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.

  1. Assessable Policy

    Assessable Policy is a type of insurance policy that may require ...
  2. Yearly Price Of Protection Method

    The yearly price of protection method determines the cost of ...
  3. Adjustable Life Insurance

    Adjustable life insurance is a term and whole life hybrid insurance ...
  4. Variable Life Insurance

    Variable life insurance is permanent life insurance product with ...
  5. Adjustment Provision

    Adjustment Provision in a life insurance policy that allows it ...
  6. Advance Premium

    An advance premium is an initial premium paid to bind an insurance ...
Related Articles
  1. Insurance

    How to Choose Permanent Life Insurance Policies

    When does it makes sense to buy a guaranteed rather than a non-guaranteed life insurance policy?
  2. Financial Advisor

    Mutual vs. Stock Insurance Companies

    Learn about the differences between stock and mutual insurance companies and which is best for you as a policyholder.
  3. Financial Advisor

    Permanent life policies: Whole versus universal

    If you're looking for life-long security, choosing between these whole and universal life policies is a key decision.
  4. Insurance

    How To Invest In Insurance Companies

    Knowing the special circumstances that insurance companies operate under helps in evaluating whether or not a listed insurance company is a good investment and whether the economic environment ...
  5. Insurance

    Life Insurance: How To Get the Most Out Of Your Policy

    There are many benefits to owning a life insurance policy - if you get the right one for you.
  6. Insurance

    For Life Insurers, Making Money Is A Numbers Game

    Life insurance is a data-driven industry that relies on complex financial models to predict future expenses and income from premiums and investments.
  7. Insurance

    What's Better: Whole Life or Term Insurance?

    Life insurance can be a difficult decision to make, especially for a young adult. Here's a look at the benefits and costs of getting whole life insurance.
  8. Investing

    The 3 Biggest Misconceptions of Dividend Stocks

    To find the best dividend stocks, focus on total return, not yield.
  9. Insurance

    Choosing Between Whole and Term Life Insurance

    For most people, term life insurance is more suitable than whole life insurance. Here's why.
  1. Can dividends be paid out monthly?

    Find out how stocks can pay dividends monthly and learn about the types of industries or companies that will most likely ... Read Answer >>
  2. Do I receive the posted dividend yield every quarter?

    Learn how companies with stock that pays dividends will typically distribute the dividend each quarter. Find out how much ... Read Answer >>
  3. What types of companies offer the most dividends?

    Find out which types of companies tend to offer the most dividends, and learn why dividends must be considered carefully ... Read Answer >>
Trading Center