Dividend-paying whole life is a type of life insurance policy that doesn’t expire and pays an annual bonus to policyholders if the insurance company overperforms financially. Policy dividends can be paid by check, applied to your future premiums, or used to buy additional coverage. Whether or not your whole life insurance policy pays dividends depends on your insurer.
What are life insurance dividends?
Dividends are payments permanent life insurance owners can get from their life insurance company each year. They’re essentially a partial return of your premium payments.
The amount you’re paid is a percentage of your policy’s value — the more expensive your policy is, the higher your dividends will be. That percentage changes every year based on your insurer’s financial performance.
For example, if you have a policy with a cash value worth $100,000 and are granted a 6% dividend this year, you’ll receive a payment of $6,000. Next year, if your policy is worth $105,000 but your insurer doesn’t perform as well, you might only get a 2% dividend of $2,100.
Dividends are only paid by some insurance companies and aren’t guaranteed each year.
Which types of life insurance pay dividends?
Permanent life insurance policies offer the potential to earn dividends — term life insurance policies don’t. Your permanent life insurance policy can be either participating or non-participating.
Participating policies pay dividends to policyholders and are usually sold by mutual insurance companies. Mutual insurance companies are owned by policyholders.
Non-participating policies don’t pay dividends, even if the insurance company makes a profit.
How does dividend-paying whole life insurance work?
Dividend-paying whole life works like traditional whole life insurance: You pay premiums for lifelong coverage and a cash value savings feature you can access while you’re alive. The main difference with dividend-paying policies is that if your insurer makes a profit — due to its investments and continuing business — you get an annual bonus.
When you’re shopping for coverage, the life insurance agent you’re working with will give you a policy summary that projects how much you can expect to earn in dividends every year. Projections aren’t guaranteed, but they’ll give you an idea.
There are a few ways to collect your dividend payments. You can change your preferred method at any time based on your needs:
Accumulate at interest: The payment stays in an account with the insurer and earns interest annually.
Cash: The insurer pays your dividends by check.
Paid-up addition: You use dividends to buy additional whole life insurance coverage.
Premium reduction: The payment goes toward your policy premiums, so that they’re reduced or covered entirely for a limited time.
For most people, a cash payment is the simplest option. It’s rarely taxable, and you can spend the money as needed instead of putting the entire payment into a single expense.
Best dividend-paying whole life insurance
2024 Policygenius award winner
MassMutual
4.9
All 50 states
Why we chose it
MassMutual’s whole life insurance plan provides a lifetime coverage option that builds cash value with the potential to earn dividends.
Pros and cons
Pros
Strong financial stability ratings
Higher potential for dividends for whole life policyholders than many competitors
Good customer satisfaction ratings
Cons
High term life premiums
Term life not available through Policygenius
MassMutual pays out higher dividends on average when compared to some of its competitors. The company is rated A++ according to AM Best, and it has high customer experience compared to other insurers. If you’re looking for a dividend-paying whole life policy, MassMutual is a reputable option.
Methodology
Why you can trust our picks
Our recommendations are based on internal and external expert analysis, as well as our Policygenius Life Insurance Price Index, which uses real-time data from leading life insurance companies to determine pricing trends. When reviewing a life insurance company, our editorial team uses a proprietary scoring rubric with five factors — price, policy details, financial strength, transparency, and customer experience — to assign an unbiased rating between one and five stars. These ratings are also taken into consideration as part of our company recommendations. We don’t get paid for our reviews.
Our reviews and recommendations can help you find a reliable insurer for your family’s financial protection, but the best life insurance company for you depends on multiple factors. A licensed agent at Policygenius can support you during the application process to ensure you get the right coverage for your circumstances at the most competitive price.
Are life insurance dividends taxable?
Dividends from a life insurance policy aren’t taxed if you receive the payout in cash or apply it to your policy. Because the dividends are only paid when your provider has a financial surplus, the IRS treats a cash payout as a refund of excess premiums you paid.
If the amount of money you get in dividends is greater than the total amount of premiums you’ve paid into your policy, then the additional amount is taxed as income. Should you opt to leave your dividends with your insurer to earn interest, any interest earned is also taxed as income.
Should you get dividend-paying whole life insurance?
If you need whole life insurance and can afford the high premiums, getting a whole life insurance policy that pays dividends will help you maximize your policy benefits. Dividends can help you cover premium payments, and you’ll get cash or coverage that a non-participating policy couldn’t offer.
Whole life insurance rates are significantly more expensive than term life insurance rates, so these types of policies are best used by high-net-worth individuals who are looking for an additional investment vehicle, or people with a specific need for lifelong coverage. And because not every insurance company sells participating policies, looking exclusively for insurance that pays dividends will limit your coverage options.
Dividends aren’t the only factor to consider when choosing life insurance. The best company for you will have a strong financial standing and cover all of your family’s financial needs. You can connect with a Policygenius agent for free to compare top insurers and find the right policy for your needs.
