If you’re thinking about buying permanent or whole life insurance (or if you already have a policy), you may have heard the word dividends. They sound like a good thing—after all, dividends are extra money that’s paid out to you. But what are they really and how do life insurance dividends work?
Life insurance companies make certain financial assumptions each year. For instance, they plan for how many claims they will pay, called mortality. They anticipate making a certain amount on the money they invest. And they project expenses, i.e., how much it will cost to run the company.
When a company finishes the year better than expected, it can choose to pay some or all of that money back to shareholders and policyowners in the form of a dividend.
Some life insurance companies don’t even have shareholders; those companies are called mutual companies (Northwestern Mutual happens to be one of those). So at mutual companies, dividends are paid solely to policyowners. At Northwestern Mutual, we have paid a dividend every year since 1872 (more than $150 billion over that timespan). We just announced that in 2024, we expect to pay $7.3 billion worth of dividends. For life insurance, we expect that to be three times as much as our nearest competitor.
This can vary from company to company. But typically a whole life insurance policy is eligible for dividends if a life insurance company pays them. This can be a great benefit over time as you may be able to use your dividend to purchase additional paid-up whole life insurance. Doing so can help you increase your death benefit and cash value more quickly than the guarantees built into the policy. And over time this can have a compounding effect as your additional insurance will be eligible for additional future dividends.
Again, this can vary from company to company. But some term life insurance policies are eligible for dividends. If dividends are paid for term life insurance, they could be taken as cash or used to reduce your premium.
While different types of permanent life insurance policies work differently, in general, when you buy permanent life insurance , you pay a yearly premium for your policy. Each year, that premium is added to your policy and becomes cash value—money that you can access for any reason during your lifetime. After the premium is added to your cash value, expenses to pay claims and operate the company are subtracted. Then, interest is credited based on a guaranteed rate. If the company’s experience is better than assumed for expenses, claims (mortality), and investments, a dividend is generated. You can learn more about Northwestern Mutual’s dividend here .
Make sure you ask about all the components of the dividend (mortality, expenses and interest rate). Just because one company’s dividend interest rate is higher than another’s doesn’t mean the actual dividend amount that you get will be higher. For example, it’s possible that a company doesn’t perform as well from a claims or expenses standpoint. If that’s the case, they could have a higher interest rate than another company but end up paying a lower dividend. That's why it’s so important to see the whole picture before you make a decision on which policy to buy.
No. While most do, there are companies that do not. And even among companies that do pay regular dividends, it’s important to look at the company’s history of paying dividends because in many cases, dividends aren’t guaranteed. This can make a big difference in the value of a permanent life insurance policy over time.