How life insurance dividends work

Permanent Participant Policies

Life insurance dividends are the funds earned from life insurance policies. Not all policies, however, dividends are obtained. Dividends are earned only by permanent participating policies. A participating policy is nothing more than a policy that earns dividends if the yield is better than average. Premiums on participating policies are higher than those for non-participating policies.

If you decide to buy participating life insurance, you will have to pay higher premiums, hoping that the shares will be priced more than expected and you will get some dividends. Most of the participating life insurance policies are permanent. This means that they cover you until the day you die without expiration.

The other type of life insurance policy is term life insurance. Term life insurance policies only cover the insured in a certain, predetermined number of years, after which it will expire and the insured will have to buy a new policy, often with an increase in premiums due to advanced age.

When dividends are paid

Dividends are not paid regularly. Instead, they are only paid based on the return on investment. When the performance (that is, expenses and management) is better than what the company had projected for a given fiscal year, dividends are usually paid on the anniversary of the policy and one year after the Dividends were earned. The dividend amount is the difference between the original value of the policy and the actual cash value during that year.

How to use dividends

Dividends cannot be cashed by the insured with a check. If the insured wishes to collect dividends in cash, he usually has to ask for it. Very often, dividends are automatically used to buy paid increases and add them to the policy. These increases also earn dividends.

It is also possible to use dividends to reduce monthly or annual premiums. In addition, dividends can be left to accrue interest. Some policyholders prefer to let dividends accrue interest for up to ten or even twenty years after they buy the policy to collect those dividends in cash. This usually ends up being a significant amount of money.