The dividend payment is a way for whole life policy owners to take part in the money an insurance company makes. This is especially important for owners of policies with mutual life insurance companies, as the policy owners are also the owners of the company.
Dividends are NOT guaranteed but most companies offering these types of life insurance policies have paid dividends consistently for the last 100+ years. This type of dividend paying coverage is also referred to as participating whole life insurance because the policy owner is participating in the insurance company’s profits.
Taxation of Whole Life Dividends. However, since they are tied to a Whole Life insurance policy, these dividends are technically considered to be a refund of overpaid premiums by the mutual insurance company. Whole life dividends are therefore considered a tax-free return of premium up to the extent of how much premium you’ve paid into the policy.
Whole life insurance is a type of permanent or “cash value” life insurance that provides benefits for the “whole” of your life (versus term insurance that only lasts for a specific period of time). Some companies offer dividend paying whole life insurance policies which means the policies pay dividends.