In the context of life insurance, a “dividend” (often referred to as a policyowner dividend) is a payment made to the policyholders of participating policies from the insurer’s surplus profits. Participating policies are typically whole life insurance policies that are eligible to receive dividends, which are not guaranteed and depend on the insurance company’s financial performance, including investment earnings, mortality rates, and expenses.
Dividends can be used in several ways according to the policyholder’s choice:
Cash payments
The policyholder can opt to receive dividends as cash payouts, which can be taken as income or used however the policyholder wishes.
Premium reduction
Dividends can be applied toward reducing the premium payments, making the insurance policy more affordable for the policyholder.
Accumulate with interest
Policyholders may choose to leave dividends with the insurer to accumulate at a specified interest rate, enhancing the policy’s cash value over time.
Purchase additional insurance
Dividends can be used to purchase paid-up additional insurance, increasing both the death benefit and the policy’s cash value without requiring further underwriting.
Repay policy loans
If the policyholder has taken a loan against the policy’s cash value, dividends can be used to repay the loan balance and interest.
In Canada, most participating policies are issued by stock insurance companies through their participating accounts. Mutual insurance companies, where the policyholders are considered part-owners of the company, also pay dividends on participating policies. For tax, cash dividends are taxable only above the policy’s adjusted cost basis (Income Tax Act s. 148), and interest earned on dividends left on deposit is taxable each year.