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  • What are life insurance dividends?
  • July 18, 2013
  • Tony Steuer

    By Tony Steuer, CLU, LA

    A “dividend” on a life insurance policy is unlike the dividend you receive on a share of stock or a stock mutual fund. Essentially, they are funds earned from life insurance policies; however, not all policies earn dividends.

    For tax purposes, dividends are considered a return of a portion of the premiums paid for the policy.

    Basically, the insurance company receives the premium payments, invests the funds into the stock market and then pays a dividend, which is based on the performance of the investment.

    If company expenses are low and investments are high, life insurance companies declares a dividend, which is rewarded to the policy owner.

    If mortality and expense experiences are favorable (i.e., the company keeps expenses down and the investments do well), the company declares a dividend, which returns a portion of the surplus to policy owners.

    Only participating policies pay dividends, which are priced to do so. Because of this, the company charges a higher premium; but, hopefully, returns a portion of it back to the policy owner.

    Dividends have always been a controversial topic within the life insurance industry, but it is advised to have a basic understand of what there are and how they function in order to determine if they are right for you.

    In the U.K., life insurance policies are sold “with profits” (i.e., with dividends), and “without profits” (i.e., no dividends). As you might expect, policies that pay no dividends are less expensive.

    However, both in the U.S. and U.K., over long periods of time the participating policy issued by a reputable company stands a very good chance of outperforming a nonparticipating policy.

    Although both term and permanent policies can be participating, as a practical matter dividends are suitable only for permanent policies, with their long in-force horizons.

    Typically, when the policy is purchased, the policy owner is allowed to elect a form of dividend options, and most insurers allow the dividend option to be changed once the policy is in-force. The policy owner can also elect a combination of options.

    Usually, dividends are paid on the anniversary of the policy and one year after the dividend in earned, which can be rewarded in a variety of ways.

    One of the common methods is to use the dividends to purchase paid-up additions to the policy, which also earn dividends. It is also fairly common to use dividends to reduce future premiums.

About Tony Steuer

Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.

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Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.

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