Legal Definitions - participating policy

A participating policy is a type of insurance policy, most commonly found in life insurance, that allows the policyholder to share in the insurance company's profits. These profits are typically distributed to policyholders in the form of "dividends." While these dividends are not guaranteed and depend on the insurer's financial performance and discretion, they provide a way for policyholders to benefit when the company performs well. Policyholders often have several options for how to receive or use these dividends, such as taking them as cash, using them to reduce future premiums, or purchasing additional insurance coverage.

Here are some examples to illustrate how a participating policy works:

• Imagine Maria purchases a whole life insurance policy from a mutual insurance company. This policy is a participating policy. After several years, the insurance company experiences a particularly profitable year due to strong investment returns and fewer claims than anticipated. The company's board of directors decides to distribute a portion of these profits to its eligible policyholders. Maria receives a notification that her policy has earned a dividend, which she can choose to receive as a check, apply towards her next premium payment, or use to increase her policy's cash value and death benefit. This demonstrates how her policy allows her to "participate" in the company's financial success through the dividend payment.

• Consider David, who has a participating universal life insurance policy. Each year, instead of receiving a cash payout, David instructs his insurance company to use any declared dividends to reduce his annual premium. For instance, if his annual premium is $1,200 and his policy earns a $150 dividend, he only has to pay $1,050 out of pocket for that year's premium. This illustrates how the participating feature can directly lower the cost of maintaining the insurance coverage, providing a tangible benefit from the insurer's profitability.

• Suppose Sarah buys a participating whole life policy for her newborn granddaughter. Sarah chooses to have any dividends declared by the insurance company used to purchase "paid-up additions" to the policy. This means that each dividend is automatically used to buy a small, fully paid-for increment of additional life insurance coverage. Over time, these paid-up additions accumulate, steadily increasing the policy's total death benefit and its cash value without requiring any additional premium payments from Sarah. This showcases how dividends from a participating policy can be reinvested to grow the policy's value and benefits over the long term.