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What is a Participating Life Insurance Policy?

Participating life insurance, also called dividend-paying life insurance, helps give policyholders a chance to benefit when the insurer has a solid financial performance. On top of this, it offers lifelong life insurance coverage and a cash value growth component that grows tax-deferred to help increase wealth. Below, we’ll explore participating life insurance in more detail and explore some ways to get the most out of these policies.

How participating life insurance works

Participating life insurance is a permanent life insurance policy type, usually whole life insurance, that may pay dividends to the policyholder if the insurer performs well financially.1 For example, insurers may have paid fewer death benefits than expected, found ways to cut costs, or outperformed investment expectations. The company’s board of directors evaluates its needs and, if it decides it doesn’t need the extra funds, pays a dividend to participating life insurance policyholders. As a result, these policies help offer another layer of potential financial benefits that traditional permanent life insurance policies lack.

How much does participating life insurance cost?

Participating life insurance policies are often whole life insurance policies. These come with higher premiums than term life insurance to account for the lifelong coverage and cash value growth component. Whole life insurance also costs more than other permanent policy types, like universal life insurance. For reference, here are some average costs for a $250,000 non-participating whole life insurance policy for healthy men and women:2

Age and Gender Monthly Premium
Male age 30 $211
Female age 30 $185
Male age 40 $303
Female age 40 $275
Male age 50 $435
Female age 50 $403

Participating life insurance policies will cost more than this, on average, due to the potential for dividends. However, this can reverse over time as your cash value and dividends grow, which can help to cover some of your premiums.

Participating vs. non-participating life insurance

Here are some key differences between participating and non-participating life insurance policies:3

  • Ownership structure: Participating life insurance is offered by mutual insurance companies, privately held insurers owned by the policyholders. Non-participating policies come from traditional insurers.

  • Dividends: Participating life policies pay dividends, whereas non-participating life insurance policies do not.

  • Cost: Participating life insurance has higher premiums than non-participating life insurance. However, you can make your premiums more cost effective with participating life insurance through faster cash value growth and dividends.

  • Simplicity: Non-participating life insurance can be simpler to manage since there is no dividend aspect to track.
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How to use dividends from a participating life insurance policy

You can use your participating life insurance policy dividends in several ways:

Receive cash directly

You can have the insurer send you cash payments as a check or ACH. This offers the most flexibility since you can use your dividends for anything you want, such as investing extra for retirement or making a discretionary purchase.

Buy paid-up life insurance

Paid-up life insurance is extra coverage you can purchase with life insurance dividends. It helps you to increase your death benefit without raising premiums. A larger policy entitles you to a larger dividend in the future, meaning paid-up insurance can help you compound dividends and earn more.4

Paid-up insurance boosts your cash value contributions as well, helping to lead to more potential cash-deferred growth over time. This option can work well if you want to accelerate your cash value and grow coverage to keep up with inflation or rising lifestyle expenses.

Pay premiums

You can ask your insurer to put dividends toward premium payments. This helps you reduce or fully cover your premiums without losing coverage. This may be a good choice if you want to maintain the same level of coverage while reducing your life insurance expenses.

Save with the insurer

Insurers let you save dividends in an insurer-maintained interest-bearing savings account. You can earn more on your dividends without managing them yourself. Additionally, you can withdraw from this account as needed. Interest earnings may be taxable.

Pay down policy loans

If you borrow from your cash value, you can ask the insurer to pay dividends toward the policy loan. This can help you reduce your loan balance and avoid policy lapse without paying as much out of pocket.

Is participating life insurance right for me?

Here are some circumstances where participating life insurance could work for you:

  • You seek additional wealth: Dividends can help offer faster potential cash growth through the cash value or by reinvesting dividends outside the policy. If you seek more investment growth, a participating policy could help.

  • You have a young family: Participating life insurance helps cover your family for life and lets you grow the policy through paid-up additions, ensuring you boost your coverage as your family grows.

  • You want to beat inflation: Inflation may decrease your death benefit’s value. Participating policy dividends help you purchase paid-up insurance to grow your death benefit and beat inflation.

  • You have a long life expectancy Getting a participating policy early help you lock in a lower rate and offers more time to earn dividends. This can help you reach a stage where you can pay all your premiums with dividends faster, ensuring lifelong coverage for low rates.

If participating life insurance doesn’t fit your needs, consider these alternatives:

  • Non-participating whole life insurance: Non-participating whole life insurance has lifelong coverage and cash value, but competitive rates and no dividends. If you want all the features of whole life insurance but want cost-effective premiums and don’t need dividends, this policy type can work.

  • Term life insurance: Term life insurance lasts for 10 to 30 years and has no cash value or dividends. However, its premiums are cost-effective, making it suitable for those who want the most coverage for their budget.

  • Universal life insurance: Universal life insurance offers lifelong coverage and cash value, but also helps you adjust your premiums and death benefit. This help offers more flexibility than whole life insurance. Certain kinds, such as indexed universal life insurance, may help you invest in funds for more potential growth and more risk.

Get a life insurance quote today

Participating life insurance helps offer a financial component that lets you earn potential dividends when the company performs well. This may help you to bolster your insurance, pay premiums, or accelerate your cash value growth. However, premiums may be higher initially, and insurers don’t pay a dividend unless they have extra funds to do so.

If you have any other questions about a dividend-paying policy life insurance or want to explore your life insurance coverage options, Aflac can help. Chat with an agent today to get a quote.

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