What is Annual Dividend (Insurance)
In the insurance industry, an annual dividend is a yearly payment given by an insurance company to a policyholder. Annual dividends are most commonly distributed in conjunction with life insurance and disability income insurance policies. Insurance companies may pay their customers an annual dividend when the company's investment returns, experience (paid claims) and operating expenses in a given year are better than expected. Dividend amounts change each year and are not guaranteed.
BREAKING DOWN Annual Dividend (Insurance)
Annual dividend calculations are based on the individual insurance policy's guaranteed cash value, the policy's annual premium, the company's actual mortality and expense costs and the dividend scale interest rate. Insurance companies need to make sure they earn enough in premiums each year to cover their expenses, reserves and contingencies, but they may choose to share a surplus with their customers. Policyholders who have borrowed against their policies may receive reduced annual dividends while the loan is outstanding.
Policyholders also need to closely consider the credit rating of the insurance company itself and judge for themselves how sustainable dividends may be, moving forward. Most insurance companies are rated A or better by major credit agencies, but those below an A rating may warrant a closer investigation to determine whether the insurance is sufficient or not.
Annual dividends can be applied to annual premiums to reduce the customer's cost of carrying the policy. They can also be applied to increase the policy's value, to purchase additional insurance or be distributed as cash or repayment of a policy loan.
Annual Dividends and Whole Life Insurance
Many whole life insurance policies pay dividends. In many ways, these dividends resemble traditional investment dividends that represent a share of a public company’s profit. The dividend amount often also depends on the amount of money paid into the policy. For instance, a policy worth $50,000 that offers a 3 percent dividend will pay a policyholder $1,500 for the year. If a policyholder contributes another $2,000 in value during the subsequent year, they will receive $60 more for a total of $1,560 next year. These amounts can increase over time to sufficient levels to offset some costs associated with the premium payments.
Whole life insurance dividends may be guaranteed or non-guaranteed, depending on the policy. This is just one reason why it's very important to carefully read through the details of a plan before purchasing a policy. Often times, policies that provide guaranteed dividends have higher premiums to make up for the added risk. Those that offer non-guaranteed dividends may have lower premiums, but there also may not be any premiums in a given year.