Whole Life Insurance

Dividend-paying whole life insurance provides lifelong insurance coverage, cash value, and the ability to receive annual payments from your provider based on its financial performance.

There are several factors to consider when buying life insurance. If you have decided that whole life insurance is best for you, you may want to purchase a dividend-paying whole life insurance policy.

Dividend-paying whole life is a type of whole life insurance policy that pays policyholders an annual bonus if the company achieves strong financial performance. Policy dividends can be paid by check, applied to future premiums, or used to purchase additional coverage.

Features

• Dividends are annual payments that some insurers send to permanent life insurance policyholders.

• Payments are based on the insurance company's financial performance and are generally not guaranteed.

• Funds can be paid by check, left with the insurer to earn interest, or applied to your policy to pay for or increase coverage.

• Dividends are not taxable except when they earn interest or exceed the amount you have paid in policy premiums.

What Are Life Insurance Dividends?

Dividends are payments that owners of permanent life insurance policies may receive from their life insurance company each year.

The dividend amount paid to you is a percentage of your policy's value. That percentage changes each year based on your insurer's financial performance.

For example, if you have a policy with a cash value of $100,000 and are awarded a 6% dividend this year, you will receive $6,000. Next year, if your policy is worth $105,000 but your insurer does not perform as well, you might receive only a 2% dividend of $2,100.

Only some insurance companies pay dividends, and they are not guaranteed every year.

Types of Life Insurance That Pay Dividends

Life insurance policies can be participating or nonparticipating. Participating policies pay dividends to policyholders and are generally sold by mutual insurance companies, which are owned by policyholders. Nonparticipating policies do not pay dividends.

You will not find a dividend-paying term life insurance policy; the benefit is available only with permanent policies.

How Does Dividend-Paying Whole Life Insurance Work?

Dividend-paying permanent life insurance works like traditional permanent life insurance: you pay premiums for lifelong coverage and a cash value feature that earns interest over time. When you die, the policy pays a death benefit to your family.

The main difference is that if your insurer has a good financial year because of its investments and new or ongoing business, you receive some extra money. When you shop for coverage, your insurance agent will give you a policy illustration projecting how much you can expect to earn in dividends each year.

Dividend Payment Options

There are several ways to receive your dividend payments. You can change your preferred method at any time based on your needs:

• Accumulate interest: The payment remains in an account with the insurer and earns interest annually.
• Cash: The insurer pays your dividends by check.
• Paid-up additions: You use dividends to buy additional whole life insurance. A single dividend payment funds new lifelong coverage.
• Premium reduction: The payment goes toward your policy premiums, reducing or covering them for a limited time.

For most people, a cash payment is the simplest option. It is rarely taxable, and you can spend the money as needed rather than directing the entire payment toward one expense.

Are Life Insurance Dividends Taxable?

Life insurance policy dividends are not taxable if you receive the payment in cash or apply it to your policy. Because dividends are paid only when your provider has a financial surplus, the IRS treats a cash payment as a refund of excess premiums you paid.

If the amount you receive in dividends exceeds the premiums you paid into your policy, the additional amount is taxed as income. If you choose to leave your dividends with your insurer to earn interest, any interest earned is also taxed as income.

Should You Get Dividend-Paying Whole Life Insurance?

If you need whole life insurance and can afford its high premiums, a dividend-paying whole life policy will help you maximize your policy's benefits. Dividends can help cover premium payments, and you will receive cash or coverage that a nonparticipating policy could not offer.

However, most people do not need whole life insurance. A permanent policy is best for someone who needs an additional investment account. And because not all insurance companies sell participating policies, looking exclusively for dividend-paying insurance will limit your coverage options.

Dividends are not the only factor to consider when choosing life insurance. The best company for you will have a strong financial position and meet all your family's financial needs.

An independent insurance agent or financial advisor can help you compare coverage.