what is a participating policy 
a participating policy is an insurance contract that pays dividends to the policyholder dividends are generated from the profits of the insurance company that sold the policy and are typically paid out on an annual basis over the life of the policy 1most policies also include a final or terminal payment when the contract matures an insurance dividend is not guaranteed and depends on the annual performance of the insurance company 2 a participating policy is also referred to as a with profits policy understanding participating policiesparticipating policies are typically life insurance contracts such as a whole life participating policy the dividend received by the policyholder can be taken in different ways it can be used to pay the insurance premium it can be left with the policy to generate interest like a regular savings account or the policyholder can take a cash payment like you d get from a dividend stock 2participating policies vs non participating policiesinsurance companies premiums are based on a number of things including expenses at first non participating policy premiums are usually lower than those for participating policies because of the dividend expense participating policies charge more with the intent of returning the excess this has implications for the policy s tax treatment the internal revenue service irs has classified the payments made by the insurance company as a return on excess premium 3for example an insurance company will base premiums on higher operating costs and lower rates of return than are actually expected by operating from conservative projections the insurance company can better protect against risk in the end this is better for the individual policyholder because it helps offset their insurance company s insolvency risk resulting in lower long term premiums participating policies are essentially a form of risk sharing in which the insurance company shifts a portion of risk to policyholders though the interest rates mortality rates and expenses that dividend formulas are based on change year to year an insurance company won t vary dividends that often instead it will alter dividend formulas periodically based on experience and anticipated future factors these approaches apply to whole life insurance 4 universal life insurance policy dividend rates can adjust much more frequently even monthly while more expensive at first participating policies can end up costing less than non participating policies over the long term with cash value policies the dividend will typically increase as the policy s cash value increases the owner of the participating policy would then have more cash value available to cover their ongoing premiums versus a nonparticipating policy 