When a life insurance company makes a profit because its projected costs and expenses are less than anticipated or its investment income returns are higher than excepted, it will pass the savings back to the insured as a return on their premium in the form of life insurance dividends. Dividends are basically earned upon the life insurance company’s performance during the year. Dividends are usually earned on permanent participating policies.
A permanent participating policy means the policy covers you until you pass away and has no term or expiration period. An example is whole life insurance. Insurance companies cannot guarantee that you will receive dividends because dividends are subject to change, and they are not fixed. Read also: How much is Your Life Worth? Life Insurance Protects Your Family.
How Dividends are Determined and Paid?
Life insurance dividends are considered non-taxable and can be paid in cash, as a reduction on the premium, an addition to a term policy or the insured can keep the dividend and let it accumulate while earning interest on it. However, keep in mind by that when dividends exceed the total amount you pay for premiums, the excess amount is then considered taxable. Most dividends are paid out on the anniversary date of the policy. In order to qualify to receive your dividend, you must have owned the policy as of the date the dividend was declared by the company’s board of directors. Read also: Why They Call It Universal Life Insurance?
You should check with the insurance company or your insurance broker as to which options your insurance company offers you to receive dividends. Each company may have different options available. Once you choose the company, it is customary that at the time you purchase the policy, you will be able to select the dividend payment option of your choice.
Many policyholders choose to receive their dividends as credits towards their premium reducing their out of pocket premium costs. Some prefer receiving a cash payment while others like the idea of purchasing added coverage or paying off a loan against the policy. Whatever option you choose, you know that you are benefiting from the added option of being able to receive insurance dividends during the course of policy ownership. Read also: Why Seniors Need Life Insurance?
Many people wonder how the dividend is calculated. It works pretty much like this. The dividend is calculated by looking at the guaranteed cash value of the policy at the beginning of the year and then adding the gross annual premium, subtracting the mortality and expense charges, crediting the balance with the current dividend scale interest rate for the year which then gives you the end of year policy value. Each company may use a slightly different scale for determining the interest rate, but many times the rates are comparable. The dividend that is paid is the difference between the end of year policy value and the guaranteed cash value at the end of the year. If you take a loan against your life insurance policy, it will not affect the amount of dividend you receive.
So, let’s say your dividend is $6,000 for the year and your insurance premium is $4,500, your insurance company may just send you a check for $1,500.00 and credit the remainder to your premium balance if that is the option you choose. Other companies may just send the entire $6,000 dividend check to you if chose this option. Or you may decide to purchase some added coverage such as term insurance or repay your policy loan. You have the flexibility to choose and manage your policy the way it benefits you and your family the most. Read also: The Challenge of Finding Life Insurance After a Cancer Diagnosis.
Selecting a Life Insurance Company
Making the choice to purchase life insurance is a smart and important choice because it gives you financial security and the peace of mind that your family will be protected after you are gone. This is important whether you have young children or your children are all grown up and it is just you and your spouse at home. Life insurance needs change. People choose life insurance for financial security, investment and income.
Other criteria for choosing the right life insurance company should also include choosing a company that is strong, stable and reliable. If the company you choose pays life insurance dividends, you have the added benefit of receiving the savings on your premiums, adding extra coverage, increasing the value of your policy by letting your dividends accrue and receiving interest. Read also: Life Insurance Later in Life.
Working with an experienced insurance broker is beneficial for most people because the insurance broker can help you select the right life insurance company and the right amount of coverage for your family and financial needs.