With all the volatility in the stock market and very low interest rates, there has been a resurgence of interest in dividend-earning assets. Most people think of stock dividends, but stocks aren’t the only asset that can earn dividends. in fact, you can buy whole life insurance that pays dividends, which is often what we recommend for those looking to automate their savings.
In this article, we’ll cover:
Reading: How is life insurance policy dividend legally defined
- what are life insurance dividends and how do they work?
- what kind of companies pay dividends?
- Are life insurance dividends taxable?
- What are your life insurance dividend options?
- and more.
- northwestern mutual, which paid policyholders $6.2 billion in 2021, is on track to pay out $6.5 billion this year.
- new york life expects to pay out $1.9 billion to policyholders.
- massmutual expects a total payout of $1.85 billion, up from $1.7 billion last year.
- the civil war
- first world war
- the flu epidemic
- the great depression
- World War II
- the savings and loan crisis
- the dot com bust
- the subprime mortgage crisis and the great recession
- covid-19
essentially, we’ll try to answer “everything you ever wanted to know about life insurance dividends but were afraid to ask”.
what is dividend paying whole life insurance?
Dividend-paying whole life insurance is whole life insurance that is purchased through a mutual company, rather than a corporation. Mutual life insurance companies share their profits with participating policyholders. they do it through dividends. Insurance companies declare their dividends annually, usually around the end of the calendar year. You may have seen announcements about 2022 dividend payments. Many companies declared the largest dividend payments in their history, including:
Note that this dividend appears in dollars and only sometimes as an interest rate (more on the latter later).
Dividends represent earnings that are paid to policyholders annually. we’ll cover dividend options below.
What type of life insurance pays dividends?
Life insurance that pays dividends is almost always whole life insurance from a mutual company like Guardian, Massmutual, or New York Life, to name a few of the more well-known mutual insurance companies. Mutual companies, unlike corporations, are companies owned by the policyholders and not by the shareholders of the company’s shares.
Permanent life insurance that pays dividends is also known as “participating life insurance” or “participating policy contract.” this simply means that the owners of the policies “participate” in sharing the profits of the insurance company. participating policies are whole life policies that pay dividends.
Term life insurance, universal life insurance, and variable life insurance policies do not pay dividends. (Term life insurance purchased from a mutual company is not a participating policy.)
How are dividends from a life insurance company different from other dividends?
The word “dividend” creates confusion because it is most often used in relation to a public company that pays stock dividends. If you own stock in a public company that pays dividends, you may receive a quarterly check from the company. Stock dividends could also come in the form of additional shares, rather than cash. Dividends represent corporate earnings and are determined by a company’s board of directors.
Life insurance dividends also represent earnings. however, mutual life insurance companies are required by law to share all company profits with participating policyholders. they distribute profits on top of money set aside for legacy benefits and operating expenses to policyholders as dividends.
If dividends are paid and reinvested in the policy as paid additions, they become part of the guaranteed cash value and part of a new higher base or floor that increases future earnings, both guaranteed earnings and premium payments. dividends. cash value can never lose value and is guaranteed to grow with at least a minimum guarantee. therefore, you cannot lose reinvested dividends if the stock market crashes. and dividends paid and reinvested ensure that your future cash value earnings and dividend payments are actually increased.
See also: Life Insurance Illustrations
Compare this to a stock dividend: If you reinvest your dividends in stocks and the stock price goes down, you’ve essentially “lost” your dividend. Or, you must wait for the share price to rise again to get your dividend back. (Of course, you can receive cash dividends, in which case you wouldn’t lose them.)
What does it mean to have declared whole life insurance dividend rates?
Annual dividend announcements (the total dollar figure) are also often accompanied by an interest rate announcement. this represents dividends as a “gross” interest rate. the actual distribution of dividends is reduced by all three expense areas within a whole life policy: mortality cost, commissions, and the mutual company’s operating expenses.
It’s tempting, though not necessarily helpful, to compare one company’s “gross dividend rates” with another. this gross rate has no meaning for the individual insured. the only thing that has meaning is the net fare (after the three expenses listed above) and the only software I’ve seen that identifies the next fare is truth concepts. (full disclosure, i’m married to its creator, todd langford).
an example of whole life insurance dividend rates:
For example, a mutual may say that its 2019 dividend is 5.9%. As Todd likes to say, that’s “just a fun fact.” To find out how much my cash value is growing this year (or over a period of years, which is more significant) I need to use the Life Values Tool and Financing Calculator to analyze this. so I can tell from that job that my cash value is growing this year at an average rate of 3.9. (this will be similar to yours, more or less by age and gender).
that is, by the time it reaches my pocket or policy, the gross dividend is reduced by around 2% of the costs.
guaranteed vs. unguaranteed growth
It’s also important to distinguish the difference between a dividend, which is not guaranteed, and your policy’s guaranteed increase. While dividends aren’t guaranteed (because they’re based on company earnings), the best-known mutuals have impressive track records. they have paid dividends during every major recession and war for at least the last century, if not longer in many cases. however, even without dividends, your cash value account is guaranteed to grow.
The guaranteed portion of your policy grows by a guaranteed dollar figure, rather than an interest rate like a typical savings account. This is important because if your account is out of money, you shouldn’t care what the interest rate is. money that grows by a dollar figure is more significant.
However, the total gross and net dividend rates include the guaranteed growth of your policy. If you use the same truth concept calculators discussed above, you can interpolate that interest rate for yourself. the guaranteed portion of my policy has a gross rate of 4% and a net rate of about 2%. when you include the dividend in this, the total is the rate of 5.9% gross and 3.9% net.
How can I use my life insurance dividends? common dividend options
There are more than a dozen options to receive your dividends, but these are the most used:
buy “paid additions”
puas represents additional “prepaid” insurance, which builds cash value, earns dividends, grows tax-deferred and increases your death benefit. this is a way to reinvest in your policy and is often the most popular option. If you’re interested in using whole life insurance as your emergency/opportunity fund, this is an ideal way to optimize your growth.
cash/check
An insured may request that the insurer send a check in the amount of the dividend. In this way, a policy can generate an annual income for the policy holder. companies pay annual dividends on the anniversary date of your policy.
premium reductions
A policyholder may request that the dividend be contributed to future premiums to offset the cost. The insurance company applies annual dividends to the premium on the anniversary of your policy. with policies in place, dividends can completely eliminate premium payments.
policy loan reductions
See also: Life Insurance for Veterans | Aflac
Dividends can help pay off a policy loan, reducing or even eliminating the need for cash outlays.
accumulate at interest
The annual dividend can stay with the insurer to earn interest. this works like a savings account. the interest earned is taxable to the policyholder annually, and you can withdraw money without affecting the life insurance portion of the policy. the accumulated money becomes payable in addition to the face value of the whole life policy as a death benefit.
What life insurance dividend options do we recommend?
In most cases, we recommend purchasing paid add-ons during the first few years of your policy. this helps accelerate and optimize your initial cash value (which is your emergency/opportunity fund). then, in the later years of your policy, you can take the cash dividend to supplement your income. this optimizes both the growth of the policy and the (eventual) income extracted from the policy.
However, if you have outstanding policy loans or cash flow issues, applying dividends to loans or premiums may make more sense. The good thing about whole life insurance dividends is that you have the flexibility to change depending on your personal finances. so there’s a potential dividend option for every stage of your life.
Aren’t dividends just a return of the excess premium paid?
Technically, the tax code classifies permanent life insurance dividends as a return of premium, but they don’t necessarily work that way in the real world. Dividends paid over time can exceed the total amount of premium paid, sometimes significantly! therefore, it is more accurate to say that dividends also represent the company’s profits. dividends must be paid when companies are profitable; it is one of the (many) guarantees of permanent life insurance. Because life insurance companies are managed very conservatively, there is almost always a modest profit.
Are life insurance dividends taxable?
Fortunately for whole life policyholders, the IRS defines dividends as a return of excess premium and therefore not taxable. however, keep in mind that if you take cash dividends, you may owe tax on dividends paid in excess of the amount of premium paid. Dividends reinvested as paid additions are not taxed because they remain part of your cash value.
By contrast, cash dividends from public companies on the stock market are taxable.
Are whole life insurance dividends guaranteed? if not, how reliable are they?
We love this question because the answer really builds confidence in the stability of the asset! No, whole life insurance dividends are not guaranteed. however, mutuals have paid dividends every year for more than 150 years, including during:
we think that’s a pretty great track record!
How can I earn dividends on life insurance?
start a whole life policy! we specialize in high cash value whole life insurance. This type of permanent life insurance builds cash value more quickly (earning higher dividends more quickly) than typical permanent life insurance policies.
Contact us today for information on whole life or convertible term insurance. we can answer questions and provide policy quotes in the form of illustrations. We also have a lot of experience with multigenerational life insurance (policies for children, grandchildren or parents).
How can I get more information about permanent life insurance?
We have two best-selling life insurance books on amazon. live your life insurance will change the way you think about whole life insurance. explains why it’s not just “death insurance” but has many benefits you can use throughout your life to build wealth and financial certainty. is a quick read (less than 100 pages) with plenty of examples of how to use life insurance effectively at every stage of life.
Debunking Life Insurance Lies tackles 38 myths and half-truths about (mostly) whole life insurance, including the “pro” whole life myths of overzealous agents! you’ve heard some of these myths and misconceptions… now find out all about it.
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