What Is a Participating Policy?

A participating policy is a type of insurance plan that is structured to provide dividend payments to the holder of the policy. The dividends are based on the amount of profit that the insurance provider generates during the time frame used as the basis for the disbursements to clients. Sometimes known as a with-profits policy, a participating policy will usually have some sort of final payment that is disbursed once the insurance contract reaches full maturity.

One of the more common examples of a participating policy is a whole life insurance plan that is equipped with the ability to receive dividends on a recurring basis. Typically, the plan is structured to provide a specific level of coverage in exchange for the remittance of premiums on a monthly, quarterly, or semi-annual basis. As part of the terms of the plan, the issuer also agrees to disburse dividend payments to the policy holder, with the amount of those payments based on the amount of profit generated by the company since the last dividend period. In some cases, the dividends are fixed at a certain amount rather than varying based on the amount of profits generated.

Many providers will offer clients the opportunity to receive the dividend generating by the participating policy in one of three ways. One approach is the direct disbursement of the dividend to the policyholder, usually in the form of a check or a direct deposit to a designated bank account. An alternative is to apply the amount of the dividend to the next scheduled premium payment. A third option is to allow the provider to hold the dividend in an interest bearing account for the provider, effectively creating a savings nest egg for that policy holder. With some plans, it is possible to go with one particular option for a year, then be able to switch to a different option if desired. This adds to the benefits of the plan, since the policy holder can make use of the dividends in whatever manner is in his or her best interests.

The premiums associated with a participating policy are somewhat higher than other whole life plans, but do offer the opportunity to receive some sort of return on the investment over the life of the policy. Those higher premiums are often justified by the dividends that are paid out over the life of the policy. In addition, the additional final payment that is tendered at the maturity date for the plan also helps to make this particular approach to whole life insurance coverage well worth considering.