There are different types of whole life insurance policies, and while they are similar in many aspects, there are differences that make each one unique. One of the differences between whole life policies is what is known as participating whole life and non-participating whole life policies. Participating whole life policy holders may receive dividends, while non-participating policy holders are not eligible to receive dividend payments.
Function
Dividends are paid to participating policy holders when the insurance company has a profitable year. The higher the earnings, the higher the dividend payments are likely to be.
Considerations
Dividends are not guaranteed by the life insurance company. If the insurance company does not meet its financial goals or has higher than expected expenses, there could be no dividend payments made to policy holders. Regardless of how the company performs financially, premium amounts and death benefit amounts are guaranteed for the duration of the policy.
Features
Policy holders are not required to pay taxes on dividends, as long as the dividend payments do not exceed premiums paid. Dividends for less than the paid premiums are considered a return of premiums for tax purposes.
Options
While you can request that your dividend payments be mailed to you, many people use dividends to pay premiums and increase the face value of the policy, or let dividends sit in their accounts and earn interest. The interest earned by dividends is taxable.
Potential
Another common use of dividends is to purchase term life insurance in one-year increments. The term life additions will increase the total death benefit for the policy holder's beneficiaries, and can be used to repay any loans taken out against the policy if the insured dies before repaying the loan amount so that beneficiaries receive the entire face amount of the policy.
Costs
Participating life insurance policies are more expensive than non-participating policies, as the opportunity for financial gain is there if the company has a profitable year.
Time Frame
Dividends will not be paid until the policy is at least a year old in order for the insurance company to view its financial performance in regards to mortality expenses, operating expenses and investment income. Dividends are typically paid on the policy's anniversary date.
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