A dividend is a payment made by the life insurance company to owners of whole life insurance policies once a year on the policy anniversary. Dividends are meant to give owners a way to share in profitability by the company. The amount of total dividends paid depends on the company performance, prevailing interest rates, and the amount of cash value in the policy. The company will announce a “dividend rate” each year that will be paid to policy owners.
Dividends will significantly increase the rate of cash value accumulation in a whole life insurance policy, or can be paid directly to policy owners as income. The dividend is in addition to the guaranteed rate of cash value growth that each whole life policy provides.
Whole life insurance pays dividends if it is a “participating” policy. This refers to the participation of owners in the positive effects of company earnings. Not all whole life insurance policies are participating, however the majority of policies from major life insurance companies will be participating and do pay dividends, as this is a competitive advantage that many companies use to attract clients. A non participating policy may be less expensive on an annual basis, but it will not enjoy the same type of long term value in terms of return on investment.
When a whole life insurance policy is illustrated, usually at least two values are shown. The first is the guaranteed minimum value, which shows how the cash value will grow if all premiums are paid, no loans are taken, and no dividends are paid. The second will be the value of the policy with estimated dividend payments, which are estimated at the current dividend rate being paid by the company. The dividend value can then be illustrated with the dividend being used to purchase additional paid up life insurance, used to pay premiums, or paid directly to the owner as income.
The type of policy an owner ultimately chooses (participating or nonparticipating) depends in part upon the ultimate use of the policy. If you as a prospective owner see the possibility that the cash value will be accessed as income or loans, or if you can afford to pay slightly higher premiums in the beginning years of the policy for the advantage of having the policy “paid up” or self sustaining with dividends at some point in the future a participating dividend paying policy will be most advantageous. If you prefer lower premiums and only foresee the need for the policy to continue for the whole life of the insured for the lowest annual amount, a nonparticipating policy may be for you. To read about whole life insurance as an investment, read our article here.
It is wise to compare the cash value accumulation outcomes of both participating and nonparticipating policies when you are considering the purchase of a whole life insurance policy. By seeing the actual illustration it can give more prospective on how the dividend will help pay for the policy and provide income, or how much less the premium payments may be on a non dividend paying policy. To illustrate both participating and nonparticipating policies please enter your zip code in our quote comparison tool and you can view quotes for both forms of policies.