What Is Dividend Paying Whole Life Insurance?

In this article...
  • Get the facts about dividend paying whole life insurance. Discover its benefits and drawbacks so you can determine if it's the right coverage for you.

All life insurance ensures that your loved ones have access to money to cover expenses after you die, but some policies also provide benefits over your lifetime. Dividend paying whole life insurance is one example. By learning about its features, benefits and drawbacks, you can decide if this form of life insurance is best for your needs.

Dividend Paying Whole Life Insurance Defined

Dividend paying whole life provides a death benefit after you die and builds up a cash value while you're alive. Unlike term life, the insurance doesn't expire; it remains in effect throughout your life if you continue to make premium payments. Each year, a policy that offers dividends may pay out a bonus called a dividend. Normally, the dividend is a percentage of the value of a policy. For example, the life insurance company may offer a dividend of 5%, which would be $5,000 on a $100,000 policy.

Which Type of Life Policy Pays Dividends?

Whole life is the form of life insurance most likely to pay dividends. Other types of insurance that build up a cash value, such as universal and variable life, normally don't offer dividends.

Does Whole Life Insurance Earn Dividends?

Whole life is generally the only type that pays dividends. However, not all whole life policies offer this benefit. Policies that pay dividends are sometimes called participating policies. Those that don't are non-participating.

Benefits of Whole Life With Dividend Payments

Policies that pay dividends have many benefits, such as:

  • Faster growth of cash value. You can usually use the dividend to increase the balance of the cash account linked to your life insurance policy to increase its value.
  • Access to cash. Most life insurance companies let you take the dividend as a cash payment that you can use to supplement your income, cover an expense or invest.
  • Ability to buy more insurance. Often, insurers let you take the premium payment and buy a second permanent life insurance policy to increase the death benefit available to your loved ones.
  • Reduced premiums. You may be able to apply the dividend to your monthly premiums so that you pay less or can stop paying for a set period.
  • Loan size reduction. If you took out a policy loan against your life insurance, you can usually apply the dividend as a payment.
  • Tax-free. The IRS generally considers dividends as a return of premiums paid. As a result, you're unlikely to need to claim them on your income tax if you apply the money to your policy or take a cash payout.
  • No impact on the face value. Accepting a dividend doesn't decrease the death benefit of your policy the way taking a cash withdrawal can.

Drawbacks of Whole Life with Dividend Payments

Some disadvantages to dividend-paying policies are:

  • Greater cost. Premium payments for dividend paying whole life are usually higher than non-participating whole life policies.
  • Not guaranteed. Life insurers usually only pay dividends if their companies perform well during the previous fiscal year. If a life insurance company struggles financially, you may not receive a dividend.
  • Variable size. Life insurance companies set new dividends annually. The amount could be more or less than the previous year, making it hard to rely on dividends to cover regular expenses.
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