Understanding Life Insurance Dividend Options

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ByMelissa Wylie
Edited byCasie McCoskey
ByMelissa Wylie
Edited byCasie McCoskey

Updated: May 22, 2024

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Participating life insurance policies offer the potential for dividends, a share of the insurer's surplus profits. These life insurance dividends present policyholders with a range of options, from receiving cash payments to purchasing additional coverage. By understanding these dividend options, you can leverage your life insurance policy to protect your loved ones and enhance your financial strategy.

What Are Life Insurance Dividend Options?

Life insurance dividends represent a feature of certain types of policies called participating policies, often associated with whole life insurance. Dividends are essentially a return of a portion of the premiums you have paid into your policy, making dividend-paying life insurance a beneficial investment for many.

Dividends are rooted in insurance company performance. When the company's financial results exceed expectations, it shares the surplus with policyholders as dividends.

Insurance companies typically pay life insurance dividends annually, but the exact timing can vary depending on the company's policies and the terms of the individual insurance contract.

Knowing how dividends on life insurance work can significantly impact your financial planning. Dividends paid from a life insurance policy reflect the insurer's performance and a benefit that can enhance the policy's overall value.

Life Insurance Policies That Pay Dividends

Not all types of life insurance pay dividends. If you're looking to receive dividends, you should get a participating policy, usually in the form of whole life insurance. These policies are often referred to as "participating" because policyholders are eligible to participate in the surplus or profits of the insurance company.

Participating whole life insurance policies offer a death benefit and a cash value component that grows over time. Policyholders can consider the dividends a bonus that enhances the policy's value. Due to the additional benefits provided, life insurance with dividends often costs more than non-participating life insurance policies. While dividends paid from a life insurance policy are not guaranteed, they can provide significant value if the company performs well.

Where to Get Life Insurance Policies With Dividend Options

Typically, life insurance policies with dividend options are available from mutual insurance companies. Instead of shareholders, the policyholders own these insurance companies. When a mutual insurance company has a profitable year, it shares the profits with its policyholders in the form of dividends.

Mutual insurance companies offer different types of policies. To ensure eligibility for life insurance dividends, purchase participating policies.

How Life Insurance Dividends Are Determined

Dividends received on participating life insurance policies are not guaranteed. They depend on various factors, and how dividends are calculated can vary from one company to another.

Generally, life insurance companies use a life insurance dividend scale. This is a table or chart that helps determine the amount of dividends to be paid out to policyholders, taking into account different components like the company's investment earnings, mortality experience and operating expenses.

Are Life Insurance Dividends Taxable?

Life insurance dividends are generally not considered taxable income because they're a return of a portion of the premiums you have paid into your policy, which have already been taxed.

There may be exceptions to this rule. For instance, if your life insurance policy is classified as a Modified Endowment Contract (MEC), any gains from the policy, including dividends, may be taxable if you borrow or withdraw them. MEC refers to a life insurance policy funded with more premiums than federal tax laws allow.

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The tax implications of life insurance dividends may differ depending on your circumstances. Tax laws may also change over time, so checking for updates regularly is best. You may also want to consult with an expert, such as a tax professional or financial advisor, for up-to-date knowledge tailored to your specific situation.

How to Use Life Insurance Dividends

Policyholders who are eligible to receive life insurance dividends can use the money in several ways:

  • Cash Payment: This option provides the most straightforward use of your dividends. The insurance company will send you a check for the dividend amount. You can use this cash as you see fit, whether for immediate financial needs or personal savings.
  • Buy Paid-Up Additions: With this option, you can purchase additional life insurance coverage using dividends. The advantage here is that these additions are fully paid up, requiring no further premium payments and increasing your policy's death benefit and cash value.
  • Reduce Premium Payments: If you want to lower your out-of-pocket expenses, you can apply your dividends to your life insurance premium. This can make your policy more affordable by reducing the amount you need to pay each year.
  • Collect Interest: Letting your dividends accumulate interest within the policy can be a smart move for long-term growth. You keep the dividends in an account within the policy where they earn interest over time, increasing the overall value of your policy. Generally, the interest earned on life insurance dividends is not taxable as long as it remains within the policy. The interest will be taxable when you withdraw it.
  • Purchase One-Year Term Life Insurance: Another option is to use your dividends to purchase one-year term life insurance. This provides additional coverage for a specified term, offering extra protection at a time when you might need it most.
  • Repay Policy Loans: If you have taken out a loan against your life insurance policy, you can use your dividends to repay it. This can be particularly beneficial as it helps reduce your outstanding debt without out-of-pocket repayment. Unpaid policy loans can reduce the death benefit, so using dividends to repay these loans can help preserve the value of your policy for your beneficiaries.

Life insurance dividend options offer policyholders a range of choices on how to best utilize their dividends, from enhancing their policy's value to addressing immediate financial needs. These potential uses illustrate the multifaceted benefits of dividend-paying life insurance.

FAQ About Life Insurance Dividend Options

Below are some frequently asked questions to help you better understand life insurance dividend options.

What are dividend options in insurance?
Are life insurance dividends worth it?
Can you change your life insurance dividend options?
Can you withdraw dividends from life insurance?
How much is a typical life insurance policy dividend payout?
Why are dividends from a mutual insurer?

About Melissa Wylie

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Melissa Wylie is a Content and SEO Manager at MoneyGeek. Melissa has worked in the financial content space since 2018 and has spent much of that time focused on all things small business.

Prior to joining MoneyGeek, Melissa held SEO positions at Bankrate and LendingTree. Melissa’s work has also appeared on LendingTree-owned websites ValuePenguin and MagnifyMoney.

Melissa began her career at American City Business Journals in 2015 as a reporter for the company’s women-focused publication Bizwomen. Melissa has a Bachelor of Arts in Journalism from the University of North Texas. Melissa relies on her foundation in journalism to craft content that simplifies complex financial topics to help everyone feel confident when making decisions with their money.

Melissa's other work can be read on LendingTree and Bizwomen.