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Whole life insurance dividends: Reinvesting in clients

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A dividend is money a company distributes when it performs better than expected. In a publicly held company, a shareholder may earn a quarterly dividend. If the company is a fraternal benefit society, like Thrivent, it may offer dividends to clients who contributed to the company's success.

Many insurance products come with the potential for dividends, and they're especially common in whole life insurance. Whole life insurance dividends—while not guaranteed—can be a valuable and versatile benefit that helps you get the most out of your contract.

How do dividends work in whole life insurance?

In life insurance, participating contracts are eligible to receive dividends, and whole life insurance contracts often are participating.

Insurance companies use a formula called a dividend scale to determine the dividend rate for each eligible contract. The year of purchase, the contract amount and the contract type factor into that formula.

Generally, larger and older contracts tend to earn higher dividends. Smaller and newer contracts earn more modest dividends at first, but may become eligible to earn higher dividends over time.

6 things insurers consider when deciding to pay dividends

Insurance companies often determine if they'll pay out dividends—and how large they might be—based on a long-term view of insurance contract performance, not on a short-term view of market ups and downs. Specifically, they'll look to these factors:

  • How many claims they paid out. When a life insurance contract holder passes away, the insurer typically owes a death benefit to loved ones, a charity, a trust or the deceased's estate. Overall claim payments may be lower than the insurer planned, providing funds that can go toward dividend payments instead.
  • Saving for future claims and dividends. Insurers typically don't use an entire surplus to pay dividends. To be prudent, they may keep part of the surplus to help pay future contract claims and dividends. Insurers know that some years may be better or worse than expected, so it's important to be prepared. This is similar to how you might put a chunk of any work bonus toward long-term savings before spending any of it.
  • How their investments performed. Insurance companies may rely on the performance of their investments, including stocks, mortgage loans and bonds, to shore up their financial strength and stability. When these investments perform better than expected, more money is available to pay dividends.
  • Reinvesting back into the company. Insurers sometimes reinvest any surplus funds they've earned back into the company. This could help the company develop new products, reach more potential clients and recruit skilled employees. Although, that reinvestment may impact the amount of dividends the company can pay.
  • How many expenses they accrued. Insurance companies have operating expenses, such as employee salaries and benefits, agent commissions, office rent and advertising. If expenses are lower than expected, the savings can go toward paying dividends.
  • How many loans are outstanding. Whole life contracts accumulate cash value that the contract holder can borrow against. Depending on the loan type, the contract's dividend may increase, decrease or stay the same while the loan is outstanding.
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When we thrive, you thrive.

Thrivent is proud to be providing an all-time high of $542 million in dividends and policy enhancements to eligible clients in 2024. Learn more about Thrivent's history with dividends.

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Ways to use whole life insurance dividends

Depending on your type of whole life contract, you may be able to use a dividend payment in several ways.

  • Reinvest your dividends through paid-up additions. Similar to how you can reinvest stock dividends to buy more shares, you can "reinvest" insurance dividends to increase your contract's death benefit and cash value. This move could increase your future dividends.
  • Pay back a contract loan. If you've borrowed against the cash value of your life insurance, you could use a dividend payment to reduce how much you owe.1
  • Reduce your premiums. Whole life insurance premiums are generally higher than term life insurance premiums because the contract offers a permanent death benefit. Using dividends to reduce your premiums can help offset this expense.
  • Take a cash payout. You may wonder if you can withdraw dividends from life insurance. With a cash payout, you aren't actually withdrawing anything from your contract or reducing your coverage. You're just getting a check in the amount of your dividend payment. You can use the money however you want—perhaps to invest or donate to a cause.

You don't have to use your dividends the same way each year. You may submit a form to your insurer requesting a change from one selection to another.

What are the tax rules for whole life insurance dividends?

Any time you receive money, consider whether the IRS could count it as taxable income. In general, the tax code considers life insurance dividends to be a return of premiums. Basically, they're classified as a refund, which makes them nontaxable. Though, there are a few, albeit rare, exceptions.

If you decide to surrender or cancel your life insurance contract, you could get back more than you paid in because of your dividends and cash value growth. If that happens, the amount that exceeds your investment (also called cost basis) is taxable as ordinary income.

How could whole life insurance dividends benefit you?

Dividends are just one way to benefit from a whole life insurance contract, along with permanent death benefits, fixed premiums and cash value accumulation. If you'd like to explore your options for permanent insurance coverage that may pay dividends—or if you want to better understand your dividend options on an existing whole life contract—contact a Thrivent financial advisor for professional, personalized advice.

1Loans and surrenders will decrease the death proceeds and the value available to pay insurance costs which may cause the contract to terminate without value. Surrenders may generate an income tax liability and charges may apply. A significant taxable event can occur if a contract terminates with outstanding debt. Contact your tax advisor for further details. Loaned values may accumulate at a lower rate than unloaned values.

Dividends are not guaranteed.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.