Whole Life Insurance Dividends

Whole Life Insurance Dividends

When purchasing a Whole Life insurance policy that is “participating” you will receive an annual dividend from the life insurance company. A dividend can be explained in two fashions.

A return of excess premium

The Life Insurance companies’ actuarial team factors into the cost of policies the mortality rates based on CSO tables, the insurance companies projected investment gains, expenses and more. As insurance carriers must be conservative, the premium required will almost always be more than the actual costs. The additional amount is refunded on a yearly basis to the policyowner in the form of a dividend.

Share in company profits

Purchasing a Whole Life Insurance policy is similar to acquiring stock in a publicly traded company. (We will discuss Life Insurance Company structure and its effect on dividends below.) As with an equity share in an organization, profits are shared with shareholders, or in this case policy owners.

In essence dividends are really made up of both factors. Therefore, the better the market returns and interest rates are, as well as the higher longevity is, the dividends should rise.

Company Structure and its effect on dividends

Most Life Insurance companies are structured in one of two manners:

  1. Mutual Companies: There are no shareholders, the company is owned entirely by its policy owners.
  2. Publicly Traded Companies: These companies have both shareholders and policy owners. As a profit seeking company their responsibility is first and foremost to their shareholders. Therefore, dividends are paid out to stock owners first and only afterwards to policy owners.

Most life insurance companies started out as Mutual companies, however the need to raise capital via a public offering seduced the majority of them to go the publicly traded route. There are a handful of mutual companies left. Most notably (in alphabetical order):

As can be seen, 3 of them have the word mutual in their name, and it is a feature that they are all very proud of. When purchasing a Whole Life Insurance policy with a goal of cash value growth and dividends, a mutual company will most likely be a more rewarding option due to the higher dividend projections and provide the best whole life insurance dividends.

Dividend Options

There are 4 general dividend options:

  1. Cash
  2. Interest Earning Account
  3. Paid Up Additions
  4. Premium Payments

1. Cash

The life insurance company will mail a check or directly deposit the dividend on an annual basis into the policy owner’s account.

2. Interest Earning Account

The dividends are deposited into a side account that earns guaranteed interest based on the interest rate market.

3. Paid Up Additions

This is the most common option initially selected on whole life insurance policies, and it is also the default when no other option is selected by the policy owner. Dividends are “reinvested” into the policy. The mechanics are as follows. Every dividend purchases a small fully paid up policy which is added onto the base whole life insurance policy. (The cost is based on the current age of the insured.)
Additionally, the dividend is deposited into the policy as cash value, similar to the way the premiums paid for the base policy are used to grow cash value as well. The next time the policy is eligible for a dividend, not only does the base policy receive a dividend as before, also the small paid up policy will receive its own dividend, and so on and so forth. In actuality, they will all be one big policy, but the death benefit and cash value will grow at a compounded rate.

4. Premium Payments

Whole Life Dividends can be used to pay the premiums of your policy instead of you making premium payments out of pocket. Depending on the amount of the premium required and the dividend received, they can either make full or partial payments. The insurance carriers will also provide projections as to when there will be enough future and past dividends to pay up the policy completely. It should be noted as a point of caution, these projections are not in any way guaranteed and may vary at any point to be better or worse, depending on the actual dividends received. Even after selecting this option, dividends can completely stop for some time which would require the resumption of premium payments. (The latter is very unlikely, but can technically happen as dividends are not guaranteed.)


Do you have to pay taxes on life insurance dividends? The answer is almost always a resounding “no.”

Life Insurance is protected by IRS code 7702 and the monies which grow inside of a policy are tax deferred, with the possibility of being tax free as well.

There are a few scenarios where insurance dividends are taxable.

  • If you choose the “Cash” option for dividends. Once the amount of dividends received is more than total premiums paid you may be taxed.
  • The “Interest Earning Account” dividend option will also trigger taxes on all future interest earned, albeit not on the original principal of dividends deposited if no withdrawals are made.
  • Upon surrender of a policy, the amount of money above total premiums paid, both from guaranteed cash value growth and dividends, is taxable.

In a scenario when the life insurance dividends are taxable. The following is the answer to the question of “how are life insurance dividends taxed?”

When applicable, Life insurance dividends tax is the same as any other taxable life insurance withdrawals, in that they are taxed at ordinary income levels in the year of the withdrawal.

Historical Dividends

What are the best dividend paying whole life insurance companies?

We listed above the 5 biggest mutual life insurance carriers.

Below is a chart showing these Mutual companies historical dividend interest rates. It should be noted that not all companies calculate their dividend interest rates the same, so the simple dividend interest number may not be a good enough factor to decide which policy to purchase. Another point is that past performance does not necessarily indicate how the future will play out. However, all we have is the past and the present and are unable to know the future with certainty. Therefore, the best way to compare companies is by getting illustrations with the exact same specifications and then comparing them apples to apples.

Historical Dividend Interest Rates

New York Life5.806.
Northwestern Mutual5.
Penn Mutual5.756.106.106.346.346.346.346.346.346.346.34

Below is a chart that compares projections of policies with Guardian and MassMutual.

We used these specifications:

  • 30 year old Male
  • Non Smoker
  • Preferred Plus (Best health class)
  • $1,000,000 initial death benefit
  • Premiums paid to age 100
  • This depicts an annual premium of $10,530. (Which is Guardians base premium. MassMutual only required $9,610 so the remaining $920 was added as Paid up Additions.)


Are distributions from life insurance taxable?

If your life insurance policy is set up properly, and when withdrawing money from the policy you do so via loans for personal use, the answer should be no. Life Insurance policies can be taxable and it is therefore important to speak to an advisor prior to setting up a Whole Life policy.

Are dividends from life insurance taxable?

In most cases life insurance dividends are not taxable. Only when choosing the cash, or interest earning side account are there immediate taxable implications. If the dividends are put back into the policy as paid up additions, often taxes will never have to be paid on them.

Are whole life insurance distributions taxable?

If the policy is fully surrendered, you will need to pay income taxes on the gains. If the policy remains in force, depending on how the proceeds are withdrawn whether or not there are taxable ramifications.

    • If all withdrawals are processed as loans, then there will be no taxes. Just be mindful that the policy does not lapse as then you can get hit with a tax bill. Many will surrender to basis first, so that there’s no loan interest on a large chunk of the withdrawal and then take the remainder of the required amount as a loan.
    • If the cash value is surrendered, any amount above the paid in basis will be taxable at income tax rates.
    • If the cash value is surrendered, any amount above the paid in basis will be taxable at income tax rates.
    • If the policy is a Modified Endowment Contract (MEC) it will lose a lot of its taxable benefits as well.

Can you cash out life insurance dividends?


Can you withdraw dividends from life insurance?


Do life insurance policies pay dividends?

Participating Whole Life Insurance policies usually pay dividends, all others do not. Dividends on any policy are not guaranteed.

Do whole life insurance policies pay dividends?

If they are participating, yes, they will likely pay a dividend.


Below are links to the dividend announcement pages of the life insurance companies mentioned in this article:

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