How Are Life Insurance Dividends Taxed?

Whole life participating insurance policies occasionally earn dividends. If your life insurance policy earns a dividend, it is considered a return on the premiums you paid for the policy and there is no income tax liability.

Determination of Dividends

Dividends are usually determined annually when the insurance company reconciles its books. When the company does better financially than predicted based on investment income and claims paid out, a dividend is paid to policy owners.

Return of Premium

The Internal Revenue Service considers a dividend to be a return of premium overpayment. Since insurance premiums are generally paid with income that has already been subject to income tax, there is no income tax liability for dividends.

No Guarantee

Dividends are never guaranteed on life insurance policies. There can only be the possibility of dividend earnings.

Participating Policy

The possibility of dividends is only present in a participating whole life insurance policy, which is usually sold by mutual fund insurance companies. Term life insurance policies never earn dividends.

Interest Earned

The interest earned on dividends that are left with the insurance company for investment is taxable as income.

Premium Payment

Dividends can be used to pay the premium or part of the premium for the life insurance policy.

References

• CompuQuotes: "Using Whole Life Insurance Dividends"
• YouBeTheBank.com: "Is Whole Life Insurance a Good Investment?"