How to Calculate Life Insurance Dividends

Life insurance dividends are paid by mutual life insurance companies and some stock life insurance companies. Dividends in a policy are generally associated with whole life insurance. This type of insurance overcharges in the early years of the policy. Dividends are then paid to the policy, initially, as a refund of overpaid premiums. When the dividend amount exceeds the premium amount, the dividend is considered a gain in the policy. When purchasing a whole life insurance policy with a dividend option, it is a good idea to understand how life insurance dividends are calculated.

Instructions

1. Get a copy of your life insurance policy illustration. You will need a copy of your whole life insurance policy illustration. The illustration will give you details about the policy that are not available or may not be very detailed in the actual contract. Life insurance policy illustrations are always available upon request from your insurance company. Make sure you ask for a dividend scale or table with your illustration.

2. Look for the dividend table, illustration or scale in your policy illustration. This is normally going to be in the back of the illustration. There will be several assumption tables including the guaranteed column which shows no dividend accumulation, one or more mid-point assumptions and the current assumption column that shows the dividends currently being paid to the policy.

3. Look at the "current assumption" column to see what the current dividend rate is. All life insurance companies use proprietary calculations to determine the dividend payment. But, in general, the dividend is calculated based on favorable mortality experience (less people die than expected) and lower than expected operating costs combined with favorable investment experience (higher than expected, or as expected investment returns). Your illustration should also show a column that lists "paid up additional insurance". This will show you the effect of dividends on additional insurance that the dividends have been used to purchase. This additional paid-up insurance can be cashed in at any time.

References

• "Practicing Financial Planning for Professionals, practitioner's 10th edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
• "Ernst & Young's Personal Financial Planning Guide, 5th edition"; Martin Nissenbaum, Barbara J. Raasch, Charles L. Ratner; 2004