Life insurance is an excellent way to provide financial security to loved ones in the event of an untimely death. But permanent life insurance can also provide financial benefits to you while you’re still alive, and some plans even pay dividends.

Not all life insurance policies are eligible for dividends, so it’s important to check your policy before you apply. Read on to learn about life insurance dividends, how they work, and which types of policies are eligible to receive them.

What is a dividend on life insurance? 

A life insurance dividend is a payment made to eligible policyholders by the insurer if they’ve experienced strong performance. Dividends are viewed as a return of a portion of premiums paid into the policy and many insurance companies pay the dividend as a percentage of the policy’s value.

For example, a life insurance policy with an accumulated value of worth $75,000 earning a 5% dividend would pay $3,750 for the year. If the policyholder reinvested the dividend and the policy earned another 5% the following year, the next dividend would pay $3,937.50.

Insurance companies usually only pay a dividend if performance exceeds expectations. Because dividends on life insurance depend on performance, they can vary year by year. In some years, life insurance policyholders may not receive a dividend at all.

Dividends vary by company, and some companies may pay life insurance dividends while others don’t. A policyholder needs permanent life insurance that’s part of a “participating” policy to qualify for a dividend. Note that dividend eligibility varies by plan and company, so check for dividend eligibility before applying for life insurance.

How do dividends work? 

Life insurance dividends are paid out based on company performance, typically based on a percentage of the policy’s value. There are three main components to company performance that affect dividends: expenses, investment outcome, and mortality.

• Expenses are the total required costs for an insurance company. These include factors like administration fees and claims service.
• Investment outcome is the result of investments. To help life insurance plans grow, companies often invest funds. Excess funds could be put toward a dividend if investments perform better than expected.
• Mortality refers to money paid on life insurance claims when people pass away. If fewer claims are paid out than expected, money saved for mortality can be put toward dividends.

The majority of life insurance companies pay dividends annually. To find out how much you might expect from a dividend, check the company’s history to get a better idea. However, note that past performance does not guarantee dividend size or that a dividend will be paid at all.

How can you use life insurance dividends? 

You can use life insurance dividends in different ways. Here are five typical ways you might redeem them.

Reinvest in the policy’s cash value 

Reinvesting your dividend in the policy’s cash value can grow the policy faster. This is a great way to grow tax-deferred cash value, similar to a retirement savings account.

Pay premiums 

You can opt to put your dividend toward your premium payments. This saves you money over the course of the year by discounting premiums or covering the cost entirely. Large life insurance accounts could feasibly receive dividends large enough to cover all premiums for the entire year.

Receive dividends as cash 

Life insurance companies may also let you receive your dividend as cash. This is the most flexible option, as you can put the cash toward anything.

Repay a policy loan 

If you choose to take out a loan from your life insurance policy, you could use your dividends to help repay the loan. This can help you pay off the loan faster, ensuring loved ones will have a larger death benefit if you pass away.

Purchase additional paid-up life insurance 

You can use your dividend to expand your current policy by adding additional paid-up insurance. These additions are covered entirely by the dividend and increase your protection. You can also earn a larger dividend in the future with paid-up additions.

Do you pay taxes on life insurance dividends? 

Life insurance dividends are considered a return on your premiums, not a payment. As a result, life insurance dividends typically are not taxed. However, there are instances where you might need to pay taxes. For example, if you choose to grow your policy with a dividend, that growth is taxable.

If you have any questions about life insurance dividends and taxes, get in touch with a tax professional.

Which type of life insurance issues dividends? 

While each insurance company creates its own standards for dividend eligibility, whole life insurance plans are the only type that issue dividends. It is worth noting that not all whole life insurance policies are dividend-eligible, so research permanent life insurance and get in touch with a licensed insurance agent to make sure the plan you’re interested in is eligible for dividends.

Find the right life insurance policy for you 

There are many life insurance policies to choose from, each with its own set of benefits. While dividends are great, they are only one factor you should consider when comparing life insurance plans. It’s also important to consider how much coverage you’ll need, the time period you’ll need financial protection, and what you can afford to pay. A licensed insurance agent can help you find the best policy to fit your unique needs and budget.

FAQs about dividend-paying life insurance 

What is the difference between dividends and cash value life insurance? 

Cash value life insurance is the amount a policyholder can benefit from while still alive. Dividends are variable payments made annually based on company performance. As with dividends, cash value is not guaranteed for all permanent policies, so research options and talk to an insurance agent if you have any questions.

Do all whole life insurance policies pay dividends? 

No, not all whole life insurance policies pay dividends, though most life insurance dividends are paid to whole life insurance policies. You can find out if a whole life insurance policy is dividend eligible before applying.

Are life insurance dividends guaranteed? 

No, life insurance dividends are not guaranteed, though they are very common in participating policies. When paid, dividends can vary in size each year. You can always research a company’s dividend history to get an idea of average dividend returns.