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Life Insurance Dividends

David Chang, ChFC®, CLU®
Robin Hartill, CFP
By: David Chang, ChFC®, CLU® and Robin Hartill, CFP

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Ashley Maready
Check IconFact Checked Ashley Maready
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Life insurance provides the peace of mind of knowing that your loved ones are taken care of financially if something unfortunate happens to you. Receiving dividends on top of life insurance coverage makes the peace of mind even stronger. Read on to learn more about life insurance dividends and how they can benefit you and your family.

What are life insurance dividends?

Life insurance dividends are payments made by life insurance companies to their policyholders. These payments are extra funds returned to policyholders that are typically made on an annual basis. The amount can vary depending on the company's financial performance during the year.

Dividends are not guaranteed, and they are not a right of the policyholder. Life insurance companies may declare dividends based on a variety of factors, including their profit for the year, mortality experience (the rate at which participants have died), and other operational factors.

Dividends are typically paid out in cash, but some life insurance companies may offer policyholders the option to reinvest their dividends into the policy. This can provide additional death benefit coverage or allow the policyholder to build up cash value within the policy.

How are life insurance dividends calculated?

Life insurance dividends are a return of a portion of the premiums you paid on your policy. Life insurance companies use a variety of factors to calculate dividends, but the two most important factors are profits of the insurance company and how much you pay into your policy.

The profit or surplus an insurance company has at the end of the year is based on the profits from insurance policies, investment returns, and its administrative costs. Underwriting profits come from mortality experience. This is the rate at which policyholders die during the year compared to what was expected. Investment earnings can come from a variety of sources, such as stocks, bonds, and real estate. Administrative costs are its operational business expenses.

Insurance dividends are also based on how much money a policyholder pays into a policy. If you have a policy of $50,000, then a 4% dividend will pay you $2,000. A policy of $100,000 will pay a dividend of $4,000. Life insurance companies typically declare dividends once per year, after they have completed their annual financial statements.

Do all life insurance policies pay dividends?

To get life insurance dividends, you'll need whole life insurance, which is a type of permanent life insurance. Not all whole life policies pay dividends, though. Dividends are issued by participating life insurance companies, which allow policyholders to share part of the insurer's profits.

You'll generally pay higher premiums for a participating whole life policy.

Some life insurance companies choose not to pay dividends. Dividends are declared by the life insurance company and are not guaranteed. It is important to look at a company's history of paying dividends for companies that do pay them. Policyholders should consult with their life insurance agent or company to determine if their policy is eligible for dividends and before buying a life insurance policy.

How do dividend scales affect life insurance policies?

Dividend scales are used by life insurance companies to determine the amount of dividends that policyholders will receive. These scales are based on different factors, including the company's financials, investment earnings, and mortality experience.

Dividend scales can have a significant impact on the overall value of a life insurance policy. Policyholders who receive higher dividends will typically have more cash value in their policy and may be able to access it sooner than those who receive lower dividends.

Dividend scales can also affect the death benefit of a life insurance policy. Policyholders who have higher dividends may be able to use them to purchase additional coverage or to add life insurance riders onto the policy.

How can you use life insurance dividends?

Life insurance dividends can be used in a variety of ways, depending on the life insurance policy and the company that issues it. Some common uses for life insurance dividends include the following.

Paying premiums

Dividends can be used to pay all or part of the premium on a life insurance policy. This can help to keep the policy in force and can provide some relief for policyholders who are struggling to make premium payments.

Adding riders

Riders are optional features that can be added onto a life insurance policy. They typically provide additional coverage or benefits, such as accelerated death benefits or living benefits. Dividends can be used to purchase these life insurance riders, which can add value to a policy.

Increasing coverage

Dividends can be used to purchase additional coverage on a life insurance policy. This can be beneficial for policyholders who have needs that change over time.

Withdrawing cash

Many life insurance policies allow policyholders to withdraw some of their cash value. Dividends can be used to increase the amount of cash that is available for withdrawal.

Dividends are a way that life insurance companies reward their policyholders with a portion of the profits the company makes. Dividends can be used to purchase more life insurance, pay premiums, or they can be received in cash.

The amount of dividends paid out varies from year to year and company to company. There are several things that affect how much a policyholder will receive in dividends, including the type of policy they have, how long it has been held, and the company's financial stability. Policyholders should consult with their life insurance agent or company to learn about the different ways that dividends can be used and to learn more about the best life insurance options for them and their families.


  • Life insurance dividends are not subject to income tax, since it is considered a return of premium. They may be subject to estate taxes if the policyholder dies while owning the policy. Policyholders should consult with a tax advisor to determine how dividends may impact their overall tax liability.

  • Policyholders may choose to receive their dividends in cash, or they may opt to reinvest them into the policy. Some companies may also offer policyholders the ability to use dividends to pay premium costs or to add riders onto the policy.

  • No, you will not receive a 1099 for life insurance dividends. Dividends are not considered to be taxable income.

  • A life insurance termination dividend is a refund of premium that is paid to policyholders upon death or when they cancel their life insurance policy. The amount of the dividend is typically based on the length of time that the policy was in force and the company's ability to pay dividends.

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