Key Takeaways:
Life insurance dividends may be paid when a company performs better than expected.
Dividends can be used to grow your life insurance, pay premiums or taken as cash.
Northwestern Mutual has paid a dividend every year since 1872.
If you’re thinking about buying permanent or whole life insurance (or if you already have a policy), you may have heard the word dividends. They sound like a good thing—after all, dividends are extra money that’s paid out to you. But what are they really and how do life insurance dividends work?
When do life insurance companies pay dividends?
Life insurance companies make certain financial assumptions each year. For instance, they plan for how many claims they will pay, called mortality. They anticipate making a certain amount on the money they invest. And they project expenses, i.e., how much it will cost to run the company.
When a company finishes the year better than expected, it can choose to pay some or all of that money back to shareholders and policyowners in the form of a dividend.
Some life insurance companies don’t even have shareholders; those companies are called mutual companies (Northwestern Mutual happens to be one of those). So at mutual companies, dividends are paid solely to policyowners.At Northwestern Mutual, we have paid a dividend every year since 1872 (more than $150 billion over that timespan). We just announced that in 2024, we expect to pay $7.3 billion worth of dividends. For life insurance, we expect that to be three times as much as our nearest competitor.
Do whole life insurance policies pay dividends?
This can vary from company to company. But typically a whole life insurance policy is eligible for dividends if a life insurance company pays them. This can be a great benefit over time as you may be able to use your dividend to purchase additional paid-up whole life insurance. Doing so can help you increase your death benefit and cash value more quickly than the guarantees built into the policy. And over time this can have a compounding effect as your additional insurance will be eligible for additional future dividends.
Do term life insurance policies pay dividends?
Again, this can vary from company to company. But some term life insurance policies are eligible for dividends. If dividends are paid for term life insurance, they could be taken as cash or used to reduce your premium.
Evaluating life insurance dividends
How is a life insurance dividend calculated?
While different types of permanent life insurance policies work differently, in general, when you buy permanent life insurance, you pay a yearly premium for your policy. Each year, that premium is added to your policy and becomes cash value—money that you can access for any reason during your lifetime. After the premium is added to your cash value, expenses to pay claims and operate the company are subtracted. Then, interest is credited based on a guaranteed rate. If the company’s experience is better than assumed for expenses, claims (mortality), and investments, a dividend is generated. You can learn more about Northwestern Mutual’s dividend here.
Comparing dividends from different whole life insurance policies
Make sure you ask about all the components of the dividend (mortality, expenses and interest rate). Just because one company’s dividend interest rate is higher than another’s doesn’t mean the actual dividend amount that you get will be higher. For example, it’s possible that a company doesn’t perform as well from a claims or expenses standpoint. If that’s the case, they could have a higher interest rate than another company but end up paying a lower dividend. That's why it’s so important to see the whole picture before you make a decision on which policy to buy.
Does every insurance company pay life insurance dividends?
No. While most do, there are companies that do not. And even among companies that do pay regular dividends, it’s important to look at the company’s history of paying dividends because in many cases, dividends aren’t guaranteed. This can make a big difference in the value of a permanent life insurance policy over time.
Video: How do life insurance dividends work?
Life insurance dividend options
When you get a dividend, you have several options. These include:
Taking your dividends as cash
You could choose to take your dividend as cash. With this election, your insurance company will send you a check any time it pays a dividend.
Paying your premium with your life insurance dividend
This can help to reduce what you’ll owe on your policy each year. And at some point, it’s not unusual for policies at Northwestern Mutual to grow to a point where the dividend can cover the entire cost of the life insurance for the year.
Reinvesting life insurance dividends
Your final option is to use your dividends to buy additional paid-up life insurance. Reinvesting dividends into your policy in this way can allow the death benefit & cash value of your policy to grow more quickly over time. That’s particularly beneficial because this growth compounds and is typically tax-deferred, similar to the way your contributions to a traditional 401(k) grow.
FAQs
Some people use their dividends to add more insurance coverage to their existing policy. In this instance, the term used is “paid-up additions” because the funds from the dividend pay for the additional coverage, and the policyholder's premium remains unchanged.
How do dividends work with life insurance? ›
Dividends are considered a return of a portion of the premiums you paid for a life insurance policy, for tax purposes. Basically, the insurance company receives your premium payments and invests them.
Do dividends increase death benefit? ›
Your policy's total cash value and total death benefit will be greatest if you use your dividends to purchase paid-up additional insurance or if you allow your dividends to accumulate at interest.
Can you increase the value of a life insurance policy? ›
If you think you might need to increase your death benefit amount in the future, it's worth considering using a riderRiderA rider is an add-on to a life insurance policy that provides more specific coverage or conditions, sometimes with an extra cost to add more coverage to your existing policy, or getting a ...
How do life insurance dividends affect cost basis? ›
Dividends paid are added to the basis when used to purchase additional insurance. Typically with a permanent life insurance policy you can withdraw the amount of basis you have paid into the policy tax free (although doing so will reduce your cash value and death benefit).
What is the cash value of a 25000 life insurance policy? ›
Examples of Cash Value Life Insurance
An example is a cash value life insurance policy with a $25,000 death benefit. Assuming you don't take out a loan or withdraw, the cash value accumulates to $5,000. After the policyholder's death, the insurance company would pay out the full death benefit, which would be $25,000.
Do I have to pay taxes on life insurance dividends? ›
Life insurance policy dividends are returns on premiums that a policyholder receives from the insurance company when it has surplus earnings. As a general rule, life insurance policy dividends are not taxable as these are considered as return of premium.
Does dividends increase value? ›
After the declaration of a stock dividend, the stock's price often increases; however, because a stock dividend increases the number of shares outstanding while the value of the company remains stable, it dilutes the book value per common share, and the stock price is reduced accordingly.
What are the disadvantages of dividends? ›
Despite their storied histories, they cut their dividends. 9 In other words, dividends are not guaranteed and are subject to macroeconomic and company-specific risks. Another downside to dividend-paying stocks is that companies that pay dividends are not usually high-growth leaders.
Which dividend option increases the death benefit? ›
The last dividend option listed is by far the most common among MassMutual policyowners. Using dividends to purchase paid-up additional whole life insurance (paid-up additions) increases the policy's total death benefit and cash value.
One option is to purchase paid-up additions (PUAs). A PUA is guaranteed permanent, paid-up life insurance. This can provide you with a growing cash value and a death benefit that is guaranteed once purchased.
How can I increase my life insurance? ›
If your life insurance policy doesn't match your coverage needs, you can get additional insurance by converting your term policy to a whole life policy or buying a new one altogether.
What is the cash value of a $100,000 life insurance policy? ›
However, most people receive around 20% of the face value on average, according to LISA. So, if we're using that 20% average to calculate the cash value of a $100,000 life insurance policy, the cash value of the policy would be $20,000.
Should I use dividends to pay life insurance premiums? ›
This can help you reduce the cost of life insurance coverage and automatically pay part or all of your premiums. Applying dividends to premium payments can also help ensure coverage doesn't lapse if you encounter financial problems in the future.
Do dividends increase your basis? ›
Dividends. To calculate the equity cost basis for a non-dividend-paying stock, you add the purchase price per share plus fees per share. Reinvesting dividends increases the cost basis of the holding because dividends are used to buy more shares.
How do dividends work? ›
Cash dividends are paid out either as a check sent to the investor or as a credit to a brokerage account, which can then be reinvested. Stock dividends are paid in fractional shares. If a company issues a stock dividend of 5%, shareholders will receive 0.05 shares in dividends for every share they already own.
How is a life insurance policy dividend legally? ›
How is a life insurance policy dividend legally defined? A return of excess premium and not taxable. (Life insurance policy dividends are a return of part of the premiums paid. As such, policy dividends are generally not taxable income.)
How can I avoid paying tax on dividends? ›
You would not owe tax on dividends from stocks held in a retirement account, such as a Roth IRA or 401(k), or a college savings plan, such as a 529 plan or Coverdell ESA.
How long do you have to pay life insurance before it pays out? ›
How term life insurance works: The basics. A term life insurance policy is the simplest, purest form of life insurance : You pay a premium for a period of time – typically between 10 and 30 years – and if you die during that time a cash benefit is paid to your family (or anyone else you name as your beneficiary).
Who owns dividends that are paid out on a participating life insurance policy? ›
The Bottom Line
A participating policy is an insurance contract that pays dividends to the policyholder. Dividends come from the issuing insurance company's profits, and are typically paid out on an annual basis over the life of the policy.
