Suppose you are looking for a life insurance policy that offers you coverage, protects your loved ones financially, and offers you some investment options. In that case, you should consider a participating whole life insurance policy.
Participating whole life insurance policy offers you the chance to share in the insurance company’s profit while you are alive. It puts a portion of your premium into mutual funds and pays you dividends annually.
This type of life insurance policy has the potential to pay you more than other non-participating life insurance policies. This article will enlighten you on what is participating whole life insurance, the pros and cons, and the difference between participating and non-participating life insurance policies.
Without skipping a bit, let’s get right into it.
What Is Participating Whole Life Insurance Policy, and How Does It Work?
Participating whole life insurance policy is a type of whole life insurance that generates and pays out dividends over the lifetime of your policy. In addition to your death benefit, you receive annual dividends.
The insurer’s performance and profits determine these dividends. You get to partake of your insurer’s earnings while you are alive.
Your insurer pools and invests your premiums, and the earnings generated from the investment are paid to you as dividends. The dividends come from surplus profits from the insurer’s participating investment fund.
However, unlike death benefits that are guaranteed, the dividends received from participating whole life insurance policies are not guaranteed. They can fluctuate depending on how well the investment performs in the market.
Because of the potential for annual dividends, participating whole life insurance policy is usually more expensive than other types of insurance, like term life insurance and standard whole life insurance policy.
Like other whole life insurance policies, the participating insurance policy also has fixed premiums. You pay a fixed premium throughout the lifetime of your policy.
Participating Vs Non-Participating Whole Life Insurance
As opposed to participating whole life insurance policies, non-participating insurance policies offer simplicity and lower premiums. They do not generate annual dividends but provide lifetime protection, guaranteed cash value, fixed premiums, and a guaranteed death benefit.
Participating whole life insurance policies come with higher premiums. If you want an insurance policy that provides a death benefit to your loved ones with minimal premiums, you should opt for a non-participating whole life insurance policy.
However, if you need an ongoing investment option offering annual dividends at fixed premiums rates, participating whole life insurance policies are a perfect fit.
Also, non participating whole life insurance are risk-free. With participating whole life insurance policy, you are sharing the risk with the insurer. While this can be beneficial when the investment earnings are high, it could become tricky when investments begin to fluctuate.
What Are The Different Types of Participating Whole Life Insurance Policy?
Many options are available on how you can receive your dividends. Mostly, it depends on the details of your contract.
The most common types of participating whole life insurance policy are:
- Premium reductions: You can choose to use your annual dividends to pay your life insurance premiums or a part of your premiums. The dividends will help you reduce the money you pay as premiums annually. However, you can only use dividends to reduce premiums if you have an annual premium payment plan. So, if your yearly premium is $800 and your policy earns dividends of $300 in a year, you will only pay $500 as a premium to your insurer.
- Buy paid-up additional insurance: You can use your policy dividends to buy additional life insurance added to your existing policy. This is a good option if you want to increase your insurance coverage and future dividends. With this, you can also build up a cash value that grows on a tax-advantaged basis.
- Paid in cash: you can also choose to receive your dividends as a direct cash payment from your insurer annually. However, this will subject your dividends to income tax.
- On deposit/cash accumulation: in this case, your insurer puts your dividends in an interest-earning account. You get to earn interest on your dividends. Your dividends grow at a pre-specified rate and can be withdrawn anytime.
Benefits And Downsides of Participating Whole Life Insurance Policy
When looking for a life insurance policy, there are a number of benefits that come with participating whole life insurance policies. Let’s look at some of the participating whole life insurance pros and cons.
Pros
- Increase the policy’s coverage amount: Participating life insurance policy allows you to buy additional coverage for your existing policy. With this, you can accumulate more cash value and increase your death benefit without going through an underwriting process.
- Create additional income stream: Participating whole life insurance policy offers you an extra source of income. Your policy pays out annual dividends when your insurer does well financially. Though the dividends are not guaranteed, most companies pay them yearly.
- Level premiums: With participating life insurance, your premium stays the same as long as you live.
- It has a cash value component: Participating whole life insurance policies have a cash value component that grows cash on a tax-deferred basis. You can withdraw or borrow against the cash value and use the money for whatever you like while alive.
Cons
- Dividends are not guaranteed: the returns on your policy are not guaranteed. You only get annual dividends if your insurance company does well financially. They probably won’t pay you any dividend if they don’t do well.
- Premiums are expensive: Participating whole life insurance policy usually costs more than other non-participating policies. You would pay five to fifteen times more premiums than a term life insurance policy.
Final Thoughts on Participating Whole Life Insurance Policy
If you want the chance to earn annual dividends while protecting your loved ones, then you should opt for participating whole life insurance policy.
You should consider this policy if you want to increase your coverage amount and accumulate more cash value without going through underwriting.
You can speak to an insurance expert to help you find the best participating whole life insurance policy tailored to your specific needs.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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