Dividend

What Does Dividend Mean?

A dividend refers to a payment made by an insurance company to a cash value life insurance policyholder. Similar to the dividends paid by a company to its shareholders, the amount paid to the policyholder depends on the expenses incurred by the insurance company and the return on its investments. Considered a partial refund of premiums, dividends provide tax-free income.

It is also known as a return of premium.

Insuranceopedia Explains Dividend

Insurance companies calculate their profits by deducting the claims paid over a period, along with relevant operating costs. They then pay dividends from the remaining profits to the policyholders of participating life insurance policies, such as whole life policies. Dividends are only paid on participating policies, so before expecting any payout you’ll want to confirm the policy type. Our guide to participating life insurance policies explains how they differ from non-participating ones.

The method of calculating dividends varies depending on whether the insurance company is privately held or a mutual company. Whole life premiums tend to be higher than other types partly because dividends and cash value growth are built into the policy, so if you’re trying to budget see how much whole life insurance costs. Additionally, some insurance companies offer various options for paying dividends to their policyholders. For example, dividends may be paid as cash, added to the cash value portion of the policy to accumulate more interest, deducted from premium payments, or used to purchase additional coverage.

Because dividend amounts depend on the insurer’s profitability and investment returns, dividend history is one factor people compare when shopping for whole life coverage. You can see how providers stack up in our list of the best life insurance companies.