What Is Dividends?
A return of surplus premium paid by mutual insurance companies to participating whole life policy owners, typically declared annually by the carrier's board of directors.
Understanding Dividends
In the context of life insurance, dividends are distributions of surplus earnings from a mutual insurance company to its participating policy owners. They represent a return of the portion of premiums that exceeded the carrier's actual costs for mortality, expenses, and investment returns. Dividends are not guaranteed and are declared annually by the carrier's board of directors based on the company's overall financial performance. Mutual insurance companies are owned by their policyholders, which is why surplus is returned to them rather than to external shareholders as it would be in a stock insurance company.
Policy owners typically have several options for how to receive dividends: take them as cash, use them to reduce future premium payments, leave them on deposit to accumulate at interest (where interest earned is taxable), or use them to purchase paid-up additions that increase both the death benefit and cash value. Each option has different financial implications and tax treatment. Taking dividends as cash or using them to reduce premiums provides immediate financial benefit. Leaving them on deposit generates taxable interest income. Purchasing paid-up additions maximizes long-term cash value growth and death benefit through the compounding effect. The best choice depends on the policy owner's goals and overall financial plan.
While many established mutual insurance companies have paid dividends consistently for over a century, with some carriers maintaining unbroken dividend histories spanning 150 years or more, it is critical to understand that dividends are not guaranteed. Past dividend performance does not guarantee future dividends. Dividend illustrations provided at the time of sale are projections based on the current dividend scale and are not promises or estimates of future performance. The financial strength of the issuing carrier, as reflected in ratings from agencies like A.M. Best, is the underlying foundation for dividend payments.
The dividend scale is determined annually by the carrier based on three primary factors: investment returns on the company's general account (typically bonds and mortgages), mortality experience (the actual death claims paid compared to expected claims), and operating expenses. When all three factors perform better than assumed in the premium pricing, the surplus is larger and dividends tend to be higher. When economic conditions are challenging, such as prolonged low interest rate environments, dividend scales may be reduced.
Important Things to Know
Dividends are not guaranteed and are declared annually by the carrier's board of directors based on the company's financial performance in investment returns, mortality, and expenses.
Dividends represent a return of surplus premium from mutual insurance companies to participating policy owners, not from stock companies to shareholders.
Common dividend options include cash, premium reduction, accumulate at interest (taxable), and paid-up additions (maximizes long-term growth).
Past dividend performance does not guarantee future dividends, and policy illustrations showing projected dividends are not promises of future results.
Dividends are available only on participating whole life policies from mutual insurance companies, not on term, universal, or IUL products.
The dividend scale is influenced by three factors: investment returns, mortality experience, and operating expenses compared to the assumptions used in pricing.
Using dividends to purchase paid-up additions creates a compounding growth effect that accelerates both cash value and death benefit over time.
Many established mutual carriers have paid dividends consistently for over a century, though past history does not guarantee future dividends.
Seeing Dividends in Practice
Illustrative example: A 50-year-old Knoxville executive owns a participating whole life policy with a $600,000 death benefit and annual premiums of $12,000. In a given year, the carrier declares a dividend of $2,400 on the policy. The policy owner elects to use the dividend to purchase paid-up additions, which increases the death benefit by approximately $8,000 and the cash value by approximately $2,400. Dividends are not guaranteed, and the amount will vary each year based on the carrier's financial performance. This example is illustrative only; actual dividend amounts vary by carrier and policy. In a second illustrative scenario, a 60-year-old Nashville retiree uses dividends to reduce their annual premium payment. The base premium is $15,000, and the annual dividend of $4,500 reduces the out-of-pocket payment to $10,500. In a year when the carrier reduces the dividend scale due to lower investment returns, the dividend decreases to $3,200, increasing the out-of-pocket premium to $11,800. This demonstrates the variability of dividends and why they should not be relied upon as guaranteed premium reductions. Actual dividends vary by carrier and are not guaranteed.
Dividends in Tennessee
Tennessee residents who own participating whole life policies benefit from the state's lack of income tax on dividend income that remains inside the policy. Dividends taken as cash may be tax-free at the federal level up to the policy's cost basis (total premiums paid), and Tennessee imposes no additional state tax. Interest earned on dividends left to accumulate with the carrier is taxable at the federal level only. This favorable tax environment enhances the value of dividend-paying whole life policies for Tennessee residents. The TDCI requires that all policy illustrations sold in Tennessee clearly distinguish between guaranteed and non-guaranteed values, including projected dividends. Under TCA Title 56, carriers must accurately represent the non-guaranteed nature of dividends in all marketing materials, policy documents, and annual statements provided to Tennessee consumers. The TDCI has emphasized that agents must clearly communicate that dividend projections are not guarantees when presenting whole life illustrations to Tennessee residents.
Explore Dividends in Detail
Get answers to specific questions about dividends.
Related Glossary Terms
Paid-Up Additions
Small, fully paid-up whole life insurance increments purchased with dividends or additional premiums that increase both the death benefit and cash value of a whole life policy.
Read Definition →Whole Life Insurance
Permanent life insurance that provides lifelong coverage with guaranteed level premiums, a guaranteed death benefit, and guaranteed cash value accumulation.
Read Definition →Cash Value
The savings component of a permanent life insurance policy that accumulates on a tax-deferred basis and can be accessed by the policy owner during their lifetime.
Read Definition →Learn More
Frequently Asked Questions About Dividends
No. Life insurance dividends are not guaranteed. They are declared annually by the mutual insurance company's board of directors based on the company's financial performance, including investment returns, mortality experience, and operating expenses. While many established carriers have long track records of paying dividends consistently for over a century, past performance does not guarantee future results.
Life insurance dividends are generally considered a return of premium and are not taxable as income until the total dividends received exceed the total premiums paid (the policy's cost basis). Dividends left to accumulate at interest with the carrier generate taxable interest income at the federal level. Tennessee has no state income tax, so only federal tax rules apply to Tennessee residents.
Only participating whole life insurance policies issued by mutual insurance companies pay dividends. Universal life, IUL, variable life, term life, and policies from stock insurance companies do not pay dividends. Stock companies may offer competitive premiums, cash value crediting rates, or other benefits in lieu of dividends.
The best dividend option depends on your financial goals. Purchasing paid-up additions maximizes long-term cash value growth and death benefit through compounding. Premium reduction lowers your out-of-pocket cost but reduces future growth. Cash dividends provide current income. Accumulation at interest provides modest growth but generates taxable interest. A licensed agent in our network can help you evaluate which option aligns with your overall financial plan.
Dividends are determined by three primary factors: the carrier's investment returns on its general account portfolio, the company's mortality experience (actual claims compared to expected), and operating expenses. When all three factors perform favorably, dividends tend to be higher. Economic conditions, interest rate environments, and claims experience all influence the annual dividend scale.
Yes. Most carriers allow policy owners to change their dividend option at any time by contacting the carrier or their agent. For example, you might initially choose paid-up additions to build cash value, then switch to premium reduction in retirement to lower out-of-pocket costs. Changes typically take effect on the next dividend payment date.
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