What Are Dividends in Life Insurance?

So what are dividends in life insurance? In life insurance, dividends are potential payments that some insurers make to eligible policyholders when the company performs better than the conservative assumptions built into its pricing. They're most common in participating whole life policies and are generally treated as a return of premium rather than guaranteed interest or income, and because of this, dividends are usually not taxable.

Dividends in life insurance are discretionary payments that share a portion of an insurer's favorable results, such as better-than-expected investment performance, lower expenses, or fewer claims, with owners of participating policies. They are typically declared annually and can fluctuate from year to year based on the company's financial performance and dividend scale. Policyholders can usually choose to take dividends in cash, use them to reduce premiums, let them accumulate at interest, or buy paid-up additional insurance to increase death benefit and cash value. Think of dividends as a potential refund of part of your premiums when the company has a good year. They're not guaranteed, but when paid, you can use them to lower premiums, take cash, or buy more coverage at your discretion.

Three bullet takeaways. Dividends are not guaranteed. They depend on insurer performance, such as investments, claims, and expenses, and apply mainly to participating whole life policies. Dividends are usually treated as a return of premium, so they're generally tax-free. Common dividend options are either to take cash, reduce your premiums, let them accumulate at interest, or buy paid-up additions to boost death benefit and cash value.

For related glossary links, you could look at participating whole life insurance, paid-up additions, dividend scale, modified endowment contract, cash value.