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A Guide to Dividend-Paying Whole Life Insurance

Whole life insurance policies offer lifelong coverage, a death benefit, and a cash value component. This can make them helpful tools for policyholders who need to help cover their loved ones and diversify their wealth. However, they may also pay dividends to policyholders when the insurer performs well financially. Policyholders can use dividends for nearly anything, and, in many cases, they aren’t taxable. Read on to learn how life insurance dividends work and find out if a dividend-paying whole life insurance policy is right for you.

What are dividends?

A dividend is an annual payment to a policyholder based on the insurer’s financial performance. Dividends are not guaranteed, but may be paid out if the insurer has strong financial performance by doing well in areas such as investment performance, how many claims were paid out compared to premiums paid in, and operational costs.1

How does dividend-paying whole life insurance work?

Dividend-paying whole life insurance is a permanent life insurance policy type that offers lifelong coverage, a death benefit, and the potential to earn dividends based on the insurer’s performance. If you hold one of these policies, you’re considered a company stakeholder entitled to dividend payments.

Dividend-paying whole life insurance also contains cash value. Part of each premium goes toward the cash value, which grows tax-deferred at fixed interest. You can use the cash value via borrowing or withdrawals when it grows large enough. You also receive it minus surrender charges if you surrender the policy.

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How to use your whole life insurance dividends

You can receive and use your whole life insurance dividends in several ways:2


Receiving dividends in cash involves having the insurance company send you a check or ACH payment to a personal bank account. This is the most straightforward and flexible method since you can use the funds for anything, such as:

  • Living expenses
  • Personal savings
  • Reinvesting
  • Discretionary spending

Keep the funds in a savings account with the insurer

Insurers may let you leave your dividends in a separate savings account with the insurer. Your dividends then earn interest at a rate the insurer specifies. This option offers liquidity and convenience since you can withdraw these funds at any time. You don’t need to deposit a check and manage the money yourself, yet you can continue saving and earning interest.

Premium deductions

You can use your dividends to pay for your policy as well. Just request that the insurer put your dividends toward future premiums, reducing the amount you owe. This can help you reduce the cost of maintaining coverage in years when your insurer has great financial performance.

Get additional insurance 

Another option for altering your policy is to get additional coverage rather than reduce your premiums. This is called purchasing paid-up coverage because you can add more to your death benefit without a corresponding premium increase. Going this route may be a good way to reduce the impact of inflation or increase your death benefit if your financial circumstances necessitate it.

Pay down policy loans

If you borrowed against your cash value, you could ask the insurer to put the dividends toward your policy loan balance. This can help you pay off your loan without using your regular income.

Are life insurance dividends taxable?

Life insurance dividends are generally not subject to taxes for most uses since the company generated the gains that allow dividends from policyholders. They are seen as a refund of overpaid premiums rather than a profit and are treated as contract distributions.

The exception is if you leave dividends in the policy to earn interest. Gains earned as interest may be taxable.2 Therefore, it may be more financially worthwhile to take the dividends as tax-free cash to reinvest in investments that may be more rewarding or use them to pay premiums and invest your savings.

Is dividend-paying whole life insurance right for me?

Here are some factors to consider when determining if dividend-paying whole life insurance is suitable for you:

  • Coverage needs: If you want even more financial protection beyond the death benefit, a dividend-paying whole life insurance policy could work. For example, the cash value and dividends you receive could help if you have growing financial responsibilities, like a family.
  • Budget: These policies can come with higher premiums, so they may only be worth it if you’re willing to pay more.
  • Insurer: Dividends are based on the insurer’s performance. So, selecting the right insurer can maximize the chance of receiving dividends while keeping costs lower.
  • Peace of mind with lifelong coverage: If you prefer the peace of mind that comes with lifelong coverage, a dividend-paying whole life insurance policy can be a good option.

Get a quote for whole life insurance 

Life insurance dividends can offer potential income in addition to your death benefit and cash value component. You can use your dividends in many ways, from receiving them as cash to putting the funds toward future premiums. If you have any questions about dividend-paying whole life insurance or are ready to explore policy options to help protect your loved ones, speak with an Aflac agent today. 

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