How Life Insurance Dividends Work & the Options Available

What are life insurance dividends, and how do you benefit from them? Read Insurist’s guide to life insurance dividend options to learn more.
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Written by Brian Greenberg

Last updated: May 10th, 2022

A life insurance policy can be a key piece of your financial security plan. It can protect your loved ones from the financial burden of your passing and can also serve as an investment vehicle. Many policies offer the opportunity to earn dividends, which can add considerable value to the policy over time. But how do dividends work, and what options are available to you? Here’s a quick rundown on life insurance dividends and how you can benefit.

What Are Life Insurance Dividends?

A life insurance dividend is a payment made to the policyholder by the insurance company. It is calculated as a percentage of your cash value, and it is typically paid out annually or semi-annually.

How Dividends Are Calculated

The insurance company considers the investment performance of the underlying assets in the policy portfolio when calculating dividends.

Whole life insurance policies pay dividends based on the cash value amount in your policy. As your cash value grows, so do your dividends.

For example, 10 years into your whole life insurance policy, you have $10,000 in cash value. A dividend of 3% provides $300 in dividends.

What Are the Different Ways To Use Dividends?

Dividends can be used in a number of ways, depending on the policy and the insurer. They can be reinvested in the policy to boost its cash value, used to purchase more coverage, or cashed out. Some policies also offer the option to use dividends to pay premiums, which can be helpful if you experience a financial setback.

Benefits of a Life Insurance Policy Dividend

There are a number of benefits to having a life insurance policy with a dividend. Here are five of the most important:

  • Increased Cash Value – A life insurance dividend can add value to your policy, boosting the cash value you can access later.
  • Reinvestment Option – When you receive a life insurance dividend, you typically have the option to reinvest it in the policy. This can add up over time, and it can be a great way to grow the value of your plan.
  • Tax-Deferred Growth – The cash value of a life insurance policy grows tax-deferred, which means you won’t have to pay taxes on it until you withdraw the money. This provides a significant advantage over other investment options, such as stocks and mutual funds.
  • Access To Cash Value – Many life insurance policies offer the option to borrow against the cash value. This can be a convenient way to access funds in an emergency.
  • Death Benefit – The most important benefit of a life insurance policy is the death benefit, which is paid out to your beneficiaries when you pass away. A life insurance dividend can help increase the amount of this benefit.

Do Life Insurance Dividends Come With Any Risks?

There are some risks associated with life insurance dividends, but they are generally considered to be minimal. The biggest risk is that the dividend may not be enough to cover the cost of the policy if you need to cash it out early. If you are considering a life insurance policy, be sure to speak with an insurance advisor to learn more about the risks and benefits.

Overall, life insurance dividends can be a valuable addition to your policy, offering you more flexibility and potential for growth. If you’re considering a whole life insurance policy, be sure to ask your agent about the dividends offered. And if you’re already a policyholder, review your options and take advantage of the benefits a dividend can bring.

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Frequently Asked Questions (FAQs) About Life Insurance Dividends

Below are some of the most asked questions about life insurance dividend options:

Are dividends guaranteed?

No, life insurance dividends are not guaranteed. They are based on the company’s investment performance and mortality experience. However, many companies have a history of paying dividends, so there is a good chance that you will receive a dividend.

Are insurance dividends paid in cash?

Insurance dividends are reinvested in the policy or used to pay premiums.  It is considered a loan when you take cash out of a whole life insurance policy.

How often are dividends paid out?

Dividends are typically paid annually or semi-annually. Check with your insurance company to find out when your dividends will be paid.

Are life insurance policy dividends taxable?

When dividends are dispersed as cash, it is considered a return on premium. In general, amounts received over the policy’s life become taxable at the point they exceed the premiums paid for the policy.
If the dividends stay within a life insurance policy, the full benefit, including the dividends, is tax-free.

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