There are many different options for life insurance policies, ranging from comprehensive whole life to limited-term policies. While term policies are usually the cheapest form of life insurance, whole life policies offer several benefits that policyholders may want to consider for purchase. These include a guaranteed death benefit, predictable premiums over time, and even dividends that can provide cash or help offset the cost of insurance over time. Show
Key Takeaways
What Are Dividends?Many whole life insurance policies provide dividends representing a portion of the insurance company's profits that are paid to policyholders. These dividends are similar to traditional investment dividends that represent a public company's profit share. The dividend amount often depends on the amount paid into the policy. For instance, a policy worth $50,000 that offers a 3% dividend will pay a policyholder $1,500 for the year. If the policyholder contributes another $2,000 in value during the subsequent year, they will receive $60 more for a total of $1,560 next year. These amounts can increase over time to sufficient levels to offset some costs associated with the premium payments. Whole life insurance dividends may be guaranteed or non-guaranteed depending on the policy, so it's essential to carefully read through the plan's details before purchasing a policy. Often, policies that provide guaranteed dividends have higher premiums to make up for the added risk to the insurance company. Those that offer non-guaranteed dividends may have lower premiums, but there's a risk that there won't be any dividends in a given year. Finally, policyholders should consider the insurance company's credit rating when determining how sustainable dividends are moving forward. Most insurance companies are rated A or better by major credit agencies. Insurance companies with below an A credit rating may warrant a closer look to determine whether the insurance is sufficient or not. Using Policy DividendsThere are many different options for using whole life policy dividends, ranging from a check in the mail to acquiring additional insurance. The most common uses of dividends include:
The good news is that dividend payments received from participating life insurance policies generally aren't subject to taxes by the Internal Revenue Service (IRS) since the insurance companies generated the gains from their policyholders. Dividends received from a life insurance policy are treated as a distribution from the contract, and they are taxed similarly to other types of distributions. Dividends are distributed income-tax-free until the taxpayer's investment in the contract has been reduced to zero. (Dividends reduce the owner's investment in the contract.) Because the insurance companies generated the gains off of their policyholders, In essence, the dividend payments are treated as refunds for overpayment of the premium. This means that the best option is usually taking the cash or check from dividends and reinvesting the proceeds in an investment vehicle that could earn more income. Does a Whole Life Insurance Policy Pay Dividends?Yes. Whole life insurance policies pay dividends. How Does Dividend Paying Whole Life Insurance Work?There are many different ways you can receive your dividends from whole life insurance including a reduction in premiums, an actual check from your insurance company, and you can let it remain within the savings component of your policy. Can You Withdraw Dividends From Life Insurance?Yes. You can withdraw dividends from your life insurance policy at any time. Do I Have To Pay Taxes on Life Insurance Dividends?Dividends from life insurance policies are not subject to income tax. The Bottom LineMany whole life insurance policies pay dividends to their policyholders that can be used in a variety of different ways. When evaluating insurance policies, individuals should investigate how dividends are calculated and whether or not they are guaranteed, as well as look at how they plan to handle the dividend income. The favorable tax treatment means that the best option is usually taking the cash and reinvesting it elsewhere at a better return. Additionally, as there's more to a good insurance policy than its dividend, be sure to review the plan in its entirety to verify that it's the best whole life insurance policy for your circumstances. How are life insurance dividends paid out?The dividends can be distributed as cash, to purchase additional paid-up insurance, or to reduce premiums due. The amount of a dividend is tied to the price of premiums paid by the policyholder. The higher the dividend, the more expensive the policy.
How often are dividends paid on a life insurance policy?Dividends are declared and paid annually. However, because a company cannot guarantee that divisible surplus will be achieved each year, the payment of dividends cannot be guaranteed. It depends on the company's performance in these three areas.
Do all life insurance policies have dividends?As noted, not all life insurance offers dividends. Permanent life insurance that pays dividends is exclusive to participating whole life insurance. Dividends are NOT guaranteed but most companies offering these types of life insurance policies have paid dividends consistently for the last 100+ years.
What is the difference between cash value and dividends?The guaranteed cash value is the portion of the policy that is guaranteed to be accessible during the life of the policyholder. A dividend value is a major part of many, but not all, whole life insurance policies.
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What is a dividend on a life insurance policy?
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