Participating Whole Life Insurance

Whole life insurance policies that provide portfolio returns to policy owners are called participating policies.

These policies provide contractually guaranteed cash values as well as dividends, allowing flow through of investment results to the policy owner. Life insurance dividends are not like corporate dividends that are received for ownership of stock. They are not taxable until the amount of the dividend received exceeds the premium paid. Life insurance dividends are considered a return of excess premium. If the premiums paid turn out to be more than the company needs because fewer insurers died than was expected, the company's expenses were lower than expected, or the company's portfolio investment returns were larger than assumed, the company will return some of this excess premium to the policyholders.

It is not that difficult to predict with relative accuracy how many insurers will die each year, and expenses are not declining for most insurance companies, so you can safely figure that a substantial part of the dividends paid by participating companies come as a result of better investment returns than assumed in the guarantees.

Where whole life insurance is concerned (insurance with its reserve or cash-value investment that is held within the company's general portfolio), dividends are the only way a variability of returns can be passed on to the policy owner. Because nonparticipating whole life policies have not been able to pass on favorable returns, the competitive position of these policies has diminished to almost nothing.