To get to the point, if you are considering whole life insurance, definitely choose participating life insurance over non-participating life insurance.
We will get into the details below, but the main point is when you buy a participating life insurance policy you are getting an ownership share of the insurance company and you get a share of the company’s surplus profits.
Participating vs Non-Participating Life Insurance
Participating life insurance is a dividend paying whole life insurance policy where the owner participates in the insurance company’s profits, via life insurance dividends.
The word participating connotes the idea that the owner of the policy “participates” in surplus profits of the insurance company.
Contrast this with a non-participating life insurance policy, where the owner does not participate in the surplus earnings of the company, and therefore, does not receive a life insurance dividend.
Non participating whole life insurance is typically seen in smaller final expense insurance policies, although there are some companies that offer larger whole life policies that do not receive dividends, such as MetLife.
The interesting thing about MetLife is the company was once a mutual company, but has since “de-mutualized” and become a stock company back in the year 2000.
Life Insurance Dividends
Life insurance dividends are considered return of premium, therefore there is no tax due when a dividend is paid to a participating life insurance policy holder.
Your dividends can be put into your policy through paid-up additions.
You can also choose other dividend life insurance options, including:
- Pay Premiums
- Cash Out (for whatever you want)
- Pay Down Existing Loan
- Buy Additional Term Life Insurance
- Leave with Insurer Earning Interest
Mutual Insurance Companies
Dividends are not guaranteed, however, the best mutual insurance companies that offer participating whole life insurance have paid dividends for over a hundred years.
That means these mutual companies have paid dividends through the great depression of 1929 and the great financial collapse of 2008.
A mutual insurance company is a carrier where policyowners are joint owners in the company.
Contrast a mutual company, with a stock insurance company, where the shareholders or stockholders of the company are the joint owners of the company.
With a mutual insurance company offering participating whole life insurance, the owner of the policy shares in the profits of the company.
One way dividends are paid to the owner of the policy via paid-up additions, which result in both the cash surrender value and death benefit of the whole life policy increasing.
That means, as you age, your cash value and death benefit increase, so that the older you are, the more cash surrender value you have and the larger death benefit you can give to your beneficiary.
As you cash value grows, you can use the cash value in three ways.
One way, which we don’t recommend, is to use the cash value to purchase paid-up life insurance, where you never have to make a premium payment again. That is nice but you limit the value of your policy over the long term.
You can also withdraw your cash value income tax free up to the basis in your policy. Your basis is the amount of premium payments you have made up to that point. Everything you take out of your policy above your basis may be taxable.
The last way to access your cash value, and the best way, is to borrow against your cash value via a life insurance loan.
Life Insurance Loans
The benefit of life insurance loans is you are not going to be taxed on the money your borrow from the life insurance company, using your cash value as collateral.
One caveat to this is, if your policy lapses while you have an outstanding loan, this could trigger a taxable event.
Other than that, you can borrow up to 90% of your cash surrender value from the insurance carrier income tax free.
This is a great way to plan for retirement, as your life insurance cash value does not affect retirement benefits and allows you to maximize your retirement income with a non-correlated asset that is not affected by the stock market.
Other Types Of Life Insurance
Other types of life insurance are non-participating, which include term life and universal life.
Term Life Insurance
A term policy is a contract that specifies a specific amount of time that you have life insurance coverage. Term life insurance is simply renting a life insurance death benefit. Once the term insurance policy expires, you are no longer covered. You have the option of renewing your term policy, but your premium will increase substantially every year.
Universal Life Insurance
Universal life insurance is permanent coverage. A typical UL policy pays an interest rate, so that your cash value grows year over year.
There are different types of universal life, including guaranteed universal life, indexed universal life, and variable universal life.
Guaranteed Universal Life provides a guaranteed death benefit protection as long as the required premium payments are made.
Indexed Universal Life provides a return based on the performance of an underlying index, such as the S&P 500. IUL policies include a cap and floor, providing a maximum and minimum return.
Variable Universal Life allows you to allocate all or a portion of your cash value into accounts that are similar to mutual funds, tracking the returns of the stock market.
Owning vs Renting
You can look at participating life insurance vs non-participating life insurance policies as similar to real estate renting vs owning.
If you want to rent a death benefit, choose term lie.
If you want to own a guaranteed death benefit, choose whole life.
Neither one is superior to the other, it really comes down to what you need and want.
For anyone who needs permanent coverage, participating whole life insurance is a great choice when considering life insurance over your lifetime.
If you would like to learn more about participating life insurance, please get in contact with a professional at I&E for a complimentary life insurance consultation.