Dividends Paid On Participating Life Insurance Policies

When you buy a participating life insurance policy you earn dividends on your policy. They are a return of premiums and should not be confused with those earned from ownership of stock. They are not guaranteed. You accumulate them on whole life policies or any participating permanent life insurance policy.

Mutual Life Insurance companies are owned by their policy owners. They have no stockholders. The insurance company sets premium rates by anticipating the costs of contractual obligations, unexpected losses and operating expenses. If there is an excess in earnings, policy owners participate equitably in this surplus.

How Are They Determined?

They are determined by considering the following factors:

• Mortality savings. When there are less death claims than projected.
• Saving on operating expenses. When the operating expenses are lower than anticipated.
• Investment earnings higher than projected. This occurs when earnings exceed amount required for guaranteed death benefit reserves and any other contractual agreements.

Policy loans do affect dividends.

How Can You Use Dividends?

• They can be used to reduce premium. This is a choice that is usually at the time you purchase the policy.
• They can be used to purchase paid up additions. That is to automatically buy additional insurance of the same type as the base policy.
• They can be left to accumulate at interest, based on whatever rate the company is paying at a given time.
• They can also be paid in cash. If you choose this option the life insurance company will send you a check each year.

The Tax Effects.

Because they are a return of premium they are not usually taxable. However, whenever they earn interest and together they exceed the premiums paid they are subject to taxes.

Let us examine how dividends are calculated.