Participating insurance is any type of insurance policy that provides some type of dividends to policyholders. The dividends are typically paid based on surplus earnings generated by the provider that issues the insurance coverage. The premiums associated with different types of participating insurance policies will vary, based on the type of coverage and how the dividends are structured for payment within the terms and provisions of the policies.
One of the most common examples of participating insurance is found with life insurance coverage. With this type of structure, the holder of the insurance policy is eligible to receive some type of dividend check depending on the amount of surplus income the provider generates within a specified time period, often a calendar year. Tying the dividend payment to surplus income helps to ensure that the provider is not committing to make any type of disbursements to policyholders that would undermine the financial stability of the company. Typically, there is no fixed amount that must be paid each year, which means that it is possible to have some type of participating life insurance policy and never receive a dividend at all.
Critics of participating insurance plans note that, depending on whether or not there are government regulations that define how companies must calculate surplus, there is every chance that policyholders will never see a dividend payment. Even if one is received, critics often claim that the surplus is nothing more than the funds raised due to the higher premiums associated with the policies themselves. From this perspective, the policyholder is not receiving a dividend in the true sense of the word, since he or she is only receiving back a portion of that higher premium.
Before choosing to invest in a participating insurance policy, it is important to investigate the track record of the issuer in terms of generating surplus earnings and paying out a portion of those earnings to their clients. This often means learning more about how the provider determines what income is considered as surplus and what is not, and looking over previous years to determine the average amount of dividend payment that was tendered to policyholders. By getting an idea of the frequency and amount of those dividend checks, it is possible to decide if the higher premium is worth the effort, or if going with a similar policy that is non-participating would be a better financial move in the long run.
