Life Insurance Dividends: What You Need to Know
If you’re considering whole life insurance, or if you already have a policy, you’ve likely encountered the term ‘dividends.’ These aren’t just extras; they represent potential financial benefits. This guide explains what life insurance dividends are, how they work, and why they might be a valuable component of your financial plan.
What are Life Insurance Dividends?
In essence, life insurance dividends are additional funds paid to policyholders when the insurance company performs more favorably than initially projected. Life insurance companies create financial assumptions related to several factors during the policy’s setup. These assumptions include estimates for:
- Mortality: The expected number of claims paid each year.
- Investment returns: The earnings expected on invested funds.
- Expenses: The operational costs of the company.
When a company surpasses these assumptions, it can return those surplus funds to shareholders and policyholders. Some life insurance companies, known as mutual companies, don’t have shareholders. Any surplus generated by these mutual companies is distributed solely to policyholders in the form of dividends.
Northwestern Mutual, for example, is a mutual life insurance company that has paid dividends every year since 1872. The company has allocated more than $150 billion in dividends over this timeframe. In 2025, they anticipate paying $8.2 billion in dividends across their policyholders. For life insurance, they expect to pay more than three times their nearest competitor.
Are Dividends Paid on Whole Life Insurance Policies?
Whole life policies are typically eligible for dividends. This can provide a long-term advantage, as dividends may be used to purchase additional paid-up whole life insurance. This can help increase both the death benefit and cash value more quickly than guaranteed within the policy terms. Over time, the dividends from the additional insurance can provide a compounding effect, as the additional coverage is also eligible for future dividends.
Are Dividends Paid on Term Life Insurance Policies?
Some term life insurance policies also offer dividends, although this varies by company. If term life insurance dividends are offered, they can often be taken as cash or used to reduce your premium payments.
How are Life Insurance Dividends Calculated?
When you buy permanent life insurance, you pay an annual premium that’s added to your policy’s cash value. You can access this cash value for any reason during your lifetime. Expenses, such as claims payouts and operational costs, are subtracted from the cash value, based on the original guaranteed assumptions. Interest is then credited at a guaranteed rate. If the company’s actual financial performance exceeds the guaranteed assumptions for expenses, claims, and investments, a dividend is paid.
Comparing Dividends Among Different Policies
It’s wise to inquire about all the components of the dividend calculation. A higher dividend interest rate doesn’t always mean a larger dividend payout. For instance, if a company’s claims or expenses perform below expectations, they may end up paying a lower dividend, even with a higher interest rate. It is essential to have a comprehensive understanding before making a decision on which policy to purchase.
Does Every Insurance Company Pay Life Insurance Dividends?
No, not all companies pay dividends. Even among the companies that do offer dividends, look at the payment history. Dividends are not guaranteed. This can significantly impact the value of a permanent life insurance policy over time.
Life Insurance Dividend Options
Policyholders typically have several options for the usage of dividends:
- Receive Dividends as Cash: The company will send you a check any time it pays a dividend.
- Use for Premium Payments: This can help reduce the annual premium owed on your policy. It is not uncommon for a policy to grow to a point where dividends cover the policy’s full cost.
- Accumulate Dividends: With permanent life insurance, you can accumulate dividends within the policy, which increases the cash value, with the company crediting interest at a rate it sets. These policies normally have a minimum crediting rate. However, they can sometimes offer a rate higher than the minimum.
- Purchase Additional Coverage: Dividends can be used to purchase additional paid-up life insurance, allowing the death benefit and the cash value to grow more quickly. The growth compounds and is generally tax-deferred.
Sean McGinn
Assistant Director of Insurance Solutions
Sean helps internal and external audiences understand the unique competitive advantages of Northwestern Mutual’s insurance products.
Disclaimer: This is for informational purposes only and not financial advice. Consult with a qualified financial advisor for personalized guidance.
