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Life insurance can be an essential investment for protecting your loved ones if you pass away. However, death benefit coverage isn’t the only benefit of owning life insurance. It can come with several other features, one of which is life insurance dividends. Some insurers may pay these each year if they have excess profits, rewarding you for being a policyholder. This article will explain how life insurance dividends work, then discuss when they may be considered taxable income.
Life insurance dividends are a sum of money the insurer pays to each policyholder based on the insurer’s company profits.1 Permanent life insurance policies, such as whole life insurance, generally pay dividends since they have cash value. Term life insurance does not pay dividends.
Insurers generally pay dividends annually. Also, keep in mind that dividends are separate from cash value earnings.
Life insurance dividends are generally not taxable. This is because, in most cases, the IRS considers a life insurance dividend to be a return of premiums paid.1 However, there are a few exceptions that we’ll cover in the next session.
Don’t wait until it’s too late. Help cover yourself and your family with coverage from Aflac.
Here are some instances where life insurance dividends may be taxable:
If the amount of dividends you receive is greater than the total premiums you have paid into the policy, the excess may be taxable. This is because any dividends over the amount you paid are considered income, not a return of premium.
For example, imagine that you pay $1,000 in life insurance premiums this year, and you receive a $1,250 dividend. You may owe taxes on the $250 excess.
You can leave your dividends in your policy to earn interest. However, this interest income may be taxable if it earns you more than you have paid in premiums.2
Policyholders can elect to receive their dividends in several ways:1
Many choose to receive their dividends in cash. This can be a good way to supplement your income, use the dividends for a specific purpose, invest the funds elsewhere, or recoup some of the costs of your life insurance without reducing your coverage.
You can elect to apply your dividends directly to future premium payments. This can help you reduce the cost of life insurance coverage and automatically pay part or all of your premiums. Applying dividends to premium payments can also help ensure coverage doesn’t lapse if you encounter financial problems in the future.
You can have your insurer pay your dividends directly into your cash value and earn interest. This allows the principal to grow faster, which also helps you earn larger interest payments. Leaving your dividends in the policy could help you grow your cash value as a source of wealth more quickly.
Paid-up life insurance is simply coverage that is already paid for, meaning you don’t need to pay additional premiums. You can use your dividends to purchase additional paid-up life insurance. This allows you to increase your coverage without a corresponding increase in premium payments.
Purchasing a reduced paid-up policy with your dividends allows you to stop paying premiums entirely, but you must lower your death benefit. You may want to consider this option if you have gone through changes that require less coverage and want to cut your out-of-pocket costs.
Life insurance dividends can reward you for being a loyal policyholder. You can take them as cash, put them toward future premiums, save them in your cash value to build more wealth, or get more coverage without increasing your costs.
Regardless of how you choose to receive your dividends, keep in mind that you may owe taxes on any amounts that exceed premiums paid. Tax professionals can help you determine whether you owe taxes on your dividends.
For more help understanding life insurance, please visit Aflac’s life insurance advice page. And if you’re ready to get a policy, speak with an agent about our life insurance options today.
1 Forbes – Life Insurance Dividends Explained. Updated February 21, 2023. https://www.forbes.com/advisor/life-insurance/life-insurance-dividends/. Accessed August 23, 2024.
2 IRS – Topic No. 403, Interest Received. https://www.irs.gov/taxtopics/tc403. Accessed August 23, 2024.
Coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, coverage is underwritten by American Family Life Assurance Company of New York. 68000 series: In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. In New York, NY68100-NY68400.65000 series: In Virginia, Policies ICC0965JTO & ICC0965JWO. B61000 series: In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC18B61JWO & ICC18B61JTO. In Delaware, Policies B61JWO, B61JTO. B60000 series: In Arkansas, Idaho, Oklahoma, Pennsylvania, Texas, & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q60000 series: Whole: In Arkansas, Delaware & Oregon, Policy Q60100M. In Idaho Policy Q60100MID. In Oklahoma, Policy Q60100MOK. In Texas, Policy Q60100MTX.Q60000 series: Term: In Delaware, Policies Q60200CM. In Arkansas, Idaho, Oklahoma, Oregon, Texas, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C.
Final Expense insurance coverage is underwritten by Tier One Insurance Company. The life insurance policy described herein contains an optional Accelerated Death Benefits Rider that is intended for favorable tax treatment under Section 101(g) of the Internal Revenue Code. Aflac does not give legal or tax advice. Please consult with a qualified legal, tax, and accounting advisor before engaging in any transaction. In AR, AZ, ID, OK, OR, PA, TX and VA: Policies ICC21-AFLLBL21 and ICC21-AFLRPL21; and Riders ICC21-AFLABR22, ICC21-AFLADB22, and ICC21-AFLCDR22. Tier One Insurance Company is part of the Aflac family of insurers. In California, Tier One Insurance Company does business as Tier One Life Insurance Company (Tier One NAIC 92908).
This is a brief product overview only. Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY or VA. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations and exclusions. For complete details, including availability and costs, please contact your local Aflac agent.
Aflac does not offer Universal or Variable Universal life insurance.
Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.
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