How Dividends Can Increase the Value of Your Life Insurance (2024)

FAQs

How Dividends Can Increase the Value of Your Life Insurance? ›

A: Life insurance dividends can be utilized effectively by reinvesting them to increase the policy's cash value, using them to pay premiums, or receiving them as cash payouts.

A life insurance dividend is only available to people with a participating whole life insurance policy. Dividends are returns on the insurance company's investment performance. They are not guaranteed but are paid on an annual basis with most companies.

Your policy's total cash value and total death benefit will be greatest if you use your dividends to purchase paid-up additional insurance or if you allow your dividends to accumulate at interest.

Dividends paid are added to the basis when used to purchase additional insurance. Typically with a permanent life insurance policy you can withdraw the amount of basis you have paid into the policy tax free (although doing so will reduce your cash value and death benefit).

The dividends represent the favorable experience of the company and result from excess investment earnings, favorable mortality and expense savings. Dividends can be paid in cash, used to reduce premiums, left to accumulate at interest or used to purchase paid-up additional insurance.

Cash dividends are paid out either as a check sent to the investor or as a credit to a brokerage account, which can then be reinvested. Stock dividends are paid in fractional shares. If a company issues a stock dividend of 5%, shareholders will receive 0.05 shares in dividends for every share they already own.

Are Whole Life Dividends Taxable? Whole Life dividends are generally not taxable since they are considered a return of premium. However, dividends can be taxable when the amount returned to the policyholder in cash exceeds the total amount they paid in premiums.

After the declaration of a stock dividend, the stock's price often increases; however, because a stock dividend increases the number of shares outstanding while the value of the company remains stable, it dilutes the book value per common share, and the stock price is reduced accordingly.

How Can You Increase the Death Benefit for a Whole Life Policy? Many whole life policies earn dividends based on the insurance company's financial performance. You can use these annual dividends to buy paid-up additions: additional coverage that is added to your face amount.

The last dividend option listed is by far the most common among MassMutual policyowners. Using dividends to purchase paid-up additional whole life insurance (paid-up additions) increases the policy's total death benefit and cash value.

Do dividends increase your basis? ›

Dividends. To calculate the equity cost basis for a non-dividend-paying stock, you add the purchase price per share plus fees per share. Reinvesting dividends increases the cost basis of the holding because dividends are used to buy more shares.

If you want your life insurance proceeds to avoid federal taxation, you'll need to transfer ownership of your policy to another person or entity.

How term life insurance works: The basics. A term life insurance policy is the simplest, purest form of life insurance : You pay a premium for a period of time – typically between 10 and 30 years – and if you die during that time a cash benefit is paid to your family (or anyone else you name as your beneficiary).

Basically, the insurance company receives your premium payments and invests them. If the company keeps expenses down and its investments do well, the company declares a dividend, which returns a portion of the surplus to policyowners.

Some life insurance policies pay dividends. These are extra funds returned to policyholders each year. If you have National Service Life Insurance or Veterans' Reopened Insurance, your policy pays dividends. These policy numbers begin with the letters V, J, or JR.

A stable dividend policy is the easiest and most commonly used. The goal of this policy is to provide shareholders with a steady and predictable dividend payout each year, which is what most investors seek. Investors receive a dividend regardless of whether earnings are up or down.

Examples of Cash Value Life Insurance

An example is a cash value life insurance policy with a $25,000 death benefit. Assuming you don't take out a loan or withdraw, the cash value accumulates to $5,000. After the policyholder's death, the insurance company would pay out the full death benefit, which would be $25,000.

How is a life insurance policy dividend legally defined? A return of excess premium and not taxable. (Life insurance policy dividends are a return of part of the premiums paid. As such, policy dividends are generally not taxable income.)

You would not owe tax on dividends from stocks held in a retirement account, such as a Roth IRA or 401(k), or a college savings plan, such as a 529 plan or Coverdell ESA.