Some life insurance policies indeed pay dividends.

A dividend is the return of some premiums to you as the policyholder at the end of the year.

But, before you rush off to take out such a policy in the belief that such a policy must be better than a policy that pays out dividends, you need to ask a few questions. It does not follow that just because one policy pays out dividends and the other does not, the one that pays must be a better policy. Hold your horses!

You need to ask yourself – what are the potential benefits of such an insurance policy? Do these benefits apply to everyone? Are there any cons to dividend-paying whole life insurance policies?

How does a dividend-paying whole life insurance policy work?

As the name implies, this insurance policy is a whole life insurance policy instead of a term policy. As a result, it has a death benefit, a cash value, and the additional potential benefit of receiving an annual dividend payout should the insurance company perform well during that year.

Sometimes there is a guaranteed dividend, but, mainly, the dividend is determined by performance within the financial year.

Where the dividend is guaranteed, the premiums will be higher to cover the risk of poor performance by the insurance company.

The dividend amount is typically set at a certain percentage of the policy’s value—the percentage changes annually, dependent on how the insurance company has performed during that year.

The dividend earnings are tax-free.

Term life insurance policies do not offer dividend payouts; only whole life policies do.

In practice, how does this work?

You pay your monthly premiums for your whole life. In addition, you receive a death benefit which pays out when you die to your beneficiaries in terms of the policy. You also accumulate a cash value on the policy during the policy’s life.

This cash value earns interest over time, so it is a form of recurring revenue and helps to grow the value of your policy.

With a dividend-paying whole life insurance policy, you get the added potential advantage of receiving an additional bonus at the end of the year based on how well 0or how poorly) the insurance company performed during the year. A good broker should guide you on the amounts that have been paid out over the past years.

What are the options for the extra cash, I hear you excitedly ask?

You get to decide how the bonus dividend is applied (assuming one is declared). There are four options for you.

Firstly. You can opt to be paid out the cash, in which case the insurance company writes you out a check which you can deposit or even cash and spend on your Christmas present for the year!

Next, you can instruct the company to hang onto the money in their account, in which case it will earn you the interest every year.

Thirdly, you can direct the company to give you additional life cover by using the annual bonus. The single payment made from the bonus can provide you with new life coverage.

Lastly, you can request the insurance company to put the bonus towards your premiums, in which case the premiums will be lowered.

So, what are the cons?

The biggest con is that premiums are significantly higher, especially if there is a guaranteed dividend.

Most people don’t need whole life insurance, and taking it to benefit from the annual dividend does not mean they don’t need it. However, insurance must be customized to your needs. There is no one-size-fits-all solution.

The policies you take out should form part of a logical strategy and cover all ofyour bases as an individual.

So whether a whole life dividend-paying policy is for you or not depends. Maybe. Maybe not.

What are the top ten insurance companies that offer whole life dividend policies?

There are several different insurance companies that pay dividends.

It is beyond the scope of this blog as to what these companies are. For now, you need to decide on whether such a policy is required in your portfolio.

If it is, then start comparing before you decide which policy is the right fit for you.