What is a life insurance dividend?

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Here's what you need to know...
  • It’s important for consumers to decide if they want to purchase life insurance from a stock company or a mutual company
  • The primary difference between stock companies and mutual companies is how ownership is structured
  • Mutual companies, which are owned by the policyholders of the company, are focused on making money for the policyholders and focus on financial stability rather than the incentives of taking risks
  • Life insurance dividends are surpluses that are paid to policyholders in a number of different ways
  • In order to be paid dividends, you’ll need to carry a permanent insurance policy and not a term life policy

There are life insurance companies that are owned by policyholders and then there are companies that are owned by stockholders. If you’re in the process of shopping for life insurance, it’s in your benefit to differentiate one company from the other and learn about some of the benefits associated with each. Compare life insurance rates now by using our FREE tool above!

While financial statements show that stock companies tend to hold more cash and invested assets, these companies don’t tend to offer the life insurance dividends that are offered by mutual policyholder-owned companies. A dividend is something that can act as a selling point to buying a policy or that can be seen as an added benefit rather than a must-have. Read on and learn more about life dividends, when they’re paid, who they’re paid to, and how they can be declared.

What exactly is a dividend earned on a life insurance contract?

A life insurance dividend is technically defined as a surplus that’s paid directly to a policyholder when the policyholder has a permanent life policy through a mutual company. Dividends are available through mutual companies because policyholders are company owners and the direct beneficiaries of profits. They are typically calculated and paid on an annual basis but can be paid in a multitude of ways.

How is a dividend calculated?

In order for there to be a surplus that’s paid in the form of a beneficiary, certain conditions need to be met. The company’s primary focus will be on paying bills and staying above water. This is why the following needs to occur before there are any dividend payouts:

  • Claims filed through the year must be paid
  • Favorable mortality rates reduce the number of death claims
  • Operational and administrative expenses are paid
  • There is an excess in investment earnings
  • Reinsurance is paid to pass on some of the burden of risk
  • Money is placed in reserves to cover future claims projections

What types of policies pay out dividends?

You may need to carry your insurance through a mutual company to benefit from dividends, but not all mutual life contracts offer dividends.

In order to get a dividend as a policyholder and company owner, you must purchase a participating policy.

A participating policy is a permanent life plan like whole life insurance or universal life that earns interest and may also earn dividends. Term life policies are considered non-participating contracts where dividends aren’t earned.

How’s your actual dividend calculated?

You may understand what conditions must be met to qualify for a dividend under your policy, but that doesn’t exactly explain how much you can expend to earn in any given year. While dividends aren’t guaranteed, most reputable companies that use proven mortality tables, charge adequate premiums and invest conservatively will pay out at least a minimal amount to their policyholders. Here are some factors that can affect how much you’ll receive each year:

  • Policy’s guaranteed cash value
  • The total annual premium for the contract
  • The company’s mortality costs
  • The company’s administrative and operational costs
  • The scale interest rate for dividends through the company
  • Interest credit after annual investments
  • End-of-year life insurance policy value

Are dividends separate from your cash values?

You might confuse a dividend with the interest that you earn under your policy for paying your permanent life premiums. While it’s easy to confuse the two, interest earned in a cash account and a policy dividend are two different things. While each is paid on a permanent cash value plan, interest that you earn on your premiums is typically guaranteed at a certain level and dividends are never guaranteed.

Can your dividends be taxed?

It’s also important that you know that tax liabilities differ between interest earned and paid dividends.

While cash values and interest in the cash account aren’t taxed every year, if you borrow or withdraw the cash you’ll incur a tax liability.

When it comes to dividends, this isn’t the case. Dividends aren’t taxed by the IRS because they are considered a return of premiums that you’ve paid and not income that you’ve received.

How are the dividends on a life policy paid to the policyholder?

If you’re carrying a participating life policy with a mutual insurance company, there’s a chance that you’ll earn dividends at some point in time. When you earn the surplus, you have options as to how you want it paid. Here are some of the ways that you can use dividends:

  • You can request that the dividends are paid as cash to you in the form of a check
  • You can ask that the company hold your dividend so that it earns interest
  • You can use your dividend to reduce your premiums so that you pay less out-of-pocket
  • You can use your dividends for additional paid-up insurance

What are the benefits of life dividends?

The biggest benefit of a dividend paid to policy owners is that it’s a return of premium. You’re still getting the total benefit you paid for at the beginning of the term but you’re getting something back in return for being a loyal customer. While there are non-participating policies that could have lower premiums, dividend plans offer living and death benefits.

How to Find a Company That is Most Likely to Pay Dividends

A company may project how much they are likely to pay in dividends, but this projection is never guaranteed. It’s your job as a consumer to do research before you buy insurance so that you improve your chances of earning these funds. One common rule of thumb is to check into a company’s financial rating to see if they are stable and invest wisely.

If a company isn’t known for being financially secure or in good standing with consumer rating agencies like A.M. Best, they aren’t are likely to pay dividends.

If you’re interested in pricing the cost of participating plans, it’s time to start price shopping. Be sure to compare only the most reputable companies and weed out those that aren’t known to perform. Once you have a list, you can use an online rate comparison tool and see if it’s realistic to buy a participating plan that will remain in force for a lifetime. Enter your zip code in our FREE tool below to compare life insurance rates now!

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