At first glance, dividend-paying life insurance policies seem to be a hybrid of a life insurance policy with an investment in the insurance company.

Is this a good idea, or should life insurance be kept separate from your investment portfolio?

Let’s start by looking at a dividend-paying life insurance policy and how it works and then look at the pros and cons.

Let’s dive in ….

What Is A Dividend-Paying Life Insurance Policy?

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

The dividends can be distributed as cash to the policyholder, decrease premiums, or buy additional paid-up insurance. Again, the choice is yours as the policyholder.

The dividend amount is not guaranteed, nor is the payment of any dividend for a particular year guaranteed by the insurance company.

The amount and whether a dividend is declared or not depend on the insurance company’s performance over the year.

Some policies guarantee a dividend, but these are more expensive to cover the additional risk to the insurance company.

How Does A Dividend-Paying Life Insurance Policy Work?

These policies have two distinct components, a death benefit, and a cash value. A standard whole life policy does not accumulate a considerable cash value. It generally only provides sufficient cash value to make up for a few missed premiums or t

A dividend-paying life insurance policy, on the other hand, provides for an additional mechanism to accrue a higher cash value based on how well the insurance company has performed during that year. If the company does very well, a decent dividend is declared and offered back to the policyholder. If you elect to leave the cash with the insurance company, your cash value increases significantly.

Such a policy is a hybrid that provides an “investment” with a potential dividend and a death benefit amount.

As with any insurance policy, the policy should fit your needs as a policyholder. Everybody has different personal circumstances and financial and insurance goals. This type of policy may be a perfect fit for you or not what you need. Never take an insurance policy because anybody touts it – make sure it is the ideal fit.

Pros And Cons Of A Dividend-Paying Life Insurance Policy

Pros

This policy provides you with a new way to earn some additional money. If the insurance company does well, you have the dividend declared, making you extra revenue.

You get to choose what to do with the dividend, so it is pretty flexible.

If you save the additional dividend, your death benefit is increased, and your cash component.

The dividend earnings are tax-free if deposited into the fund, you have access to the cash whenever you want, and you can spend them on whatever you want.

Cons

These policies can be pretty expensive – especially if there is a guaranteed annual dividend.

You potentially run the risk of having no dividend declared if the insurance company does poorly.

Some people prefer to keep their investments and insurance separate.

Which Dividend-Paying Life Insurance Policy Should You Choose?

The policy you should choose is most suitable for your long-term needs and goals.

Once you have decided to opt for a dividend-paying life insurance policy, check out this great article comparing dividends of different insurance companies.

Remember that there is more to a life insurance policy than the dividend-paying feature, so be sure to assess the entire policy and not over-emphasize the dividend element.