Understanding the need for insurance is straightforward—we all recognize how bad things could get if something goes wrong and we’re not covered. Many of us spend time online searching for affordable insurance quotes to get the best value. However, it often feels like our insurance premiums just disappear without any real benefit.
But did you know there’s a way to actually get something back from your insurance policy? By choosing the right type of policy, you can receive an annual dividend that you can use as you like. So, what exactly is an insurance dividend? It’s an annual payment that the insurance company returns to you, which is considered by the IRS as a partial refund of your premium, and therefore, it’s not subject to income tax.
Who can get this benefit, and how does it work? You need to purchase a ‘participating’ policy from a ‘mutual’ insurance company to be eligible for a dividend. As a policyholder, you have four options for using your dividends:
1. Take a cash dividend
2. Apply it to partially pay your annual premium
3. Use it to buy additional paid-up insurance
4. Let it accumulate interest (note that the interest will be taxable and you’ll need a 1099 form at the end of the fiscal year)
How do insurance companies figure out how much your dividend should be? There’s no fixed percentage or amount. They calculate it by subtracting their costs, contingencies, and contractual obligations from their earnings. The remaining amount, called a divisible surplus, is then shared among all policyholders with a participating policy. This isn’t like the dividends from stock companies, so traditional concepts like dividend yield and payout ratio don’t apply here.
Keep in mind that dividends are not guaranteed. There might be a year when the insurance company has no leftover surplus, which means no dividends for that year. However, many reputable companies have a long track record of paying annual dividends consistently.
Investing in an insurance policy from a mutual company that pays dividends can help reduce your out-of-pocket costs and give you a tangible return on your premiums. You can easily find affordable insurance quotes online, helping you to get great coverage options and benefit from potential dividends.