There are three different types of companies that sell life insurance. Stock companies, which pay profits to stockholder aft expenses, fraternal's that have a common membership and profits are used to provide extra benefits for the members, and mutual companies that pay excess profits back to the policy holder in the form of dividends. Dividends then are the excess profit a mutual company pays. You will have three options with a company that pays dividends: You can leave them to accumulate interest, but you may have to pay tax on the interest, you can allow them to buy additional paid up insurance, this is the one I usually recommend. This helps increase your death benefit thus allowing for inflation. The third option is using them to reduce premium, thus in some case depending on the dividends paid the dividends will eventually be making your premium payments for you. Dividends are not guaranteed.
Agent Owner, Gilmore Insurance Services, Marysville, Washington State
By IRS definition Life Insurance Dividends are considered a return of "unused premium" and not subject to income tax as they have already been taxed going in as premium.
Mutual companies pay dividends to policyholders as they have no stockholders as owners of the company. The permanent policyholders (not term, not universal life policyholders) are considered the owners of the company and dividends are applied to their whole life policies.
A dividend for a mutual life insurance company is a combination of investment return, positive mortality experience (fewer deaths than expected) and operating expense savings and what is held as surplus by the company. Money beyond what the company needs or projects is returned to whole life policyholders in that form of a dividend. The surplus is what protects the company if for some reason they goof. Most mutual companies have been paying dividends consistently for more than a century.
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Mutual companies pay dividends to policyholders as they have no stockholders as owners of the company. The permanent policyholders (not term, not universal life policyholders) are considered the owners of the company and dividends are applied to their whole life policies.
A dividend for a mutual life insurance company is a combination of investment return, positive mortality experience (fewer deaths than expected) and operating expense savings and what is held as surplus by the company. Money beyond what the company needs or projects is returned to whole life policyholders in that form of a dividend. The surplus is what protects the company if for some reason they goof. Most mutual companies have been paying dividends consistently for more than a century.