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3.12 Policy Dividends

Just as in determining premiums, the same factors influence dividends, only whether they end up higher or lower than projected.

  1. Mortality charges
  2. Interest rates
  3. Loading charges

If the policy's surplus is increased through favorable results, so will the dividend amounts increase. Since all three factors are judged as "anticipated" however, dividend payments are never guaranteed.

Policy dividends are not taxable income as they are considered a return of premiums paid.

Only participating policies pay dividends. Shareholders receive dividends in stock companies; mutual companies pay their dividends to the participating policies in the form of a "return of excess premium." Dividends to shareholders are taxable income; a premium return is not taxable. Dividends are not guaranteed, however, because there are too many fluctuating factors and projections to make a totally accurate prediction. If the dividends are left to accumulate at interest, that interest is taxable and a Form 1099 is issued.

Participating policies are those under which the policyowner receives dividends of the divisible surplus of the company. Nonparticipating policies are those in which the insured is not entitled to share in the surplus.

How does participating and nonparticipating life insurance compare as to premiums, surrender values and general policy provisions?

The premium payments for a participating policy are usually higher, although dividends can be used to reduce premiums. The surrender values are generally the same for both types of policies. The general policy provisions are the same, except the participating policy includes a dividend provision and options on how the policyholder can use the dividends.