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 board of directors decides whether to distribute surplus as dividends. Mutual life insurance companies are owned by policyholders and pay dividends only to participating policyholders. Stock companies are owned by shareholders and may distribute profits to both shareholders and policyholders.

Dividends are a product of three performance factors, each of which contributes independently.

Mortality experience (death benefit claims) adds to dividends when the insurer pays fewer claims than projected. Investment returns contribute when earnings exceed the guaranteed rate. Expense management is a factor when operating costs come in below assumptions.

A higher interest rate at one company doesn't mean higher total dividends if the other two factors underperform. Total dividend history is a more useful comparison point than the interest rate alone.

Life insurance dividends are generally not taxable. The IRS treats them as a return of premiums already paid.

Two exceptions apply. First, if cumulative dividends exceed total premiums paid, the excess is taxable income. Second, interest on dividends held with the insurer is taxable when withdrawn.

Dividends used to buy paid-up additions don't create an immediate tax event. Growth is tax-deferred, the same as the underlying cash value. A tax professional can clarify how these rules apply to your specific policy.

When comparing dividend-paying policies, long-term performance history and financial strength carry more weight than current dividend rates.

Company Dividend History

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

Past performance doesn't guarantee future dividends. It does show financial strength. Companies that kept paying dividends through 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). For dividend-paying policies, target an A rating or higher. A higher rating means the insurer is better positioned to sustain dividends through economic downturns.

Participating whole life insurance (most often from mutual companies) has the most consistent dividend potential, with no guarantee that dividends will be paid. The dividend option you choose should match your current financial goals. Compare policies from multiple highly-rated mutual insurers before deciding.