What Does Dividend Mean?
A dividend refers to a payment that an insurance company makes to a cash value life insurance policyholder. Similar to the dividends paid by a company to its shareholders, the amount of payment paid to the policyholders depends on the expenses incurred by the insurance company and the return on investment received by the insurance company. Considered a partial refund of premiums, dividends provide tax-free income.
It is also known as return of premium.
Insuranceopedia Explains Dividend
Insurance companies calculate their profits after deducting the claims paid over a period along with relevant operating costs. Thereafter, they pay dividends from the remaining profits to the policyholders of participating life insurance policies, such as whole life policies. Depending on whether the insurance company is a privately held company or a mutual company, the manner of calculating dividends varies. Moreover, some insurance companies offer their policyholders various options for the payment of dividends. For instance, insurance companies could pay dividends as cash; add it into the cash value portion of the policy, thereby enabling it to accumulate more interest; deduct it from premium payments; or additional coverage.