How Do Life Insurance Dividends Work?

Sean McGinn is an assistant director of Product Positioning in the Insurance Solutions department at Northwestern Mutual.

If you’re thinking about buying 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?

When do life insurance companies pay dividends?

Life insurance companies make certain financial assumptions when setting the guarantees underlying the products they sell. For instance, they make an assumption about how many claims they will pay each year, called mortality. They make an assumption about the amount they will earn on the money they invest. And they make an assumption about expenses, i.e., how much it will cost to run the company.

When a company finishes the year better than those assumptions, it can choose to pay some or all of that money back to shareholders and policyowners.

Some life insurance companies don’t have shareholders; many of those companies are called mutual companies (Northwestern Mutual happens to be one of those). So at mutual companies, surplus money is paid solely to policyowners in the form of a dividend. At Northwestern Mutual, we have paid a dividend every year since 1872 (more than $150 billion over that timespan. We just announced that in 2025 we expect to pay $8.2 billion worth of dividends. For life insurance we expect that to be more than three times as much as our nearest competitor.

Are dividends paid on whole life insurance policies?

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.

Are dividends paid on term life insurance policies?

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.

Evaluating life insurance dividends

How is a life insurance dividend calculated?

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 based on the guaranteed assumptions. Then, interest is credited also based on a guaranteed rate. If the company’s actual experience is better than the guaranteed assumptions for expenses, claims (mortality), and investments, a dividend is paid. You can learn more about Northwestern Mutual’s dividend here.

Comparing dividends from different whole life insurance policies

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.

Does every insurance company pay life insurance dividends?

Some companies do, some 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, after all, dividends aren’t guaranteed. This can make a big difference in the value of a permanent life insurance policy over time.

Are life insurance dividends taxed?

Generally, life insurance dividends are considered a return of premium. Whether a dividend is taxed depends on how it is used and specific facts about the policy.

Life insurance dividend options

When you get a dividend, you have several options. These include:

Taking your dividends as cash

You could choose to take your dividend as cash. With this election, your insurance company will send you a check any time it pays a dividend.

Paying your premium with your life insurance dividend

This can help to reduce what you’ll owe on your policy each year. And at some point, it’s not unusual for policies at Northwestern Mutual to grow to a point where the dividend can cover the entire cost of the life insurance for the year.

Accumulate dividends inside the policy

With certain types of permanent life insurance policies, you can accumulate dividends with the company inside the policy (thereby increasing the cash value) with interest credited at a rate set by the company. These policies have a minimum crediting rate, but the rate can be higher than the minimum.

Purchasing additional coverage

Your final option is to use your dividends to buy additional paid-up life insurance. Using dividends in this way can allow the death benefit & cash value of your policy to grow more quickly over time. That’s particularly beneficial because this growth compounds and is typically tax-deferred.