With so many types of life insurance policies available, it can get confusing trying to find the best coverage option available. Do you go with term life or whole life? Term is usually the least expensive, but whole life is provides many advantages too. Whole life insurance can provide you level premiums, a guaranteed death benefit, and dividends to help you in a variety of ways.
Today, we’re going to go over some important considerations for shoppers looking into policies with dividends. We’ll also answer some frequently asked questions such as: What are Life Insurance Dividends? How are life insurance policy dividends taxed? How does dividend paying whole life insurance work?
What are Dividends in Life Insurance?
Life insurance dividends definition: A dividend is a payout from the annual surpluses of the life insurance company. It’s a portion of the carrier’s profits.
Some whole life insurance policies provide policy owners dividends and some do not. These dividend payouts are a great thing. However, you need to know your options, how life insurance dividends work and who offers them.
Mutual Life Insurance Companies Pay Dividends
Not all life insurance companies pay dividends. Not all whole life insurance policies pay dividends. So who pays and what is the source of life insurance policy dividends?
Only mutual life insurance companies will pay out a dividend to the policy owners. Mutual companies are life insurance companies that are owned by the policyholders. Stock companies are owned by shareholders.
When it comes to whole life insurance dividends, you have several options on how you can use them.
Popular Dividend Options
Let’s first look into the most popular dividend options that policy holders can choose from.
1. Policy Loan Repayment
2. Cash Payment
3. Paid Up Additions
4. Buy 1 Year Term
5. Accumulate Interest
6. Reduce Future Premiums
Are Life Insurance Dividends Taxable?
How are life insurance dividends taxed? The dividends you earn from your participating whole life insurance policy are not taxed by the IRS. Why are the dividends not taxed as income?
The simple answer is that your life insurance dividends aren’t like traditional “dividends.” Dividends on life insurance policies are not like dividends from a mutual fund or stock.
The life insurance dividends are a portion of the insurer’s profits- the company’s profits were made from your premiums. So the IRS looks at these profits like they’re a refund or return of premium. Technically, it isn’t a return of premium. It’s a return of the excess life insurance premium and that is why it isn’t taxed. Basically, your life insurance carrier gets all of the life insurance premiums from the policy holders and invests them. If their expenses and mortality is favorable, the carrier will declare a dividend.
>>Related: Is life insurance taxed?
Life Insurance Dividends
Hopefully this article provided you the information you need about dividend options for whole life insurance. The bottom line is that the price for a participating whole life insurance policy is typically higher compared to at non-participating policy. Term life will be less expensive than both participating and non-participating whole life.
Please contact us if you have questions about your life insurance policy or your dividends. We’d be happy to help you. Life Insurance Blog is an independent life insurance broker. This means we have access to more than one company. In fact, you’ll get quotes and access to over 60 of the best life insurance companies in the marketplace.
Want to learn more about whole life and cash value? Make sure to read our best cash value whole life insurance companies review.