Free Insurance Guide

Participating life insurance pays dividends to policy holders.  Whole life insurance is a product that builds cash value equity and is guaranteed to pay out a death benefit (unless you cash in the policy early).    This is in contrast to term life insurance, the standard, which only pays out if the insured dies during a finite term of coverage.  Participating whole life insurance has the characteristics of both participating and whole insurance.

The nature of dividends in life insurance

People usually speak of dividends in the context of corporate stock ownership.  Any corporate profits that are not re-invested in the company are paid out to the shareholders as dividends.

On a superficial level, dividends from a life insurance company function the same, but a technical difference gives recipients a tax advantage.  Because the policyholders are constantly investing in their insurer (by paying premiums), the dividends they receive can be considered refunds of their premiums.  That means that, unlike regular premiums, they are not taxable as income.

An exception, in which dividends would be subject to income tax, is when you receive dividends in excess of premiums you paid during a given tax year.  Ordinarily, this shouldn’t happen, but in the case of single-premium whole life insurance, it may happen in every year but the first.  With single-premium whole life insurance, the policy owner pays only a one premium, at the start of the policy, and never pays again.

When life insurance is like corporate stock

Most life insurance companies that offer participating whole life insurance are mutual companies, as opposed to being stock companies.  What this means is that the life insurance policy owners are actually part-owners in the life insurance company—the life insurance coverage you carry is like stock in the company!  It stands to reason that profits made by such a company should be meted out to the policyholders.

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