Definition - What does Policy Dividend mean?
A policy dividend is the amount given to policyholders (usually of certain life insurance policies) by an insurance company every year after meeting certain financial requirements.
The amount is decided by the insurance company's board of directors and is in part based on the financial performance of the company. It is, therefore, neither fixed nor guaranteed. The policy's cash value and premium determine the amount of the dividend.
Insuranceopedia explains Policy Dividend
An insurance company can afford to pay dividends to its policyholders if it had positive earnings that year. The dividends that are distributed are surpluses from the operational costs and expenses of the company. How well the insurance company has performed will determine the amount of the dividend, which explains why the dividend varies every year.
The insurance company may not distribute it as cash money. Instead, it may be used as payment for a loan from a policy, payment for the next premium, or payment for another insurance purchase.