insurance

Dividends (Insurance)

Returns of excess premiums paid to policyholders of mutual insurance companies or participating policies when the company performs better than expected. These dividends represent a refund of overpaid premiums rather than investment income and are typically not taxable.

Example

“Jennifer's whole life insurance policy paid a $340 dividend last year, which she used to reduce her annual premium payment.”

Memory Tip

Insurance dividends = 'Divide the Difference' - when the company does better than expected, they divide the difference with policyholders.

Why It Matters

Insurance dividends can significantly reduce the actual cost of your coverage over time and provide additional financial flexibility. For whole life policies, dividends can accelerate cash value growth or reduce premium payments, making the coverage more affordable and valuable.

Common Misconception

People often think insurance dividends are guaranteed investment returns like stock dividends. However, insurance dividends are actually refunds of excess premiums and are never guaranteed, varying based on the insurance company's financial performance, claims experience, and investment results.

In Practice

Tom pays $2,400 annually for a participating whole life policy with a $100,000 death benefit. In a good year, his mutual insurance company declares a 4% dividend, giving Tom $96. He chooses to use this dividend to purchase additional paid-up insurance, increasing his death benefit to $100,500. Over 20 years, these dividends could increase his death benefit to over $120,000 while keeping his premiums level.

Etymology

From Latin 'dividendum' (something to be divided), the concept in insurance dates to the mid-1800s when mutual life insurance companies began sharing surplus earnings with policyholders who technically owned the company.

Common Misspellings

dividentsdividensdivdendsdividends insurence

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