A portion of the insurance company’s surplus earnings that are returned to participating policies (typically, whole life insurance). The dividend is not guaranteed to be paid in any given year but, once paid, often becomes part of the guaranteed provisions of the policy and helps buy more paid-up life insurance, generating more cash value and future dividends for the policyholder. Dividends may also be paid in cash, used to reduce the premium of the policy, held on deposit with the insurer to earn interest (at current interest rates), and can sometimes be used to buy supplemental term life insurance or pay down policy loans.
Dividends are a combination of:
- Mortality savings
- Expense savings
- Investment gains
Mortality savings means fewer people died than was originally projected by the company. Expense savings means the insurance company spent less than it originally budgeted for running the company. Investment gain is interest earnings and capital gains in excess of the guaranteed minimum investment rate used to establish the guaranteed cash value accumulation rate for the policy.
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