What Is Dividend-paying Life Insurance?

Dividend-paying life insurance, also called participating life insurance, is a form of whole life insurance. With a dividend-paying life insurance policy, the policyholder will share in the insurance company's good fortune if the company has a profitable year financially. There is no guarantee that the company will show a profit for the year, however, in which case there would be no dividend paid to the policy holder.

Types

As the payment of dividends is not guaranteed, the policyholder is taking some risk that the insurance company will have a profitable year. The two primary ways the insurance company makes money is to have investments that perform well and to have people live longer than expected, thus ensuring the continuance of paying premiums for a greater period of time.

Effects

The owner of a dividend-paying policy would naturally like to see the company do well financially as that would increase the amount of his dividend payment. While it would seem the insurance company would want to estimate risk on the high side to increase profits, it does have to be competitive with other insurance providers. Therefore, insurance companies actually do a good job of assessing the actual risk of any potential customer, which may keep dividend payments down.

Uses

Policyholders who do receive dividends from the insurance company may use them in many different ways, such as to make premium payments, repay any amount of money borrowed against their life insurance policy or have the dividends mailed as a check.

Potential

Policyholders who receive a dividend may also use that money to purchase what is referred to as a paid addition. A paid addition is essentially an extra addition to your life insurance policy that is fully paid off so that you will never have to make further payments on the addition. The paid addition will also have the ability to earn dividends in the future.

Considerations

Dividends are typically paid on the policy's anniversary date, provided the insurance company is issuing dividends. Dividends will be paid on the actual life insurance policy as well as on any paid additions that were earned in previous years.