you in cash.

There is no guarantee a policy will pay dividends. However, many issuers have paid dividends continuously for years, even decades.

Is a participating life insurance policy right for you?

In general, anyone with dependents should have some form of life insurance — it’s a way to help your family pay for things in case you die.

A participating life insurance policy can be a good idea for someone who wants to share in the insurer’s favorable investment, expense and mortality experience.

But for some people, the potential additional cost is not worth it.

Why term life insurance might be a better fit

Simply put, term life insurance offers lower costs and a simpler user experience. With term life insurance, you’re buying a policy for a set period of time (the “term”). If you die during that time period, your beneficiaries receive a lump sum payout equal to the value of your policy. That money is typically tax-free.

The idea behind term life insurance is that you cover the years when you are responsible for someone else’s expenses — for example, a mortgage you co-signed with your spouse, or the daily expenses that come with having kids. These are the years when you’re earning a salary. For most people, the end of those years mean life insurance is no longer necessary, and they let their policy lapse.

The upshot is that term life insurance is often the most affordable policy option. That’s because it covers the years when you’re young and healthy, and ends before the years where you’re less likely to be in good health.

Find out what you might pay for a term life insurance policy from Haven Life by getting a free online quote today.