Dividends (Insurance)

Example

“Maria received a $340 dividend check from her whole life insurance policy because her mutual insurance company had lower claims costs and better investment returns than expected that year.”

Memory Tip

Insurance Dividends = 'Divide the Surplus' - when the company does well, they divide the extra money among policyholders.

Why It Matters

Insurance dividends can significantly reduce your effective premium costs over time, making participating policies more affordable than they initially appear. For permanent life insurance especially, dividends can help build cash value faster or purchase additional coverage without increasing out-of-pocket costs.

Common Misconception

Many people think insurance dividends are guaranteed investment returns like stock dividends. However, insurance dividends are actually refunds of excess premiums and can vary greatly year to year or disappear entirely if the company's performance declines.

In Practice

John owns a $100,000 whole life insurance policy with annual premiums of $2,400. His mutual insurer pays dividends averaging 4% of premiums over 10 years, returning approximately $960 in total dividends. He uses these dividends to purchase additional insurance, increasing his death benefit to $108,000 without paying additional premiums, effectively reducing his cost per thousand dollars of coverage.

Etymology

From Latin 'dividendum' meaning 'thing to be divided.' In insurance, the term evolved in the 19th century when mutual insurance companies began sharing surplus profits with policyholders who were also company owners.

Common Misspellings

Related Terms

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Other insurance terms you should know

See Also