Life Insurance Dividends – What It Is & How It Works

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Life Insurance Dividends – Getting life insurance is like giving a gift of financial protection to your family. It helps make sure they won’t face money problems if something happens to them. If your insurance performs well, you might receive extra money, called dividends.

Life Insurance Dividends - What It Is & How It Works

However, not all life insurance policies give dividends. To get them, you need a specific kind of policy called a participating policy. This policy is from a mutual life company.

For the company to pay dividends, it has to collect more money than it needs for things like covering the cost of life insurance payouts, keeping some in reserve, and handling administrative expenses.

What Are Life Insurance Dividends?

Life insurance companies make payments to policyholders in the form of dividends. Annually, they also make additional fund payments to policyholders.

The amount differs, and it depends on the financial performance of the company during the year. The policyholder does not have a right to dividends; therefore, dividends are not guaranteed.

How It Works

The company pays out certain amounts of money as dividends, determined by its performance and calculated as a percentage of the policy’s value.

Also, three main components of company performance affect dividends. This includes investment outcome, mortality, and expenses. Dividends are paid annually by most life insurance companies.

Advantages Of Life Insurance Dividends

Getting a policy with insurance dividends comes with some advantages, and they include:

  • Payments are reliable.
  • It is a good way to generate additional income.
  • Dividends are very flexible.
  • It helps you maximize your policy benefits.

Also, as you accumulate value within your policy, the dividends can grow over time, settling some of your premium costs.

Will I Pay Taxes On Life Insurance Dividends?

No, you won’t. They do not consider dividends as payments; instead, they consider them a return on your premiums. Consequently, they remain untaxed.

How Are Life Insurance Dividends Calculated?

Life insurance insurers have different factors they consider before calculating your dividend. The two main factors that they consider are how much you pay into your policy and the profit of the company.

Note that the profit made by the insurance company every year is based on the profits from insurance policies, administrative costs, and investment returns.

How Are Life Insurance Dividends Paid Out?

Dividends are paid out on the actual date the policy was purchased. However, it is up to the policyholder to determine how they receive dividends.

These are paid out in four ways, and you are free to choose how you want to be paid.

Increased Coverage

This is one method of distributing your dividend. Your dividend might contribute to purchasing paid-up coverage, thereby enhancing your health benefits.


Another way you can receive your life insurance dividend is through cash. Your insurer will send you a check for the dividend amount.


You can have your dividends deposited into your policy’s cash value and let them accrue interest.

Premium Payments

Your insurance dividend can be used to cover and prepay your premium.

How Can I Use Dividends?

There are different ways policyholders can use their insurance dividends. If you just received your life insurance dividend and don’t know what to do with it, just take a look at the list below.

Purchase Additional Paid-up Life Insurance

You can use your dividend to purchase additional paid-up life insurance. This way you are simply expanding your current policy.

However, this addition is covered entirely by the dividend and increases your production.

Repay A Policy Loan

You can use your dividend to repay the loan if you take out a loan from your life insurance policy. This will help you pay off the loan faster and ensure your loved ones will benefit from it when you pass it on.

Reinvest In The Policy’s Cash Value

If you want to grow your policy faster, you should reinvest your dividend. This is similar to a retirement savings account and it is an excellent way to grow tax-deferred cash value.

Pay Premiums

Instead of using your dividend for something else, you can use it for your premium payments.

Frequently Asked Questions

Do All Whole Life Insurance Policies Pay Dividends?

No, not all whole-life insurance policies pay dividends. Also, the whole policy plan typically receives the majority of dividends.

However, before you apply, you can find out if a whole life insurance policy is dividend-eligible.

Are Life Insurance Dividends Guaranteed?

No, the guarantee of dividends is absent. However, their size fluctuates annually when sent.

Are Dividends Paid In Cash?

The payment of dividends may not necessarily occur in cash. However, the payment method depends on the policyholder. You can choose to receive your dividend in cash, or you may reinvest it in the policy.