There are several factors to consider when you’re buying life insurance. If you’ve decided that whole life insurance is best for you, you may want to buy a dividend-paying whole life insurance policy.
Dividend-paying whole life is a type of whole life insurance policy that pays an annual bonus to policyholders if the company overperforms financially. Policy dividends can be paid by check, be applied to your future premiums, or be used to buy additional coverage.
Key takeaways
Dividends are annual payments some insurers send to permanent life insurance policyholders.
Payments are based on the insurance company’s financial performance and are not usually guaranteed.
Funds can be paid out by check, held with the insurer to earn interest, or applied to your policy to pay for or increase coverage.
Dividends are not taxable except when they earn interest or exceed the amount you’ve paid in policy premiums.
What are life insurance dividends?
Dividends are payments permanent life insurance owners can get from their life insurance company each year. The dividend amount you’re paid is a percentage of your policy’s value. That percentage changes every year based on your insurer’s financial performance.
For example, if you have a policy with a cash value worth $100,000 and are granted a 6% dividend this year, you’ll receive a payment of $6,000. Next year, if your policy is worth $105,000 but your insurer doesn’t perform as well, you might only get a 2% dividend of $2,100.
Dividends are only paid by some insurance companies and are not guaranteed each year.
Types of life insurance that pay dividends
Life insurance policies can be either participating or non-participating. Participating policies pay dividends to policyholders and are usually sold by mutual insurance companies (which are owned by policyholders), whereas non-participating policies do not pay dividends.
You won’t find a term life insurance policy that pays dividends—the benefit is only available on permanent policies.
How does dividend-paying whole life insurance work?
Dividend-paying whole life works like traditional whole life insurance: you pay premiums for coverage that lasts for life and a cash value feature that earns interest over time. When you die, the policy pays a death benefit to your family.
The main difference is that if your insurer has a good financial year—due to their investments and new or continuing business—you get some extra cash. When you’re shopping for coverage, your insurance agent will give you a policy summary that projects how much you can expect to earn in dividends every year.
Dividend payout options
There are a few ways to collect your dividend payments. You can change your preferred method at any time based on your needs:
Accumulate at interest: The payment stays in an account with the insurer and earns interest annually.
Cash: The insurer pays your dividends by check.
Paid-up addition: You use dividends to buy additional whole life insurance. A single dividend payment funds new coverage for life.
Premium reduction: The payment goes towards your policy premiums so that they’re reduced or covered for a limited time.
For most people, a cash payment is the simplest option. It is rarely taxable, and you can spend the money as needed instead of putting the entire payment into a single expense.
Are life insurance dividends taxable?
Dividends from a life insurance policy are not taxed if you receive the payout in cash or apply it to your policy. Because the dividends are only paid when your provider has a financial surplus, the IRS treats a cash payout as a refund of excess premiums you paid.
If the amount of money you get in dividends is greater than the amount of premiums you’ve paid into your policy, then the additional amount is taxed as income. Should you opt to leave your dividends with your insurer to earn interest, any interest earned is also taxed as income.
Should you get dividend-paying whole life insurance?
If you need whole life insurance and can afford the high premiums, getting a whole life insurance policy that pays dividends will help you maximize your policy benefits. Dividends can help you cover premium payments, and you’ll get cash or coverage that a non-participating policy couldn’t offer.
However, most people don’t need whole life insurance. A permanent policy is best for someone who needs an additional investment account. And because not every insurance company sells participating policies, looking exclusively for insurance that pays dividends will limit your coverage options.
Dividends aren’t the only factor to consider when choosing life insurance. The best company for you will have a strong financial standing and cover all of your family’s financial needs. An independent insurance agent or financial advisor can help you compare coverage.
Frequently asked questions
What is dividend-paying whole life insurance?
A dividend-paying whole life policy works like a traditional whole life insurance policy, except you receive a cash payment if your insurer has a good financial year.
Should you pay your life insurance premiums with dividends?
You can use your dividends to pay premiums, but receiving the payment by check gives you the most flexibility with your money.
Are you taxed on dividends from life insurance?
Your dividends are only taxable if the amount you receive is greater than the amount of premiums you’ve paid into your policy or if you leave the funds with the insurer to earn interest.
