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When you’re talking about whole life insurance with a mutually owned life insurance company, it’s natural that you’ll talk about dividends, and you may be wondering, what exactly is a dividend and how do life insurance dividends differ from investment dividends? And that’s exactly what we’re going to cover today.

Now, there are some key distinctions between life insurance dividends and investment dividends. What exactly are they? So an investment dividend is literally a distribution of profits from the company to its shareholders, and those dividends are taxable. Those distributions are taxable. Now, a dividend in life insurance is literally a return of overpaid premium, and as such is not taxable. So that is a key huge distinction, right? And that’s why we always talk about paying taxes, income tax on the premiums. You never want to take a deduction for your life insurance premium, even if you’re using it for business purposes, because that would mess everything up in the sense that if you take the deduction on the premium payments, then your death benefit, that big pool of money that’s going to go to the beneficiary, will end up being taxable. So it’s important to make sure that all your ducks are in a line all along the way to make sure you’re getting the most bang for your buck when it comes to the benefits of life insurance.

You know, and that brings up a good point. The premium is the small contributions you make to get the huge death benefit. So if the premium is deductible, the death benefit is taxable. You don’t want that. So by paying the premium with after-tax dollars, that allows for the tax advantages of the large amount, the death benefit. But let’s get back to dividends. Why are dividends important? Well, real simply, dividends in life insurance enhance your cash value growth. Now again, the dividends are a refund of overpaid premiums. But think of it this way, that refund is technically a profit. And understand that if you buy a policy with a mutual insurance company, you are the owner of the company as it relates to your policy.

And think about it this way: with the whole life insurance policy, there are actuaries that design and engineer these policies, right? And we all know that engineers overestimate, and that’s why we have the dividends built in, right? So when you see an illustration, you’ll see those guaranteed numbers—the worst-case scenario. As in, if there were no dividends paid to that policy ever, this is what you would have—the worst case, correct? And then there’s another illustration in there, and that’s usually based on the current dividend rate. What would happen if we earned the 2024 dividends or 2025 dividends every single year perpetually going forward? How would the policy perform?

And I think another thing we need to touch on here is it makes the most sense to have those dividends reinvested into the policy using paid purchasing, paid-up additions, right? So with that, the dividends go and purchase a small chunk of death benefit that’s not going to have any more ongoing premiums. And so you’re able to earn interest on those dividends that you’ve earned, and it increases your dividends going forward, right? So think of it—you’re earning interest on your dividends and dividends on your dividends. And this thing just continues to snowball and really build long-term value. And that’s the key. Remember we said you’re the owner of the company as it relates to your policy. Well, those profits are smaller in the beginning, in the early years, and much larger in the later years. So the longer you have the policy, the more dividends you’ll receive, the greater those dividends will be, and the greater the compounding.

And that makes perfect sense when you think about the design of a life insurance policy, right? Because when you purchase a whole life insurance policy, the insurance company is making you two promises. The first is to pay that death benefit out if and when the insured dies anywhere along the way, and the second is to have a cash value equal to that death benefit at the age of maturity, which is typically age 121. But that’s really key. They’re actually designed to increase in cash value on an exponential basis, on a guaranteed basis, even over time as that policy matures. So if you add dividends on top of that, it makes it go even faster and faster and makes this machine as efficient as possible, especially as that policy ages.

Exactly. But now let’s talk about one key feature of dividends, and it’s real simple: they are not guaranteed. Dividends are not guaranteed. So keep this in mind. That’s why when you get your illustration, there’s two columns: there’s the guaranteed numbers with no dividends, and then the current numbers, which include dividends at the current rate the insurance company is paying out. Dividends. Now two things need to be addressed. Number one, the guarantees are the worst-case scenario. And number two, the numbers you see on the non-guaranteed with dividends is guaranteed to not be that number. It’s funny. So you get these two illustrations, and you know you have the worst-case scenario, you have the current-case scenario. Neither of them are going to be true. They’re just meant to give you an idea of what those cash values could look like over time. But another key we need to remember here is that the only dividends that aren’t guaranteed are the ones that haven’t been credited yet. Once your policy earns a dividend, there’s no risk of losing that dividend, that cash value, that death benefit associated with those paid-up additions. There’s no risk associated with it from the market, even if, you know, the insurance company never pays another dividend again. The dividends that you’ve already earned are yours, and you get to keep those.

So understand a few things here. Number one, dividends are not guaranteed. But if you’re buying a policy with a mutual insurance company, most mutual insurance companies have been around for over 150 years or so, paid dividends for over 125 consecutive years—that’s through world wars, depressions, gas shortages, you name it. So those dividends, again, aren’t guaranteed, but the probability is the company will pay something. It may not be what they’re projecting, but they will pay something. And the other thing is that as the owner of the policy, you get to choose how your dividend is allocated. You can use it to reduce premiums, you can use it to be paid in cash, you can use it to purchase paid-up additions or paid-up life insurance. So there’s a lot of different ways you can allocate your dividend, and that’s your contractual right.

Now, when we talk about whole life insurance designed for cash value accumulation, dividends are a key feature. Thanks so much for watching our video, and remember, it’s not how much money you make, it’s how much money you keep that really matters. We’ll see you in the next one.

When discussing whole life insurance with a mutually owned life insurance company, dividends naturally come into the conversation. You might wonder, what exactly is a dividend and how do life insurance dividends differ from investment dividends? That’s exactly what we are going to cover today.

There are some key distinctions between life insurance dividends and investment dividends. An investment dividend is a distribution of profits from a company to its shareholders, and these dividends are taxable. However, life insurance dividends are a return of overpaid premiums and are not taxable. This is a crucial distinction.

One reason we always talk about paying income tax on the premiums is that you never want to take a deduction for your life insurance premium, even if it is for business purposes. Doing so could lead to your death benefit—the large sum of money that goes to the beneficiary—becoming taxable. It’s vital to ensure that everything is aligned properly to get the most out of life insurance.

The premiums you pay are small contributions towards the huge death benefit. If the premiums are deductible, the death benefit becomes taxable, and you don’t want that. By paying premiums with after-tax dollars, you maintain the tax advantages of the death benefit. Dividends, on the other hand, are used to enhance your policy’s cash value growth. Although dividends are technically a refund of overpaid premiums, they can be seen as profits because if you have a policy with a mutual insurance company, you essentially become an owner of the company.

With whole life insurance, policies are designed by actuaries, who typically overestimate the amount needed, which is why dividends are built into the policy. When you see an illustration, you’ll notice two sets of numbers—the guaranteed figures representing the worst-case scenario (if no dividends were ever paid) and another set based on the current dividend rate, showing how the policy could perform if dividends are paid consistently over time.

Reinvesting dividends into the policy by purchasing paid-up additions is a smart strategy. This allows you to earn interest on the dividends, which in turn increases future dividends. Over time, this compounding effect builds long-term value, with dividends being smaller in the early years and much larger in the later years.

Life insurance companies make two promises with a whole life policy. First, to pay out the death benefit when the insured dies, and second, to have the cash value equal to the death benefit by the policy’s maturity, which is usually age 121. As the policy matures, the cash value grows exponentially. If you add dividends into the mix, this process accelerates, making the policy more efficient over time.

One key thing to remember is that dividends are not guaranteed. When you get your policy illustration, the figures showing the dividends are based on the current rate, which is subject to change. However, once a dividend is earned, it’s yours—there is no risk of losing that dividend or the associated cash value, even if no future dividends are paid.

Although dividends aren’t guaranteed, many mutual insurance companies have been paying dividends for over 125 consecutive years, even through significant events like world wars, depressions, and economic downturns. While the dividend projections may not always be met, companies generally do pay something.

As the owner of the policy, you have the contractual right to choose how your dividends are allocated. You can use them to reduce premiums, take them as cash, or purchase paid-up additions.

If you’d like to learn more about how to apply this process to your business, family, or personal finances, visit our website at tier1capital.com. We’d love to speak with you in a free strategy session.

Remember, it’s not how much money you make; it’s how much money you keep that really matters.