What Type of Insurer is a Participating Company?

A participating company is a type of insurer that offers participating policies. Participating policies, also known as with-profits policies, are insurance policies that pay dividends to policyholders. These dividends come from the profits earned by the insurance company.

Overview of Participating Policies

Participating policies have the following key features:

• Policyholders receive dividends: A portion of the insurance company’s profits are shared with policyholders in the form of dividends. These dividends are typically paid on an annual basis.

• Dividends are not guaranteed: The dividend payout depends on the profitability of the insurance company, so they are not guaranteed. Poor performance may result in lower dividends or no dividends at all.

• Dividends can be taken in cash or left to accumulate: Policyholders have the flexibility to take the dividends in cash or use them in other ways like paying premiums or earning interest.

• Mostly issued on permanent life insurance: Participating policies are commonly issued on whole life, universal life, and other permanent life insurance policies. Term life insurance is generally non-participating.

• Offered by mutual insurance companies: In most states, mutual insurance companies can only issue participating policies. Stock insurance companies typically issue non-participating policies.

What is a Mutual Insurance Company?

A mutual insurance company is a type of insurer that is owned by its policyholders rather than stockholders. It is set up to serve the interests of those policyholders rather than maximize profits.

Some key characteristics of mutual insurance companies:

• Policyholders are owners: The policyholders own the mutual company, so they get voting rights to elect the company’s board of directors.

• Focus is on policyholders rather than profits: Mutual companies aim to provide good service and fair prices to policyholders rather than maximize profits.

• Surpluses returned to policyholders: Any surpluses generated are returned to policyholders in the form of dividends on participating policies.

• No outside shareholders: Mutual companies do not have shareholders or pay out dividends to outside investors. All profits go back to the policyholders.

• Permitted to issue participating policies only: In most states, mutual insurers can only issue participating policies to their policyholder-owners.

Why Mutual Companies Issue Participating Policies

There are a few key reasons why mutual insurance companies issue participating policies:

• Aligns with their focus on policyholders: Participating policies allow mutual companies to share their success with policyholders in the form of dividends. This aligns with their overall mission.

• Required by state laws: Most states have laws restricting mutual insurers to issuing only participating policies. This helps ensure they operate for the benefit of policyholders.

• Lowers risk through risk-sharing: Participating policies share risk between the insurer and policyholders. This makes mutual companies more stable and less prone to insolvency.

• Reduces costs long-term: Although participating policies have higher initial premiums, the dividends returned over time can reduce overall costs below non-participating policies.

• Provides flexibility to policyholders: Policyholders can use their dividends to offset premium costs, earn interest, or take cash payouts. This flexibility is beneficial for consumers.

Participating Company vs. Non-Participating Company

The key difference between participating and non-participating companies involves the way they handle profits and issue policies:

• Participating: Mutual companies return profits to policyholders as dividends on participating policies. Most states only allow them to issue this type of policy.

• Non-participating: Stock companies retain profits to pay shareholders. They primarily issue non-participating policies that do not pay dividends.

Here is a comparison between participating and non-participating insurers:

Examples of Major Mutual Life Insurance Companies

Some of the largest mutual life insurance companies in the United States include:

• MassMutual: With over $235 billion in total assets, MassMutual is one of the largest mutual life insurers. It offers participating whole life, term, and disability income insurance.

• New York Life: The largest mutual life insurer in the U.S. with over $620 billion in assets. Its participating policies include whole life, term, and universal life.

• Northwestern Mutual: One of the oldest and largest mutual companies with $308 billion in total assets. It offers a variety of participating permanent life insurance policies.

• Guardian Life: Provides participating whole life, term, and disability insurance. As a mutual company, it has over $73 billion in total assets.

• Principal Financial Group: A Fortune 500 company and one of the largest mutual life insurers globally with over $173 billion in total assets under management.

These mutual companies have been operating for over a century and manage hundreds of billions in assets for policyholders. They have established track records for financial strength and issuing with-profits policies.

Pros and Cons of Participating Policies

Participating policies have some advantages but also come with drawbacks:

Pros

• Dividends can lower long-term costs
• Provides policyholders flexibility in using dividends
• Aligns insurer’s interests with policyholders
• Access to products from financially strong mutual insurers
• Risk and profits are shared between policyholders

Cons

• Higher premiums initially
• Dividends are not guaranteed
• Limited control over how dividends are determined
• Primarily available through mutual companies
• Participating policies can be complex

Whether participating policies make sense depends on individual circumstances and needs. They tend to work better for long-term buy-and-hold consumers than those wanting simple, low-cost protection.

Is a Participating Policy Right for You?

Here are a few key questions to consider when deciding if a participating policy meets your needs:

• What are your time horizon and needs? Participating policies work better for permanent, long-term coverage given the dividend payouts over time.

• Are you comfortable with risk? Dividends are not guaranteed, so you must be willing to accept this uncertainty.

• Do you want cash value? Participating policies combine protection with savings that grow via dividends.

• Does flexibility appeal to you? Having options on how to use dividends may be advantageous.

• How much do premium costs matter? The lower initial premiums of non-participating policies may be preferable if cost is very important.

• What companies do you want access to? If you prefer a mutual insurer, participating policies may make sense.

For many consumers buying permanent life insurance, participating policies are a great choice due to their dividends, upside potential, and mutual company benefits. However, they are complex, not guar