Understanding Life Insurance Dividends
If you’re considering whole life insurance – or if you already have a policy – you might have heard the term “dividends.” They sound like a bonus, extra money coming your way. But what exactly are they, and how do they work with life insurance?
Sean McGinn, Assistant Director of Insurance Solutions
What Triggers Dividends?
Life insurance companies make certain financial estimations to set the guarantees of the products they offer. These include assumptions about:
- Mortality: The anticipated number of claims each year.
- Investment Earnings: The returns earned on invested funds.
- Expenses: The operational costs of the company.
When a company performs better than these estimations, it has surplus funds. This surplus is sometimes shared with stakeholders. Many life insurance companies are mutual companies, meaning they don’t have shareholders. In these instances, the surplus money, or dividends, is given only to policyholders.
Northwestern Mutual, a mutual company, has paid dividends every year since 1872, distributing over $150 billion in that time. For 2025, they anticipate paying $8.2 billion in dividends. They expect that figure for their life insurance policies to be more than three times greater than their closest competitor.
Dividends on Whole Life Policies
Generally, whole life insurance policies are eligible for dividends. This can be a big advantage over time, because you can use the dividend to buy more paid-up whole life insurance. This additional coverage helps to accelerate the growth of your death benefit and cash value beyond the policy’s guarantees. Over time, this compounds, as the extra insurance also earns future dividends.
Term Life Insurance and Dividends
Some term life insurance policies also offer dividends. If available, you can typically take the dividends as cash or use them to lower your premiums.
How are Life Insurance Dividends Calculated?
When you buy permanent life insurance, you pay an annual premium. This premium is added to your policy, creating cash value that you can access during your lifetime. Expenses, claim payouts, and company operating costs are then deducted from your premium payments, based on predicted figures. The policy then credits interest based on a guaranteed rate.
A dividend is then paid if the company performs better than the guaranteed assumptions for expenses, claims, and investments. You can learn more about Northwestern Mutual’s dividend here.
Choosing the Right Policy
It’s essential to inquire about all facets of the dividend, encompassing mortality, expenses, and interest rates. A higher dividend interest rate doesn’t always mean a larger dividend payout. A company with a higher rate might not perform as well in claims or expenses, potentially leading to a lower overall dividend. Always compare all factors before deciding.
Dividend History Matters
Not all insurance companies pay dividends. And even if a company does, assess the history of dividend payments, as they’re not guaranteed. This can significantly affect the value of a permanent life insurance policy over the long term.
Life Insurance Dividend Options
There are several ways you can use your dividends:
- Take Dividends as Cash: Receive a check anytime a dividend is paid.
- Reduce Premiums: Use dividends to offset your annual premiums. At some point, the dividend might cover the full cost of the insurance.
- Accumulate Dividends: Accumulate dividends within the policy, which increases its cash value, with interest credited at a rate determined by the company.
- Purchase Additional Coverage: Use dividends to buy additional paid-up life insurance. This accelerates the growth of your death benefit and cash value, leading to tax-deferred compounding growth.
Life Insurance Guide
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Are you ready for what life brings? Connect with a Northwestern Mutual advisor.
