Life insurance dividends are payments insurers return to participating policyholders when financial results are better than expected.
Updated: January 12, 2026
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You can use dividends to buy additional coverage, reduce premiums, take cash, accumulate at interest or pay down policy loans.
Dividends are generally not taxable as they're treated as premium refunds, with exceptions when dividends exceed total premiums paid.
Only participating policies have life insurance dividends. These are most commonly issued by mutual insurance companies.
Dividends aren't guaranteed, and past performance doesn't guarantee future results
Life insurance dividends are returns of excess premiums that participating policyholders receive. These payments occur when the insurer performs better than expected on mortality rates, operating expenses and investment returns.
Dividends aren't guaranteed, but many insurers have paid dividends consistently for decades. Amounts can change year to year. These distributions provide flexible options to enhance your policy value, reduce out-of-pocket costs, or access cash when needed.
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 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.
Not all types of life insurance pay dividends. Only participating life insurance policies are eligible. The policy must explicitly state it's a participating contract for you to receive dividend payments.
Whole life insurance is the most common participating policy type. These policies provide permanent coverage with a guaranteed death benefit and cash value that grows on a tax-deferred basis.
Your premium remains level throughout life, providing predictable costs. The cash value component builds over time and earns dividends when your insurer performs well financially.
Some term life policies offer dividends, though this structure is uncommon and limited to specific participating term contracts. These policies provide coverage for a set period and pay dividends when claims or expenses are lower than expected.
You can use dividends to reduce your premium or take them as cash. Unlike whole life, term policies don't have a cash value component.
Participating policies cost more than non-participating policies but offer dividend potential. Non-participating policies charge lower premiums with fixed guarantees.
Weigh the premium difference against potential dividend value over time.
Once you get a dividend, choose how to use it. Each option serves different financial goals.
This option buys additional whole life coverage without premium payments. Paid-up additions increase both your death benefit and cash value. The additional insurance also earns future dividends, creating a compounding effect. Tax-deferred growth continues on both the original policy and paid-up additions.
Apply your dividend toward your annual premium, reducing out-of-pocket costs each year while maintaining your original coverage levels. Eventually, dividends may cover your entire premium. Budget-conscious policyholders often choose this option.
The insurance company sends you a check for the dividend amount. You get immediate access to funds for any purpose. Taking cash payments doesn’t directly reduce your existing policy cash value. Payments aren't taxable since the IRS treats them as premium refunds.
Leave dividends with the insurance company where they earn interest at a company-set rate with a guaranteed minimum. Withdraw these funds anytime without affecting your cash value. The funds are separate from your policy’s cash value. Interest earnings may be taxable when withdrawn.
Pay down outstanding loans against your cash value. This reduces loan interest charges and maintains more cash value for future use. Choose this if you've borrowed from your policy and want to restore it to its original financial position.
Buy additional temporary coverage based on your age and insurability. This is useful for temporary coverage needs but is less common than other dividend options.
Choose paid-up additions if you're focused on long-term value growth. Select premium reduction for lower annual costs. Take cash for immediate financial needs.
Your choice isn't permanent. Change dividend options as your situation changes.
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.
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.
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.
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.
No. Dividends depend on the annual financial performance of the insurer.
Dividends already credited to your policy don’t disappear. When used to buy paid-up additions, dividends permanently increase your death benefit and cash value. Future dividends aren’t guaranteed and can decrease or stop based on insurer performance.
Most participating whole life policies pay first dividends after the first policy anniversary. Some delay dividends until the second or third year. Check your policy documents for timing.
No. Only participating whole life policies pay dividends. Non-participating policies charge lower premiums but don't offer dividends. Participating policies cost more upfront but provide profit distribution potential.
Yes. Contact your insurance company anytime to change your dividend option. Many policyholders start with premium reduction, then switch to paid-up additions as finances improve.
About Mark Fitzpatrick
Mark Fitzpatrick, a Licensed Property and Casualty Insurance Producer, is MoneyGeek's resident Personal Finance Expert. He has analyzed the insurance market for over five years, conducting original research for insurance shoppers. His insights have been featured in CNBC, NBC News and Mashable.
Fitzpatrick holds a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He's also a five-time Jeopardy champion!
He writes about economics and insurance, breaking down complex topics so people know what they're buying.
