Life Insurance

Explore Life Insurance Dividend Options for Financial Growth

Erica Kolari | Apr 18, 2024
Life Insurance Dividend Options

Life insurance is best known as a protective financial tool but it can also be used as a way to help secure your family's future at your time of passing. If you have participating whole life insurance, it may generate dividends that you may be entitled to receive. These dividends provide an opportunity to enhance your policy's value, and there are several dividend options from which to choose. 

Learn more about the various life insurance dividend options and how to make informed decisions to maximize the benefits of your life insurance policies.

What is a life insurance dividend?

Dividends are a feature of participating permanent life insurance policies issued by mutual life insurance companies. In participating policies, policyholders become "participants" in the mutual company's profits and may receive a share of those profits in the form of dividends.

There are some things about life insurance dividends to keep in mind:

  • They are not guaranteed. While insurance companies strive to pay dividends regularly, they are not guaranteed. Dividends are contingent on the company's financial performance and may vary from year to year.
  • Tax treatment varies. Dividends are typically not subject to income tax. However, specific tax rules may apply in certain situations, and policyholders should consult with a tax professional.
  • Dividends can be used in different ways. Dividends can be a valuable way to enhance the overall benefits of a participating permanent life insurance policy. They may be used to increase the death benefit, boost the policy's cash value, or reduce future premium payments.

Life insurance dividend options

If your life insurance policy pays out dividends, there are several ways you can use them. 

Cash payment

Policyholders can opt to receive dividends in cash. This typically provides immediate access to the cash value generated by the policy, allowing individuals to use the funds for any purpose, such as covering expenses or making investments.


  • Immediate access: Policyholders typically receive cash immediately, providing liquidity for various financial needs.
  • Flexibility: Cash can be used for any purpose, such as covering expenses, making investments, or paying off debts.


  • Limited policy growth: Opting for cash payments may result in lower overall policy growth compared to options that reinvest dividends back into the policy.

Premium reduction

Dividends can be used to reduce or fully offset future premium payments. This option allows policyholders to maintain the coverage while potentially lowering their out-of-pocket expenses.


  • Lower out-of-pocket expenses: Using dividends to reduce or offset future premiums can significantly lower the policyholder's out-of-pocket expenses.
  • Maintained coverage: Policyholders can maintain the same coverage while reducing the financial burden of premium payments.


  • Potential reduction in cash value growth: While premiums are reduced, the cash value growth may be impacted, potentially slowing down the policy's accumulation.

Paid-Up Additions (PUA)

One popular option is to use dividends to purchase additional paid-up life insurance coverage. These paid-up additions act as a supplement to the original policy, increasing both the death benefit and cash value.


  • Increased death benefit: Using dividends to purchase additional paid-up life insurance coverage enhances the policy's death benefit.
  • Accumulated cash value: Paid-up additions contribute to the policy's cash value, potentially accelerating its growth.


  • Higher premiums: While PUAs increase coverage and cash value, they may also result in higher future premiums, due to increased coverage, affecting the policyholder's cash flow.
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Accumulation at interest

Dividends can be left with the insurance company to accumulate interest. This option allows policyholders to earn interest on the dividend amount.


  • Compound growth: Leaving dividends to accumulate at interest allows for compound growth over time.
  • Control over timing: Policyholders have control over when they choose to access the dividend benefits.


  • Market dependency: The interest rate is often tied to market conditions, and the growth is subject to fluctuations in the interest rate environment.

Term insurance purchase

Dividends could also be used to purchase additional term insurance coverage. While this option doesn't contribute to the policy's cash value, it can enhance the overall death benefit.


  • Enhanced death benefit: Purchasing additional term insurance with dividends boosts the overall death benefit.
  • Cost-effective option: Term insurance is generally more affordable than whole life insurance.


  • Limited duration: Term insurance purchased with dividends is temporary and does not contribute to the policy's cash value. It may expire after a certain period.

Key considerations for choosing dividend options

If your life insurance offers dividends, assess your overall financial situation. Ask yourself the following questions:

What are your financial goals? Understanding your financial goals is crucial in selecting the most appropriate dividend option. Whether you prioritize immediate cash flow, long-term growth, or premium reduction, aligning the dividend option with your goals is essential.

What is your risk tolerance? Some options, such as purchasing paid-up additions or leaving dividends to accumulate at interest, involve a level of risk. Policyholders should assess their risk tolerance and comfort with the potential variability in returns.

How is your policy performing? The overall performance of the life insurance policy, the insurance company's financial stability, and the historical dividend-paying track record are important considerations. Choosing a financially sound insurance provider enhances the likelihood of consistent and competitive dividends.

What are the tax implications? Policyholders should be aware of the tax implications associated with each dividend option. While dividends are generally not subject to income tax, specific tax rules may apply in certain situations.

Make life insurance dividends work for you

Exploring life insurance dividend options empowers you to tailor your policies to meet your evolving financial needs. Whether seeking immediate cash, enhanced death benefits, or premium reduction, the flexibility of dividend options adds value to participating whole life insurance. Work closely with your insurance advisors to assess your unique circumstances, understand the implications of each option, and make informed decisions that align with your financial goals. Life insurance, when used strategically, becomes not only a risk management tool but also a valuable asset in a comprehensive financial plan.

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