Last updated: May 10th, 2022
A life insurance policy can be a key piece of your financial security plan. It can protect your loved ones from the financial burden of your passing and can also serve as an investment vehicle. Many policies offer the opportunity to earn dividends, which can add considerable value to the policy over time. But how do dividends work, and what options are available to you? Here’s a quick rundown on life insurance dividends and how you can benefit.
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A life insurance dividend is a payment made to the policyholder by the insurance company. It is calculated as a percentage of your cash value, and it is typically paid out annually or semi-annually.
The insurance company considers the investment performance of the underlying assets in the policy portfolio when calculating dividends.
Whole life insurance policies pay dividends based on the cash value amount in your policy. As your cash value grows, so do your dividends.
For example, 10 years into your whole life insurance policy, you have $10,000 in cash value. A dividend of 3% provides $300 in dividends.
Dividends can be used in a number of ways, depending on the policy and the insurer. They can be reinvested in the policy to boost its cash value, used to purchase more coverage, or cashed out. Some policies also offer the option to use dividends to pay premiums, which can be helpful if you experience a financial setback.
There are a number of benefits to having a life insurance policy with a dividend. Here are five of the most important:
There are some risks associated with life insurance dividends, but they are generally considered to be minimal. The biggest risk is that the dividend may not be enough to cover the cost of the policy if you need to cash it out early. If you are considering a life insurance policy, be sure to speak with an insurance advisor to learn more about the risks and benefits.
Overall, life insurance dividends can be a valuable addition to your policy, offering you more flexibility and potential for growth. If you’re considering a whole life insurance policy, be sure to ask your agent about the dividends offered. And if you’re already a policyholder, review your options and take advantage of the benefits a dividend can bring.
Below are some of the most asked questions about life insurance dividend options:
No, life insurance dividends are not guaranteed. They are based on the company’s investment performance and mortality experience. However, many companies have a history of paying dividends, so there is a good chance that you will receive a dividend.
Insurance dividends are reinvested in the policy or used to pay premiums. It is considered a loan when you take cash out of a whole life insurance policy.
Dividends are typically paid annually or semi-annually. Check with your insurance company to find out when your dividends will be paid.
When dividends are dispersed as cash, it is considered a return on premium. In general, amounts received over the policy’s life become taxable at the point they exceed the premiums paid for the policy.
If the dividends stay within a life insurance policy, the full benefit, including the dividends, is tax-free.
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Brian is the founder and CEO of Insurist and carries Life, Health, and Property & Casualty licenses in all 50 U.S. states. Since 2013, Brian has been a member of Million Dollar Round Table, a designation for the top 1% of financial advisors worldwide. Brian has been featured in Yahoo! Finance, Money.com, Entrepreneur.com, Life Happens, Forbes, MSN, and Good Financial Cents. Brian’s goal is to show customers the best products, the quickest answers to their questions, and provide expert advice.
