What to Know About Life Insurance Dividends

Reviewed by W&S Financial Review Board
Life Insurance Dividend DefinitionLife Insurance Dividend Definition

Key Takeaways

  • Dividends are common with whole life policies, but some term life insurance policies offer this benefit, too.
  • They're based on an insurer's financial performance, so payouts often vary every year.
  • Although dividends aren't guaranteed, many of the largest mutual companies have a history of consistently paying them.
  • Dividends can make a policy more valuable, allowing you to leave an even greater financial legacy for your loved ones.

When shopping around for an insurance policy, you may see information about a policy's death benefits or cash value, especially if you're considering either term life insurance or whole life insurance. But there's another potential benefit you may want to explore: life insurance dividends.

Dividends can make a policy more valuable, allowing you to leave an even greater financial legacy for your loved ones. Curious to learn more? Here's some of what you need to know about life insurance dividend options.

What Is a Life Insurance Dividend?

A life insurance dividend is a benefit that typically may come with whole life insurance, otherwise known as permanent life insurance.

With whole life insurance, you pay premiums on a schedule. In return, your coverage never expires (except when the policy reaches maturity, at which point you get maturity benefits). Whole life also has a cash value component where part of your premium gets invested. That cash value can grow tax-deferred over the life of the policy.

Some whole life policies pay dividends, allowing you to get substantial financial benefits if your insurance company performs well financially. The company may share profits with policyholders as dividends if it meets financial targets.

Policies that pay dividends are called participating policies. Not every insurer offers dividends - some only have dividend-paying whole life insurance, while others have term life policies with dividends.

You shouldn't choose insurance just for the dividends. But do consider the dividend rates each company declares and how they calculate dividends. Also look at whether dividends are guaranteed for the life of the policy.

How Are Life Insurance Dividends Determined?

Calculation methods vary by insurer. Generally, your insurance company will determine your dividend based on its financial performance, cash flow and expenses, investment returns and mortality, and how many death claims the company paid in a given year.

Your policy coverage will also determine how much of a dividend you receive. A higher coverage amount generally will yield a higher dividend payout. Dividends typically are paid annually on the policy's anniversary. However, as this benefit is based on the insurance company's financial performance, it can vary every year.

What Is a Dividend Scale?

A dividend scale is what insurers use to determine dividend interest rates and payouts for policyholders. The scale includes information regarding the life insurance dividend you could receive in the current calendar year and potential dividends you could receive in the future if factors such as expenses, investment returns and mortality experience remain as anticipated. Insurers sometimes update their dividend scale when there's major economic volatility or market factors significantly change their financial outlook or potential performance.

An insurance company's dividend scale should be accessible on its website. If not, you can call customer service and ask for a copy.

How Are Dividends Taxed?

Regardless of the amount you receive, life insurance dividends have one major advantage over dividends derived from other asset classes: They generally aren't taxable as income. That's because the IRS generally views insurance dividends as a return of premium.

However, insurance dividends may be taxable if they exceed the premiums paid into the policy. This can occur if the policyholder has withdrawn some of the policy's cash value, taken out a loan against the policy or surrendered the policy.

If your life insurance policy is considered a modified endowment contract (MEC), most dividends you earn will be taxable, with the exception of dividends used to pay the policy's premiums or to purchase paid-up additional insurance or extra whole life coverage. With a MEC, the IRS will tax life insurance dividends that represent a gain in the contract, which is calculated based on the difference between the policy's cash value and any premiums paid into the policy, minus any tax-free amounts or withdrawals the policyholder previously took or received.

Are Dividends Guaranteed?

Life insurance dividends may or may not be guaranteed depending on your policy and your insurer's financial performance. When companies do well, they generally issue a dividend. During down years, more likely they won't.

Just as you would with any investment, it's important to do your due diligence and understand if a company has consistently paid dividends. You'll want to get information on the insurer's credit rating. In general, it's wise to stick with insurers that have at least an A credit rating as this indicates their financial strength.

Typically, A++ and AAA are considered the highest ratings, but this varies by credit agency.1

If the insurance company is publicly traded, you can also look for news coverage about its quarterly financial filings and annual performance to determine past dividends the company has paid. This can also help you learn whether it has ever cut its dividend altogether in a specific year or over consecutive years.2 Many of the largest mutual insurance companies have 100-year histories of consistently paying dividends.

If you have a whole life policy, you are likely paying higher premiums for access to your policy's cash value as well as this added — though optional — benefit. Understanding a potential insurer's financial health could help you better assess whether getting dividend-paying whole life coverage with them is worth the purchase.

How Do Outstanding Loans Affect Dividends?

If your policy has cash value, this financial flexibility comes with several advantages, such as the ability to withdraw from the policy or take out a loan against it while you're still alive.

This can, however, also be considered a potential drawback. Depending on the interest calculation method your insurer uses, borrowing from your policy will likely reduce your dividends. If your insurer uses the direct recognition method to calculate dividends — meaning it may decrease or increase dividends based on loaned funds it couldn't invest — then your dividend is likely to be lower.

Everyone has different reasons for borrowing from their life insurance policy, such as paying off debt or using the money to invest in real estate. However, it's best to be prudent when taking out a loan against your policy. This is because the more you borrow or withdraw, the less your beneficiaries could receive. It also could diminish the ultimate value of getting dividends in the first place. That may make your policy less valuable than it would have been otherwise.

5 Life Insurance Dividend Options

You can use life insurance dividends in several ways. Here are five options you could choose from.

1. Take a Dividend as Cash

Cash is one of the most straightforward ways to collect a dividend payment. With this option, your insurance company will routinely send you, the policyholder, a check for the dividend amount. You can then cash it and do whatever you wish with the money.

2. Reduce Your Premium

You can use your dividend payout to cover your policy premium if your annual dividend is higher than the premium.3 Depending on the size of your policy and dividend payouts over the life of the policy, you may reach a point where dividends alone cover your premium, which will effectively eliminate your out-of-pocket costs for owning a dividend-paying whole or term life policy.

3. Reduce an Outstanding Loan Balance

If you've taken out a loan against your policy, you can use annual dividends to pay down the loan. This might be a worthwhile option if you're focused on leaving as much money in the policy as possible so that your beneficiaries get the maximum death benefit available to them.

4. Earn Additional Interest

You can choose not to withdraw or apply your dividend using the methods previously mentioned. Instead, you can leave the money in your policy account to accumulate and earn interest at a rate your insurer will determine. You then can withdraw these dividends at your own discretion without reducing your policy's cash value or death benefit. One downside to this life insurance dividend option is that the interest will be taxable and may be subject to income taxes in the year you earn it.

5. Purchase Additional Paid-Up Insurance

You can use dividends to buy additional paid-up insurance. This additional whole life coverage allows you to provide even more financial protection for your family at no or very little added cost to you. Like your original policy, paid-up insurance also may include dividend payouts and a cash value component that offers greater financial flexibility to withdraw from or borrow against the policy.

Another benefit of paid-up insurance is that you can increase your coverage without having to undergo another medical exam or provide more details on your health history. Life insurance typically gets more expensive as you age, so using this approach could help you secure additional coverage without having to worry about these barriers or potentially higher costs.

Is Dividend-Paying Life Insurance Right for You?

The intention behind life insurance is to reduce future financial burdens for your loved ones after you're gone. Dividend-paying life insurance, or a participating policy, offers an additional benefit that can help you achieve this goal.

The rules and rates around dividends vary by insurer. This benefit also isn't guaranteed. Based on an insurer's investment returns, expenses and the number of mortality claims it has paid out in a given year, you may get a reduced premium or not receive one altogether.

However, this shouldn't deter you from getting a policy, especially if you can afford whole life coverage. Whole life coverage also comes with other benefits, such as cash value, guaranteed premiums that never change over the life of the policy and coverage that never expires as long as you continue to pay your premiums. All these benefits are reason enough to consider getting whole life insurance. The annual dividend payout is just an added bonus.

If you're ready to purchase a policy or simply want to learn more about how coverage could fit into your personal financial situation, reach out to a financial professional for assistance and receive your free quote!


  1. How to assess the financial strength of an insurance company. Insurance Information Institute. https://www.iii.org/article/how-to-assess-the-financial-strength-of-an-insurance-company.
  2. Whole life dividend rate history: 1995 to 2020. GBS Insurance and Financial Services, Inc. https://www.gbslife.com/media/29249/dividend-rate-report-2020.pdf.
  3. Life insurance dividend payment options. U.S. Department of Veterans Affairs. https://www.va.gov/resources/life-insurance-dividend-payment-options/.

Related Life Insurance Articles


Information provided is general and educational in nature, and all products or services discussed may not be provided by Western & Southern Financial Group or its member companies (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.