Life Insurance Dividends Options – The Ultimate Guide

Learn about the do’s and don’ts when it comes to Life Insurance Dividend Options.

Are you worried about your life insurance policies and the dividend options? If so, then you have come to the right place. It is highly important to have a detailed understanding of the dividend-paying life insurance options. Therefore, continue reading this thorough guide to get all the answers to questions.

So, what are you waiting for? Let’s dive in!

What are Life Insurance Dividends?

Life insurance dividends are also recognized as a compensation of surplus value and are quite similar to the dividends you get from other forms of investment, where you acquire a percentage in the profits of the company you invested in.

Aspects like the type of life insurance are quite important to know especially when you want to find out whether your policy pays out dividends or not.

Active life insurance policies generally do pay dividends. However, a lasting insurance can either be participating or non-participating. In order to acquire dividends that come with a life insurance policy, it is important for you to sign up for a participating policy which is usually presented with a life insurance.

What are Dividend Options?

In order to fully understand as to what are dividend options, we need to first know its definition. In simple terms, a dividend is the amount of money that your life insurance company gives to you.

On the other hand, a dividend option indicates the decision you can make regarding how you want to get the dividends in accordance with the company’s life insurance policy.

In simpler words, dividend options are the different ways through which insureds can choose to receive dividends. The dividends can be obtained via cash payments, as increments to the policy’s cash value, or as paid-up additional insurance.

The Four Main Life Insurance Dividend Options

The contribution to the growth and development of dividend options by an insurance company results in functionality and adaptability of whole life insurance. There are four main life insurance dividend options. Let us look at these four options that you can find in almost every policy available regarding life insurance policies.

Moreover, we will also look at a detailed overview of some other one-of-a-kind dividend options accessible at just a few insurers.

There are numerous alternatives when it comes to utilizing whole life policy dividends. These options can vary from a cheque in your mailbox to gaining extra insurance.The four main life insurance dividend options are:

  • Cash Payment
  • Paid up Additions
  • Pay premium or Reduce
  • Interest

The above given whole life insurance dividend options did not emerge and develop at the same time. However, their presence and continuation as significant options spreads over a very long period.  These days, essentially every life insurer providing a dividend-paying life insurance incorporates all these four options.

Cash Payment

There is not much rocket science behind this option and it is quite clear. The insurance company will write you a cheque for the dividend on an annual basis. The amount is directly given to you i.e. the policyholder and after you have received it, you can use the cash for whatever purpose that you wish to. Moreover, it must be known that dividends are viewed as a premium refund. Thus, upon receiving it as cash, it is not taxed.

This tax policy is relevant till you satisfy the cost grounds of your policy. For example, if you have a life insurance policy for a total of 20 years with $80,000 as your cost basis, and you go for a cash payment dividend option, then, the moment you get $80,000 in cash dividends, your coming cash dividends will be taxable. Furthermore, once the cost basis is met and satisfied, any amount taken from the policy will also be taxable.

You will not face any instantaneous taxable issue after receiving the dividend in cash because of the U.S. Tax Code policy which categorizes the dividend amount on participating life insurance policies as a compensation of premiums paid. This is due to the fact that the dividend paid in cash is basically lowering the tax grounds built up by your installment of premiums.

Ultimately, however, choosing the option for dividends paid in cash can result in the elimination of the cost basis of the entire life insurance policy.  Thus, all dividends paid will carry income tax outcomes to the policyholder in the future.

Paid Up Additions

Paid Up Additions are smaller, policies that improve your initial policy, thus, greatly boosting the cash value. When you select this option, you choose for the insurance company to utilize your dividend money to pay for paid-up additions. Thus, choosing this option will allow your dividend to create the highest long-term value.

Paid up additions instructs the insurance company to take the yearly dividend and purchase paid up additions with it. They are tiny whole life insurance policies that connect to a main whole life policy.  They earn dividends on their own and have instant cash value.

Moreover,  this option makes sure that you receive maximum profit in terms of premiums producing cash value. In other words, if you are looking to increase the profit on premiums then the paid up additions should be the ideal life insurance dividend option for you.

Pay Premium or Reduce

Upon selecting this life insurance dividend option, the insurance company will just utilize your dividend to pay some or all of your annual premium. Choosing this option includes opting for an alternate option if your dividend is greater than your premium. However, you will have to pay according to the normal policies if your dividend is less than your premium.

Deciding to decrease or pay the premium with the profit implies that the policyholder decides to pay a fraction or the entirety of the premium due with the profit. On the off chance that the dividend payment is less than the premium due, the policyholder should pay the remainder of the premium either with cash using cash on hand or with money esteems from the entire life insurance policy. It is quite frequent for the policyholder to pay with cash based money.

When the dividend payment rises to or surpasses the expected premium sum, the profit generated can pay the whole premium due and you do no’t have to pay anything to the arrangement with any cash. It’s pretty frequent to see more seasoned whole life insurance policies utilizing this alternative. Thus, as a policyholder, you can keep your death profit without paying any premium on the life insurance tactics.

Selecting this option does have some drawbacks. One of them is that the insurance company will need the policyholder to change the payment frequency to that on a yearly basis. This policy is quite advantageous and important for all those who pay premiums under some other frequency because it could result in a cash flow problem.


This option forms an account for your dividends that involve interest, and the interest rate can be altered annually. This account is solely based for dividend payments. Furthermore, this account gains no advantage from the other tax absolved dividend options. In addition to this, you also cannot decide to include other funds when you observe that the interest rate is good or for any other reason.

The choice to aggregate at interest implies the insurance agency puts the profit installment in a fascinating bearing record and adds interest to the record every year. The insurer sets the financing cost on these records every year and typically declares it with other data viewing loan fees, for example, credit rates, all inclusive life financing costs, and annuity rates. In the event that you experience difficulty finding these declarations, a speedy call to the insurance agency can answer what the current rate is.

Moreover, the policyholder has the liberty to withdraw funds from the interest account whenever he/she deems it best. However, once the amount is withdrawn, the only way to increase the account backup is through up and coming dividend payments on the whole life insurance policy. Furthermore, one must also know that the interest account is not a component of the life insurance policy and does not gain any advantage from the tax-friendly treatment related with cash value life insurance.

More Life Insurance Dividend Options

Term Insurance

Term Insurance as a life insurance dividend option has been freshly observed which grants you to pay for term insurance with your dividends. This is a highly effective short term solution to gain a death benefit. If your dividend increases the cost of the term insurance, then you will have to select an alternate option.

Index Credit

The index crediting is similar to the option regarding interest. The dividend amount is sent to an index account. This account gains interest bound to a stock index just like indexed amounts or whole life insurance gains interest.

Moreover, you are not allowed to add any extra amounts to the index account. However, you can manage all of your dividends to the account.  In addition to this, the policyholder is also free to take money from the account at any given time.

Long Term Benefits

Though not quite common, it is one of the most important dividend options. When looking at insurance policies, long term benefits can be highly advantageous to the policyholder especially when it is related to an entire life insurance policy. Moreover, it also boosts the life insurers’ initial efforts to solve problems via increased death benefit options.

Basically, this alternative uses all or a part of the profit to pay for a drawn out care insurance policy that is joined to the entire life insurance. This decreases a portion of the significant expense of lasting care protection premiums found on standard independent strategies. However, it does lose a portion of the advantage wealth found on more conventional long term life insurance dividend options.

Taxable Life Insurance Dividends

Generally, life insurance dividends are seen as a bonus and are not taxed. However, sometimes these life insurance dividends become taxable and can alter your bottom line during tax months.

Usually, life insurance dividends are only taxable if they stay with the insurance company and gather more interest than the total of premiums paid. This is applicable in cases where you are paying premiums or even after the dues have been cleared. There are a few exemptions to this, for example, when dispersions originate from single-premium strategies, and when the cash value surpasses your interest in it. The tax collection process can be genuinely graceless in taxing life insurance dividends, potentially in any event, exposing you to almost a 10% charge if dispersions are taken early – before you reach 60. Various complex issues will decide your tax rate on life insurance profits, assuming any, so make certain to talk about your circumstance with your expense proficient at your next gathering. A couple of changes to your current approach could spare you some genuine money.


Most of the life insurance policies provide dividends to their policyholders which can be utilized multiple ways. When figuring out the right insurance policy for you, you must remember to consider and examine how dividends are estimated and/or calculated and whether or not they are secure. Moreover, you must see as to how the company plans to deal with the dividend income. The ideal tax handling and management implies that the best choice is generally to take the money and reinstate it somewhere else at a superior return.

Tony Bennett

Tony Bennett

Tony Benett makes his living in the insurance industry by teaching and consulting. He is also recognized by the legal profession as an expert on insurance coverages. His insurance experience includes having worked at the company level, owned an independent general agency and having worked for an insurance association. He has received various certificates over the past few years and helps his clients and readers by giving them a realistic outlook on what they can expect to achieve within their set targets. At Insurance Noon, he is known for his in-depth analysis and attention to details with accuracy. He has been published as one of the most referred agents by his peers in the insurance community. Tony loves the outdoors and most sport events. His passion other than providing excellent advice is playing golf.