Information on Dividend Paying With Whole Life Insurance

A whole life participating insurance policy is a dividend paying type of life insurance. Mutual fund companies most often sell participating policies, but there are some stock insurance companies that also sell them.

Dividend Guarantee

There is no guarantee that a policy will earn dividends.

Annual Determination

Dividends are a return on the premiums paid. The insurance company determines at the end of each year if a policyholder has paid too much in premiums based on overall investment returns and claims paid. If the company does better than anticipated, the participating policyholder will receive a dividend or return on the premiums paid in.

Tax Liability

There is no income tax liability on dividends because they are a return on premiums, and companies pay premiums with after-tax dollars.

Interest Earned

When the policyholder leaves the dividends with the insurance company for investing, the interest earned as a result of the dividend investing is subject to income tax.

Additional Insurance

There are a number of ways that policyholders can utilize dividends. They can purchase paid-up additions to the life insurance policy with dividends earned. The policyholder may elect to purchase single premium one-year term insurance with dividends. Policyholders can then use these dividends to pay the premiums in part or in full on the insurance policy on which they were earned.

Cash

The policy owner may also simply choose to receive the dividends in cash.

References

• Whole Life Insurance: Dividends Can Enhance Performance