Life Insurance Dividends

Life insurance dividends are a return on investment paid on participating whole life insurance policies. Whole life insurance may be participating or non-participating with participating policies having higher premiums. Life insurance dividends are determined differently for privately held (stock) and mutual companies, and the insured person has a number of options for using these earned life insurance dividends.

Mutual Life Insurance Companies

Mutual life insurance companies are owned by the policyholders. Insurance premiums are calculated to cover operating expenses, claims and unforeseen costs. If there is a surplus of funds at the end of the fiscal year, a dividend is declared and is split between policyholders with participating whole life insurance policies.

It is important to note that outstanding loans on the cash value of the policy will reduce life insurance dividend payments. The face value of the whole life insurance policy determines the policyholder’s share of these surplus funds.

Privately Held Companies

In privately held or stock companies, life insurance policies offer a benefit similar to holding stock in the company. If the company’s investments do well and the stock prices rise, a dividend is declared and stockholders and those with participating life policies share in the profits. If the company stock falls, stockholders lose money but eligible policyholders do not lose their investment; they simply do not receive life insurance dividends.

Policies For Life Insurance Dividends

Policyholders who receive life insurance dividends may choose to use them to pay premiums on the policy, add the dividends to the cash value of the policy or opt to receive a check from the insurer. The dividends may also be used to purchase additional coverage, called paid up additions, on the life insurance policy.

Paid up additions add to the face value (death benefit) of the policy and are subject to the same terms and conditions as the existing life insurance policy. Life insurance companies all handle dividends differently, so it may be best to inquire with your carrier to learn what types of life insurance they offer, and how dividends are distributed.

Income Tax and Dividends

If life insurance dividends are used to pay premiums, added to the cash value or used to buy paid up additions to whole life insurance, dividends are not subject to income tax. If the amount of the dividend is less than the insurance premiums for the year, dividends are considered a return of premium and are not taxable. In the event that the dividend exceeds the yearly premium, the amount of the dividend in excess of the premium is taxable as income as a life insurance tax.

Participating Life Insurance in Financial Planning

If a life insurance policy is used as part of a financial plan, it is important to thoroughly research and find the best life insurance company. The company should be financially stable with a history of paying life insurance dividends regularly. Since income earned on the cash value of life insurance is tax deferred until it is withdrawn, a participating life insurance policy can have tax advantages for some individuals.

These types of life insurance policies offer insured families, parents, seniors, and children the option of withdrawing premium payments from the policy’s cash value when needed, for mortgage payments, credit card bills, medical expenses, or tuition.