Dividends: The Hidden Wealth Builder in Life Insurance
- ironsharplifellc
- Sep 24
- 2 min read
When most people think of life insurance, they think of protection—money paid to loved ones when the insured passes away. While that’s true, certain types of life insurance policies offer much more. If your policy is with a participating insurance company, you may be eligible to receive dividends—a powerful, tax-advantaged financial tool that can support both protection and long-term wealth-building.
Participating vs. Nonparticipating Insurance Companies
To understand dividends, it’s important to know the difference between two types of insurance companies:
Stock Companies (Nonparticipating): These companies are owned by shareholders. Profits are distributed to the shareholders, not to policyholders. While these companies may offer competitive policies, their focus is on providing value to investors rather than directly sharing profits with policyholders.
Examples include Transamerica, MetLife, and Prudential.
Mutual Companies (Participating): These companies are owned by policyholders. When the company performs well, it may distribute a portion of its surplus back to policyholders in the form of dividends. With these companies, policyholders aren’t just customers—they’re part-owners, with the potential to share in the success of the company.
Examples include National Life Group, MassMutual, New York Life, and Northwestern Mutual.
How Dividends Work
Dividends are essentially a return of premium when the company collects more in premiums than it needs to cover claims, expenses, and reserves. While not guaranteed, many mutual companies have paid dividends consistently for over 100 years—even through wars, depressions, and recessions.
Once dividends are paid, policyowners get to decide how to use them. Common options include:
Reduce Premiums – Use dividends to lower or even cover your annual premium costs.
Cash Value Growth – Apply dividends to increase the policy’s cash value, compounding long-term growth inside the policy.
Paid-Up Additions (PUAs) – Buy additional permanent insurance, which increases both the policy’s death benefit and cash value.
Take as Cash – Receive dividends as cash payments you can use immediately, tax-advantaged.
Leave with the Company – Allow dividends to accumulate with the insurance company, earning interest.
This flexibility means dividends can adapt to your financial needs—whether that’s lowering costs now, building wealth for the future, or creating additional protection.
Tax Benefits of Dividends
One of the most attractive features of life insurance dividends is their tax treatment. Because dividends are considered a return of premium (rather than traditional investment income), they are generally not taxable when paid out. This makes them a unique way to enjoy financial growth without the immediate tax burden that comes with most other investments.
Of course, if dividends accumulate interest with the company or exceed the total premiums paid into the policy, portions may become taxable. But in most cases, dividends provide a highly tax-efficient wealth-building tool.
Final Thoughts
While dividends are never guaranteed, mutual insurance companies have a long history of paying them consistently. The power lies in the hands of the policyowner—you get to choose how your dividends are used. From reducing premiums to building wealth with tax advantages, dividends are one of the most underappreciated benefits of participating life insurance policies.
If you’re considering permanent life insurance or want to learn how dividends can support your long-term financial goals, book a free consultation today!
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