Understanding Life Insurance Dividends: A Guide to Where Your Dividends Go
Life insurance dividends can be a complex topic for policyholders, partly due to the way insurance agents and companies explain them. These dividends might seem similar to stock dividends, but they operate differently. In this guide, we’ll cover what life insurance dividends are, the types of policies that offer them, where your dividends go, and how you can best use them. We’ll also explain how Acrisure and Abdul Aslam, Business Development Manager at Acrisure, can add value to your decision-making process.
What Is a Life Insurance Dividend?
Life insurance dividends represent a return on a portion of the premiums you’ve paid. When you make premium payments, the insurance company typically invests them. If the company’s investments perform well and its costs stay low, it may declare a dividend, redistributing some of the surplus to policyholders. Thus, these dividends are partially a refund of overcharged expenses.
Key Takeaways:
- Dividends are not guaranteed: Each company calculates dividends based on its own criteria.
- Only certain policies qualify for dividends: Generally, only “participating” policies are eligible for dividends, with slightly higher premiums.
Types of Life Insurance That Earn Dividends
Whole life insurance is generally the primary type eligible for dividends. Understanding whether a policy is participating or non-participating can help you decide which policy type suits your goals:
| Policy Type | Eligible for Dividends | Premium Cost |
|---|---|---|
| Participating | Yes | Higher |
| Non-Participating | No | Lower |
Participating policies typically come with a higher premium but offer regular dividends, while non-participating policies don’t pay dividends and often have lower premiums.
Where Do Life Insurance Dividends Go?
When dividends are declared, they can go toward various options. Many insurers allow policyholders to change how they use dividends over time.
- Receive Cash Payments: You may receive dividends as a cash payment, typically on each policy anniversary.
- Reduce Future Premium Payments: Dividends can be applied to reduce future premium payments, potentially covering the full cost if dividends are high.
- Accumulate Interest: Dividends can be left with the insurance company to earn interest in a dividend accumulation account. This account balance is accessible any time, and upon the insured’s death, the balance is added to the policy’s payout.
- Buy Paid-Up Additional Insurance: Dividends can purchase additional coverage that generates dividends itself, with no extra premiums or exams required.
- Buy One-Year Term Insurance: Dividends can fund one-year term coverage, ideal for temporary additional coverage needs.
- Repay Policy Loans: If you have taken a loan against your policy, dividends can be used to cover loan interest or principal payments.
Are Life Insurance Dividends Taxable?
Dividends on life insurance policies are generally tax-free, as they’re treated as a return of premiums. However, if they’re kept in an accumulation account and earn interest, that interest is taxable.
Should Dividends Influence Your Choice of Life Insurance?
While dividends offer additional value, they should not be the sole factor in selecting a life insurance policy. Insurance companies tend to overestimate costs to ensure stability, resulting in dividends when actual costs are lower. Since companies often don’t disclose how dividends are calculated, it can be difficult to predict them accurately.
How Acrisure and Abdul Aslam Can Add Value
Choosing the right life insurance policy requires aligning your options with your financial goals and knowing where your dividends will go. Abdul Aslam, Business Development Manager at Acrisure, can help you understand dividend-eligible policies and make the best choice for your future. Abdul will connect you with an insurance agent who can provide guidance and competitive quotes to meet your specific needs. To learn more, contact Abdul at 916-778-5979 or visit www.abdulconnects.com.
Disclaimer
This article is for informational purposes only and should not be considered financial advice. Always consult with an insurance agent and do your own research before making any decisions. For personalized support, Abdul Aslam can connect you with an insurance agent to help you find the right life insurance policy and obtain quotes.