What Are Life Insurance Dividends?

Insurers don't guarantee dividends. But many insurers have paid them every year for decades. Your dividend amount changes year to year.

Use your dividends to boost your policy value, cut your premium costs or get cash.

Insurance companies make financial assumptions when setting policy guarantees: expected mortality (claims), investment performance projections and operating expense estimates. When actual performance exceeds these assumptions, surplus funds become available.

The insurer's board of directors decides whether to distribute surplus as dividends. Mutual life insurance companies, owned by policyholders, pay dividends solely to participating policyholders. Stock companies, owned by shareholders, may distribute profits to both shareholders and policyholders.

Dividends reflect three performance factors. Each factor contributes independently to your dividend amount.

Mortality experience (death benefit claims) contributes when the insurer pays fewer claims than projected. Investment returns add value when earnings exceed the guaranteed rate. Expense management increases dividends when operating costs stay lower than assumed.

One company's higher interest rate doesn't guarantee higher total dividends if other factors underperform. Look at total dividend history, not just the interest rate component.

Life insurance dividends are generally not taxable. The IRS treats dividends as a return of premium or money you already paid.

Exceptions exist when cumulative dividends exceed total premiums paid. The excess becomes taxable income in this scenario. Interest earnings are also taxable. When dividends accumulate at interest, you pay taxes on the interest portion when withdrawn.

Dividends used to buy paid-up additions don't trigger immediate taxes. Growth continues on a tax-deferred basis, just like your original cash value. Consult a tax professional about your situation.

*This information is for educational purposes only and should not be considered tax advice.

Compare dividend-paying policies by examining long-term performance and company financial strength beyond current rates.

Company Dividend History

Review dividend payment consistency over at least 10 years when comparing insurers. Companies advertising dividend payment records exceeding 100 years usually demonstrate long-term financial stability.

Past performance doesn't guarantee future dividends, but it shows financial strength. For example, companies that continued paying dividends during the 2008 to 2009 financial crisis and the 2020 economic disruption showed financial durability across market cycles.

TIP: Request a 20-year dividend history from any insurer you're considering. This reveals how they maintained dividends during economic downturns like 2008-2009 and 2020.

Dividend Interest Rate vs. Total Dividend

Don't compare only dividend interest rates. Company A, with a 6% dividend rate but poor mortality and expense performance, may pay lower total dividends than Company B, which has a 5.5% dividend rate and excellent overall performance.

Request dividend illustrations showing all components. Ask about mortality charges and expense ratios. Total dividend value matters more than any single component.

Financial Strength Ratings

Check ratings from AM Best (A++ to D), Moody's (Aaa to C), Standard & Poor's (AAA to D) and Fitch Ratings (AAA to D). Target A or higher ratings for dividend-paying policies. Higher ratings indicate greater ability to sustain dividends during economic challenges.

Life insurance dividends provide flexible options to enhance your policy value when your insurer performs well financially. Participating whole life insurance from insurers (often mutual companies) offers the most consistent dividend potential, though dividends are never guaranteed.

Your dividend choice should align with your financial goals. Compare multiple participating whole life policies from highly-rated mutual insurers to find the best option.