What is the term for a type of life insurance that pays dividends to policyholders?

A type of life insurance that pays dividends to policyholders is participating life insurance.

In a participating policy, the insurer may distribute part of its divisible surplus to policyholders as annual dividends. That surplus can result from favorable mortality, lower expenses, stronger investment returns, or conservative pricing assumptions. The payments are not guaranteed and are not the same as stock dividends paid to company shareholders.

Participating policies are commonly associated with mutual life insurance companies, whose policyholders may have certain ownership rights. Dividends can often be received in cash, used to reduce premiums, left to accumulate with interest, or used to buy paid-up additional insurance.

A common mix-up is assuming that every whole life policy pays dividends. Whole life insurance may be either participating or non-participating: the former can pay policy dividends, while the latter generally does not. “With-profits policy” is the closely related Commonwealth term, while “participating policy” is standard in the United States.