Disaster mustn’t need to strike in order for you to collect money from your insurance company. These annual payouts, called dividends, can occur under happier circumstances.
A mutual insurance company, which is owned by its policyholders, pays dividends on policies. Non-mutual insurance companies may pay an insurance dividend on participating policies, which are contracts that pass along surplus money to policyholders.
When a company pays out fewer claims than expected, or spends less than anticipated on agent commissions, office expenditures and advertising, current policyholders may receive a dividend or part of their death benefit.
For example, if the insurer calculates its premiums assuming that it will earn 4 percent interest on its reserves, and the company actually earns 8 percent, the participating policyholders could receive a dividend.
“Generally, dividends increase the longer you hold the policy,” says Brian Ashe, President of Brian Ashe and Associates, Ltd. in Lisle, Ill., and Treasurer of the Life and Health Insurance Foundation for Education (LIFE). “Most companies offer five options for dividends. You can take them in cash, apply them to succeeding years’ premiums, buy paid up additional life insurance with them, accumulate them at interest or buy as much term life insurance as the dividend will buy, based on your age.”
Dividends are usually tax-free until the total amount of cash a policyholder has taken from the policy, including the dividends, exceeds the premiums he or she has paid. You can find more information about your insurer’s dividends online. For example, MassMutual provides information about the benefits of dividends and dividend taxation on their website.
A dividend provides the customer incentive to remain loyal and renew coverage with their their insurance provider. But who wouldn’t appreciate a little extra cash at the end of the year?