Life Insurance Dividends

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Contributor, Benzinga
January 25, 2022

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Life insurance dividends are payments made to owners of certain types of life insurance policies. The only type of life insurance policies that pay dividends are whole life policies, which are life insurance policies that guarantee a death benefit and also include a cash value component.  Dividends are paid to the policy owner on a yearly basis in most circumstances, and they allow the policy owner a few different options when choosing what they wish to do with the dividend payment. 

What is a Life Insurance Dividend?

Life insurance dividends are payments made to whole life insurance policy owners. The dividend payments that you receive come from the return of a part of the premiums you’ve paid in on the policy. The payments are made in cash and paid out by the life insurance company that is handling the policy. Dividends are typically paid each year on the anniversary date of the policy, but the payments are not always guaranteed every year. 

Dividends are a way the insurance company shares their profitability with their life insurance policy holders. This component is part of the reason dividends are not guaranteed on an annual basis; if the company doesn’t see a profit higher than what its projected for the year, you are unlikely to receive dividend payments to your life insurance policy. However, because the insurance company determines the amount of the dividends or whether there will be dividends to pay out at all, this rule is not set in stone. The method of determining dividends can vary from company to company. Dividends one year may be less or more than dividends the previous years based on the overall insurance market and the performance of the specific life insurance provider that you’ve purchased your policy through. 

Because life insurance companies are formed as mutual companies, policy owners are actually considered to be owners of the company. The dividend payments are a way of sharing the profits of the company to the owners. While most life insurance companies today are not considered mutual companies, they usually still pay dividends in an effort to compete with the mutual companies still existing on the market.

What Types of Policies Pay Dividends?

Whole life insurance policies, sometimes referred to as dividend-paying life insurance policies, are the only type of policy that pay dividends. Whole life policies are a type of permanent life insurance, offering coverage for the entirety of the insured’s life. Whole life policies have fixed premium payments and a cash value that accumulates over time. Other types of life insurance, such as universal life and term life policies, do not pay annual dividends. 

Whole life policies have a guaranteed death benefit and a guaranteed cash value. The dual nature of this type of insurance is one of the primary appeals of whole life insurance policies — as long as you continue to pay your monthly premiums and you don’t lie on your initial application, your beneficiaries are guaranteed to receive your death benefit. These two values are also not affected by dividend payments. The total death benefit and total cash value are affected by dividend payments.  

The whole life policy must be a participating policy in order to be paid dividends, meaning the policy owners are participating in the financial earnings of the insurance company. Not all whole life policies are considered participating policies, but many are. Those whole life policies that are not considered participating are typically less expensive than those that are participating policies because the insurance company takes on less of a financial burden when issuing the policy. In the long term, those whole life policies that are participating will have a higher return on investment than those that are classified as nonparticipating.       

Life Insurance Dividend Taxation

Dividends paid out by your life insurance company are considered to be a return of premiums that are already paid. Therefore, these payments are not taxed until the total value of dividends paid exceeds the total amount of premium payments that the policy owner has paid into the policy over the period of the policy being active. The IRS does not view dividends as taxable since the gains are derived from the policyholders.   

In the case a life insurance policy is a modified endowment contract, which is taxation of a policy that was funded with more money than is allowed according to federal tax laws, then the taxation of the policy becomes more complicated. The policy at that point is no longer considered life insurance in the eyes of the IRS and is instead looked at as a nonqualified annuity. If you’re considering investing in a modified endowment contract, you should work with a financial planner or accountant to determine if this type of complex policy will outweigh its tax liabilities. 

Life Insurance Dividend Payment Options

Several life insurance dividend payment options are available to whole life insurance policy holders, and the dividends can be used in several different ways depending on what the policy owner wants to do. The first option is to take the dividend as a cash payment. The cash payment option will give you the money in cash, allowing you to use it immediately however you want. A cash payment gives you immediate access to the money, but it may end up being less money in the long term when compared to alternative options.  

Dividend payments can also be used to purchase more insurance. If you choose to purchase more insurance with the dividends, it will increase your future dividends. This option allows the return on your investment to compound in much the same way that dividend reinvestments result in more dividends paid out when you invest in stocks or ETFs. When the policy size increases, the dividends increase as well. In addition, the cash surrender value increases, as well as the death benefit.   

Dividends can be requested to be put towards future premium payments, which would decrease the amount of the premium in the future. This option offsets the premiums that are due. If the dividend exceeds the amount of the premium needing to be paid, then you can use the excess for any of the other options included on this list. Through this option, you can either reduce the premium amount itself or you can reduce the number of premiums you will have to pay in the future. Either way, you’re decreasing the amount of money you have to pay out of pocket, which can be a major benefit for expensive whole life insurance policies. 

The dividend can also be kept with the insurance company, stored in cash, in order to gain interest. The cash value can be increased over time with this option through savings and interest. You can also use the dividend payment to help pay off a loan if you borrowed money against your policy. It’s important to note that if you choose to earn interest on your dividend payment, the interest earned is subject to being taxed.   

Compare Life Insurance Dividends

Choosing the right insurance company to issue your life insurance policy is a crucial first step in maximizing your life insurance dividend payouts. Benzinga offers insights and reviews on the following life insurance providers. You may want to consider beginning your search for a policy using the links below. 

  • securely through Wysh Life Insurance's website
    securely through Wysh Life Insurance's website
    Best For:
    Those Under 50 Years Old
    Rating:
    Read Review
  • securely through Ladder Life Insurance's website
    securely through Ladder Life Insurance's website
    Best For:
    Adjustable coverage
    Rating:
    Read Review

    Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers – for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products. Coverage amounts vary by state.

  • Best For:
    Under Age 64
    Rating:
    Read Review

    Haven Term is a Term Life Insurance Policy (ICC21 Haven Term in certain states, including NC) issued by C.M. Life Insurance Company (C.M. Life), Enfield, CT 06082. In New York (DTC-NY) and California (DTC-CA), it is issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.

  • securely through Fabric Life Insurance's website
    securely through Fabric Life Insurance's website
    Best For:
    Young families
    Rating:
    Read Review
  • securely through Bestow Life Insurance's website
    securely through Bestow Life Insurance's website
    Best For:
    Term life insurance
    Rating:
    Read Review

    *excludes New York

  • securely through Sproutt Life's website
    securely through Sproutt Life's website
    Best For:
    People with healthy lifestyles
    Rating:
    Read Review

Choosing a Life Insurance Option

Life insurance can be an important protection for both yourself and your beneficiaries. While life insurance dividends can be an appealing component, it’s important to remember that whole life insurance policies are significantly more expensive than other types of insurance, meaning that these policies may not be financially feasible for you even with the return. Consider costs for both whole life and term life insurance options before you sign up for coverage. 

Frequently Asked Questions

Q

Are dividends paid in cash?

A

Yes, dividends can be paid in cash to the policy owner by the insurance company. The only time when dividends aren’t paid in cash is when the policy owner chooses to do something different with the dividend payment. If you choose not to take your dividend payments in cash, you have other options, ranging from offsetting future premium payments to having cash held by the insurance company to accrue interest. You can also choose to use your dividend payments to purchase more life insurance, which helps compound your future dividend returns. 

Q

Are life insurance dividends taxable income?

A

Life insurance dividends are not considered by the IRS to be taxable income unless the amount of the dividend being paid to the policy owner exceeds the amount the owner has paid into the policy through premiums. If the life insurance policy is a modified endowment contract, then the IRS may view the dividends as taxable income on a case-by-case basis. 

 

Methodology

Benzinga crafted a specific methodology to rank life insurance. To see a comprehensive breakdown of our methodology, please visit our Life Insurance Methodology page.

About Sarah Horvath

Sarah is an expert in the insurance, investing for retirement and cryptocurrency space.