Whole life insurance policies are either participating or non-participating. If participating, policy owners can earn dividends based on the insurance company’s financial performance.
In this guide, we’ll explore how dividend-paying whole life insurance works, how much it costs, and the pros and cons of this type of policy.
Table of Contents
- What Is Dividend-Paying Whole Life Insurance?
- How Whole Life Insurance Dividends Work
- Rates for Dividend-Paying Whole Life Insurance
- Pros & Cons of Life Insurance with Dividends
- Is Dividend-Paying Whole Life Insurance for You?
- Dividend-Paying Whole Life Insurance FAQs
Not sure what whole life insurance is? Here’s a good place to start: A Guide to Whole Life Insurance.
What is dividend-paying whole life insurance?
Whole life insurance is one type of permanent life insurance.
Participating whole life insurance (also called dividend-paying) is still a regular whole life policy. The only difference is that you’ve opted to share in the company’s overall profits, which come in the form of dividends.
Characteristics of all dividend-paying whole life policies include:
- Lifelong coverage
- Fixed rates
- Guaranteed rate for cash value component
- Guaranteed death benefit payout
- May earn annual dividends
Dividends are generally not guaranteed and can vary year after year based on the company’s financial performance. Payouts will decrease or even cease if a company has a bad year.
Non-Participating vs Participating Life Insurance
Whole life insurance policies can be either participating or non-participating, both offer guaranteed death benefits, fixed premiums, and a cash value that accumulates interest at a guaranteed rate.
The primary difference is that non-participating policies don’t earn dividends. However, these policies tend to have lower premiums as a result. Consider the quotes in the table below.
|Monthly Quotes for a $100,000 Life Insurance Policy, Healthy Male Age 40
|Participating Whole Life
|Non-Participating Whole Life
How Whole Life Insurance Dividends Work
Typically, insurance companies declare dividends annually. Because they’re determined by financial performance, they cannot be guaranteed.
Companies calculate dividend shares differently. In general, three factors determine what, if any, will be paid:
- Mortality rates: If fewer policyholders pass away than expected, the company has saved money on death claims, which can be passed on through dividends.
- Expenses: If the company operates more efficiently and spends less than expected, there will be savings to pass on.
- Investment returns: If their investments perform better than expected, there will be savings to pass on.
Life Insurance Dividend Options
As policy owner, you decide how to use your dividends. There are seven potential options:
- Cash payout
- Put them towards premiums
- Use them to buy additional paid-up policies
- Leave them alone to earn more interest
- Use them to buy term insurance
- Put them towards paying your policy off sooner
- Use them to pay policy loans
Rates for Dividend-Paying Whole Life Insurance
Premiums for a participating or dividend-paying whole life insurance policy are higher than for a non-participating policy. This is due to the potential dividends these policies can generate, providing added value over time.
|The Cost of Whole Life Insurance: Participating vs Non
|Applicant: A healthy 35-year-old male who doesn’t use tobacco.
|Non-Participating Monthly Rates
|Participating Monthly Rates (dividend-paying)
The table above compares non-participating vs participating policy rates.
However, the cost of your life insurance policy isn’t determined solely by the type of coverage you purchase.
It’s also significantly influenced by personal factors such as age, overall health, and lifestyle habits, including tobacco and alcohol use.
See what you’d pay for life insurance
Pros and Cons of Life Insurance With Dividends
Understanding any financial product’s pros and cons is essential to make an informed decision.
- Dividend-paying life insurance can create an additional income stream if you receive dividends as cash or invest it.
- It can increase the death benefit amounts your beneficiaries receive if you buy paid-up additions.
- You can reduce your premium payments if you decide to put your dividend earnings toward your policy.
- Whole life insurance ensures coverage for your entire lifetime.
- Whole life insurance has many guarantees.
- Dividends are not guaranteed.
- Premiums for these policies are among the highest in the life insurance market.
Is dividend-paying whole life insurance right for you?
If you need permanent coverage, dividend-paying whole life insurance is a great option.
Premiums for participating policies may be slightly higher than those for non-participating, but earning dividends can offset the price difference.
Dividends aren’t guaranteed, but it’s worth noting that many top-rated insurance companies have an exceptional track record.
For example, MassMutual advertises that they’ve paid dividends to eligible participating policy owners every year since 1869. When deciding on an insurance company, learn about its dividend-payout history.
Determining if dividend-paying whole life insurance is the right choice for you involves careful consideration of your financial situation and insurance needs.
Here are a few key questions you should explore:
- Duration of coverage: Do you need life insurance coverage your entire life? Or do you primarily need it for specific life events?
- Financial commitment: Can you afford the premiums of a dividend-paying whole life insurance long term?
- Financial goals and priorities: Could your income be better used elsewhere? For example, weigh it against investing the difference in cost between a term life policy and a whole life policy in other financial vehicles such as stocks, bonds, or retirement funds.
- Risk tolerance: Are you young and more comfortable with higher risk for potentially higher returns from other investment options?
Working with an experienced life insurance broker, like Quotacy, can make the process easier. We have access to the products of many different insurers and will advocate on your behalf to find the best policy and price for your unique situation.
If you’re unsure about which type of insurance is right for you, contact us for a free needs analysis.
FAQs: Dividend-Paying Life Insurance
Permanent life insurance is complex, so we understand if you have questions. Here we answer some of the most common questions we receive.
Are dividends from life insurance taxable?
No. Dividend earnings are not taxable as long as they don’t exceed the total premiums you’ve paid into the policy.
But if you leave dividends with the insurance company to earn additional interest, interest earned on accumulated dividends is generally taxable in the year credited. It may be subject to income tax withholding.
Can you withdraw dividends from life insurance?
You can “withdraw” dividends from a participating policy in the following ways:
- Choose to get the dividend earnings directly as cash.
- Decide to use your dividends for paid-up additions and later surrender them in exchange for their cash value.
- Leave the dividends with the insurance company to gain extra interest and withdraw these funds whenever you wish.
Can dividends increase what my beneficiaries receive?
Yes, there are a few options:
- Paid-up additions are mini life insurance policies that earn dividends and accumulate cash value. Your beneficiaries would receive the death benefits from your primary policy and any additional coverage bought upon your death.
- Leaving your dividends to earn interest with the insurance company also increases the total amount your beneficiaries receive.
- If you choose to purchase term life insurance with your dividends and die during the term, beneficiaries receive death benefits from the whole life and term life policies.
Does term life insurance pay dividends?
No, term life insurance policies do not earn dividends.
What should you look for in a dividend-paying life insurance company?
Many top-tier insurers offer dividend-paying life insurance policies. Although everyone has their own opinions, here are key elements to focus on:
- Company structure: Considering mutual companies over stock companies might be beneficial.
- Financial strength: Choose a highly-rated insurer renowned for its financial stability, a solid track record of fulfilling claims, and a history of strong financial performance.
- Dividend-paying history: While past performance does not guarantee future dividends, a consistent track record can be a good indicator.
- Flexibility: Check the flexibility the insurance company offers regarding using dividends.
Request Whole Life Insurance Quotes Through Quotacy
There are many different life insurance coverage options. A participating whole life insurance policy offers advantages like dividend-earning potential, fixed premiums, guaranteed cash value growth, and financial protection for your beneficiaries.
Contact us here at Quotacy for personalized whole life insurance quotes. As an independent broker, we work with over 25 of the nation’s top insurance companies and can help find a policy that fits your needs and budget.
Note: Life insurance quotes used in this article are accurate as of August 22, 2023. These are only estimates and your life insurance costs may be higher or lower.