Dividends in Life Insurance
Participating vs Non-Participating Life insurance Policies
Before we dive into whole life dividends, know that not every whole life policy generates dividends. The distinction is whether you have a participating or a non-participating policy.
When you have a participating whole life insurance policy, you’re considered a stakeholder in the insurance company. As a stakeholder, the company can use the money you pay into the policy to invest with, and if they have a successful year you might receive a dividend. Many companies use their track record of paying consistent dividends as an incentive for customers to use their services and to show their financial strength. For example, New York Life advertises making annual dividend payments since 1854.
The other purchase option for a whole life policy is a non-participating policy, which doesn’t pay dividends. Why would someone opt out of dividends? The answer: a non-participating policy has a lower premium. The choice boils down to what’s more important to the policy owner, a low, fixed premium that won’t change or a slightly higher premium with the chance for dividends to offset the higher cost.
How Whole Life Dividends Work
When a policyholder picks a participating policy, chances are they’ll receive a dividend of some amount, assuming they chose a reputable life insurance company. Even so, an established track record of dividends doesn’t guarantee future dividends.
The insurance company is the sole determinant of any dividend. The board of directors decides whether to pay a dividend and how much. The amount depends on how much money the company made in the past fiscal year, its level of expenses for the previous year and its cash reserves to cover upcoming debts and contractual obligations.
Dividends on life insurance policies are usually displayed as a percentage when released. The percentage dividend is based on your policy value. If, for example, you own a whole life policy with a death benefit of $100,000 and a life insurance company issues a dividend of 0.5%, you would be entitled to a dividend of $500.
How to Use Life Insurance Dividends
When policyholders receive a dividend, they have a few options on how to use the money. A common option is to let the dividend cover a portion of the next outstanding premium. Depending on how your policy reads and how your financial institution operates, it’s possible to leave the dividend as a “credit” on your premiums owed. This way, you pay less per month and keep your coverage.
Another way to handle dividends is to take the dividend in cash. You can do this by requesting that the financial institution underwriting your life insurance policy send you a check. You can then cash that check and use the money for any purpose you wish.
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. Over time, the interest compounds, and the increased value for the combined policy can be significant.