Life insurance dividends are often confused with those paid on stock. However, they are not the same as those you may receive on stock shares or stock mutual funds.
What are Life Insurance Dividends?
To begin with, a dividend is a return of a portion of the premiums you paid for life insurance policy, that is the idea with respect to tax purposes.
Simply, an insurance company receives premium payments and invests them. If the company keeps expenses down and the investments perform well, then it declares a dividend. Thus, it returns a part of the surplus to its policyowners.
So you could see the “dividend”, in a way, as part of a refund on overcharged expenses in your premium payments.
Above all, the important thing to note is the insurance company declares how much of its earnings it will distribute as dividends. Furthermore, the calculation of this amount is not disclosed.
Another important point is that there are no guarantees of dividend payments.
Life Insurance Types With Dividends
Whole life insurance policies can be eligible for dividends but only if they fall into the category of “participating” ones. The opposite category of “non-participating” policies do not pay dividends.
A participating policy charges higher premiums while paying dividends to the policy owner. On the other hand, non-participating ones pay no dividends and usually have lower premiums than participating ones.
Using Life Insurance Dividends
If you buy a participating policy, then you can usually pick a dividend option. In addition, some insurers let you change the dividend option once the policy is active.
Below we list some of the most common dividend options. Of course, the list is not complete but we do encourage you to check the dividend options on any whole life policy you consider.
Also, note that dividends are not taxable, tax authorities view them as tax-free returns of premiums unless you earn interest on the dividends. That gain is taxable.
- Dividend payment in cash: You can opt to receive any dividends as a cash payment. To explain further, the insurance company sends you a check after is policy anniversaries.
- Reduce your future premium payments: This option directs the insurance company to immediately apply any dividends to reduce your future payments. So the greater the dividends, the lesser the premium payments. If dividends exceed your premium due, you don’t have to pay it.
- Collecting interest on the dividends: Here, the insurer retains the dividend and it earns interest in a dividend accumulation account. Additionally, you can withdraw cash at any point from the account.\
- Buy paid-up additional life insurance: You could use your dividends to purchase small amounts of completely paid-up additional life insurance. This additional life insurance will be the same type of life insurance as your original policy.
- Buying one year term life insurance
- Repaying policy loans
Dividends and Life Insurance Companies
Experts advise that you should not choose an insurer or policy based on potential dividend payments. That is because they are challenging to compare between two insurance companies.
Above all, dividends are refunds of overcharged expenses on premium payments and so you should expect to pay a higher premium for a life insurance policy eligible for dividends.