What is Participating Insurance?
How participating policies work
A participating policy — which you might also hear called a par policy, for short, or a with-profits policy — is essentially a way you can share risk with the insurance company with potential upside for yourself.
Insurance companies generally charge slightly more for participating policies in order to set themselves up for success. That extra cash flow might get directed into the insurance company’s investment portfolio or another revenue-generating channel. Ultimately, though, the goal is to support them on their way to a profitable year.
Assuming they do, you’ll get a dividend paid to you. Most dividends get paid annually based on the company’s performance over the previous year.
While participating insurance is technically a way for insurance companies to risk-share with you, you probably don’t need to worry. Most reputable life insurance companies haven’t missed a dividend payment in some time.
How dividends get paid and used
Generally, the dividend you’ll get paid is a set percentage of the amount of cash value in your life insurance policy at that time.
You’ll most likely have the option to choose how the dividend gets distributed to you. You can usually:
Take it as a payout
Apply it toward your policy premiums (if your policy terms allow)
Add it to your cash value
If you choose to take the dividend as cash, you won’t need to worry about income taxes on it. The IRS sees it as a return of premium, not a taxable distribution.