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Life insurance can be an essential investment for protecting your loved ones if you pass away. However, death benefit coverage isn’t the only benefit of owning life insurance. It can come with several other features, one of which is life insurance dividends. Some insurers may pay these each year if they have excess profits, rewarding you for being a policyholder. This article will explain how life insurance dividends work, then discuss when they may be considered taxable income.
Table of Contents
Life insurance dividends are a sum of money the insurer pays to each policyholder based on the insurer’s company profits.1 Permanent life insurance policies, such as whole life insurance, generally pay dividends since they have cash value. Term life insurance does not pay dividends.
Insurers generally pay dividends annually. Also, keep in mind that dividends are separate from cash value earnings.
Life insurance dividends are generally not taxable. This is because, in most cases, the IRS considers a life insurance dividend to be a return of premiums paid.1 However, there are a few exceptions that we’ll cover in the next section.
Here are some instances where life insurance dividends may be taxable:
If the amount of dividends you receive is greater than the total premiums you have paid into the policy, the excess may be taxable. This is because any dividends over the amount you paid are considered income, not a return of premium.
For example, imagine that you pay $1,000 in life insurance premiums this year, and you receive a $1,250 dividend. You may owe taxes on the $250 excess.
You can leave your dividends in your policy to earn interest. However, this interest income may be taxable if it earns you more than you have paid in premiums.3
Don’t wait until it’s too late. Help cover yourself and your family with coverage from Aflac.
Get StartedPolicyholders can elect to receive their dividends in several ways:1
Many choose to receive their dividends in cash. This can be a good way to add to your income, use the dividends for a specific purpose, invest the funds elsewhere, or recoup some of the costs of your life insurance without reducing your coverage.
You can elect to apply your dividends directly to future premium payments. This can help you reduce the cost of life insurance coverage and pay part or all of your premiums. Applying dividends to premium payments can also help ensure coverage doesn’t lapse if you encounter financial problems in the future.
You can have your insurer pay your dividends directly into your cash value and earn interest. This allows the principal to grow faster, which also helps you earn larger interest payments. Leaving your dividends in the policy could help you grow your cash value as a source of wealth more quickly.
Paid-up life insurance is simply coverage that is already paid for, meaning you don’t need to pay additional premiums.4 You can use your dividends to purchase additional paid-up life insurance. This allows you to increase your coverage without a corresponding increase in premium payments.
Purchasing a reduced paid-up policy with your dividends allows you to stop paying premiums entirely, but you must lower your death benefit.5 You may want to consider this option if you have gone through changes that require less coverage and want to cut your out-of-pocket costs.
Life insurance dividends can reward you for being a loyal policyholder. You can take them as cash, put them toward future premiums, save them in your cash value to build interest, or purchase more coverage without increasing your costs.
Regardless of how you choose to receive your dividends, keep in mind that you may owe taxes on any amounts that exceed premiums paid. Tax professionals can help you determine whether you owe taxes on your dividends.
For more help understanding life insurance, please visit Aflac’s life insurance advice page. And if you’re ready to get a policy, speak with an agent about our life insurance options today.
Get Started
Life insurance costs vary based on many factors. Learn how much life insurance is on average and what affects the cost to decide on a life insurance plan.
How much life insurance do you need? Learn how life insurance works, how to calculate your needs, and life insurance plans to consider.
Life insurance costs vary based on many factors. Learn how much life insurance is on average and what affects the cost to decide on a life insurance plan.
How much life insurance do you need? Learn how life insurance works, how to calculate your needs, and life insurance plans to consider.
1 NerdWallet – What Are Life Insurance Dividends? Updated June 25, 2025. https://www.nerdwallet.com/article/insurance/life-insurance-dividends. Accessed September 8, 2025.
2 NerdWallet – Is Life Insurance Taxable? Updated May 16, 2025. https://www.nerdwallet.com/article/insurance/is-life-insurance-taxable#are-life-insurance-dividends-taxable. Accessed October 6, 2025.
3 BankRate – Is life insurance taxable? Published on April 18, 2025. https://www.bankrate.com/insurance/life-insurance/life-insurance-taxes/. Accessed September 8, 2025.
4 Insurance and Estate Strategies – Paid-Up Life Insurance: Complete Guide to No-Premium Coverage (2025). Updated April 2, 2025. https://www.insuranceandestates.com/paid-up-life-insurance/. Accessed October 6, 2025.
5 Bankrate – Reduced paid-up life insurance. Updated August 11, 2025. https://www.bankrate.com/insurance/life-insurance/reduced-paid-up-insurance/. Accessed October 6, 2025.
Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.
Aflac coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, Aflac coverage is underwritten by American Family Life Assurance Company of New York.
Aflac life plans – A68000 series: Whole Life Policies: In Arkansas, Idaho, Oklahoma, Oregon, Texas, Pennsylvania & Virginia, Policies: ICC1368100. In Delaware, Policy A68100. In New York, Policy NYR68100. B60000 series: In Arkansas, Oklahoma & Virginia, Whole Life Policies: ICC18B60C10, ICC18B60100. Q60000 series/Whole Life Policies: In Arkansas, & Delaware, Policy Q60100M. In Idaho, Policy Q60100MID. In Oklahoma, Policy Q60100MOK. Not available in Virginia. Not available in Virginia.
Aflac Final Expense insurance coverage is underwritten by Tier One Insurance Company, a subsidiary of Aflac Incorporated and is administered by Aetna Life Insurance Company. Tier One Insurance Company is part of the Aflac family of insurers. In California, Tier One Insurance Company does business as Tier One Life Insurance Company (NAIC 92908).
In AR, DE, ID, OK and VA: Policies ICC21-AFLLBL21 and ICC21-AFLRPL21; and Riders ICC21-AFLABR22, ICC21-AFLADB22, and ICC21-AFLCDR22. Aflac Final Expense policies are not available in New York.
Aflac does not offer universal life insurance, but we can point you toward our whole life insurance policy if you have different coverage goals in mind. Chatting with an agent about your options may make this decision easier.
Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY, VA or VT. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations, and exclusions.
Aflac WWHQ | Tier One | 1932 Wynnton Road | Columbus, GA 31999
Aflac New York | 22 Corporate Woods Boulevard, Suite 2 | Albany, NY 12211
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