Quick answer
Life insurance dividends are a share of a mutual insurer's favorable results paid to participating whole life policyholders. They are not guaranteed, but mutual carriers like MassMutual, Penn Mutual, Guardian, and Foresters have long records of paying them. You can take dividends in cash, use them to reduce premiums, leave them to earn interest, repay policy loans, or buy paid-up additions that compound your coverage and cash value over time.
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.
What Are Life Insurance Dividends?
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.
How Dividends Are Calculated
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.
What Are the Different Ways To Use 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.
Benefits of a Life Insurance Policy Dividend
There are a number of benefits to having a life insurance policy with a dividend. Here are five of the most important:
- Increased Cash Value - A life insurance dividend can add value to your policy, boosting the cash value you can access later.
- Reinvestment Option - When you receive a life insurance dividend, you typically have the option to reinvest it in the policy. This can add up over time, and it can be a great way to grow the value of your plan.
- Tax-Deferred Growth - The cash value of a life insurance policy grows tax-deferred, which means you won’t have to pay taxes on it until you withdraw the money. This provides a significant advantage over other investment options, such as stocks and mutual funds.
- Access To Cash Value - Many life insurance policies offer the option to borrow against the cash value. This can be a convenient way to access funds in an emergency.
- Death Benefit - The most important benefit of a life insurance policy is the death benefit, which is paid out to your beneficiaries when you pass away. A life insurance dividend can help increase the amount of this benefit.
Do Life Insurance Dividends Come With Any Risks?
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.
Ready to shop for life insurance? Start here
Find the Right Policy for You
Get a free quote to find the best insurance plan for your needs and make sure you get the most out of your policy.
