How Do Life Insurance Dividends Work?

Sean McGinn is an assistant director of Product Positioning in the Insurance Solutions department at Northwestern Mutual.

If you’re thinking about buying whole life insurance (or if you already have a policy), you may have heard the word “dividends.” They sound like a good thing—after all, dividends are extra money that’s paid out to you. But what are they really, and how do life insurance dividends work?

When do life insurance companies pay dividends?

Life insurance companies make certain financial assumptions when setting the guarantees underlying the products they sell. For example, they make an assumption about how many claims they will pay each year, called mortality. They also estimate how much they will earn on the money they invest. And they make an assumption about how much it will cost to run the company.

When a company finishes the year better than those assumptions, it can choose to pay some or all of that money back to shareholders and policyowners.

Some life insurance companies don’t have shareholders, and; many of those companies are called mutual companies. (Northwestern Mutual happens to be one of those.) So, at mutual companies, surplus money is paid solely to policyowners in the form of a dividend. At Northwestern Mutual, we have paid a dividend every year since 1872 (more than $150 billion over that time span). In 2026 we expect to pay $9.2 billion in total dividends, with $7.9 billion of that to whole life insurance policyowners. Even through periods of economic uncertainty, market volatility and global challenges, Northwestern Mutual has accelerated its dividend growth.

Are dividends paid on whole life insurance policies?

This can vary from company to company. But typically a whole life insurance policy is eligible for dividends if a life insurance company pays them. This can be a great benefit over time because you may be able to use your dividend to purchase additional paid-up whole life insurance. Doing so can help you increase your death benefit and cash value more quickly than the guarantees built into the policy. And over time this can have a compounding effect, as your additional insurance will be eligible for additional future dividends.

Are dividends paid on term life insurance policies?

Again, this can vary from company to company. But some term life insurance policies are eligible for dividends. If dividends are paid for term life insurance, they could be taken as cash or used to reduce your premium.

Evaluating life insurance dividends

How is a life insurance dividend calculated?

While different types of permanent life insurance policies work differently, in general, when you buy permanent life insurance, you pay a yearly premium for your policy. Each year, that premium is added to your policy and becomes cash value—money that you can access for any reason during your lifetime. After the premium is added to your cash value, expenses to pay claims and operate the company are subtracted based on the guaranteed assumptions. Then, interest is credited, also based on a guaranteed rate. If the company’s actual experience is better than the guaranteed assumptions for expenses, claims (mortality) and investments, a dividend is paid. (You can learn more about how we determine our dividend.)

Comparing dividends from different whole life insurance policies

Make sure you ask about all the components of the dividend (mortality, expenses and interest rate). Just because one company’s dividend interest rate is higher than another’s doesn’t mean the actual dividend amount that you get will be higher. For example, it’s possible that a company doesn’t perform as well from a claims or expenses standpoint. If that’s the case, they could have a higher interest rate than another company but end up paying a lower dividend. That's why it’s so important to see the whole picture before you decide which policy to buy.

Does every insurance company pay life insurance dividends?

Some companies do; some do not. Because mutual insurance companies are owned by the policyholders, that type of company is more likely to pay them dividends. Stock insurance companies can pay dividends to their shareholders, but it’s not as common or expected as it is with mutual companies.

Among companies that do pay regular dividends, it’s important to look at the history of paying them. After all, dividends aren’t guaranteed. This can make a big difference in the value of a permanent life insurance policy over time.

Are life insurance dividends taxed?

Life insurance dividends are generally not taxed as income because they’re viewed as a return of some of the money you paid in as premium. In other words, they’re considered your own money coming back to you rather than taxable income. But there are some exceptions.

When it comes to tax laws, it’s best to consult with a tax professional to understand your specific situation. But as an example, a life insurance dividend can be taxed as income if the total dividends you use to pay premiums or receive in cash exceed the total premiums you've paid in. Then you may have to pay taxes on the excess.

Dividends used to purchase additional insurance are not generally taxed as income.

Life insurance dividend options

When you get a dividend, you have several options. You might take it as cash one year and then allow the dividend to accumulate inside the policy for the future. The typical options include these:

Take your dividend as cash

You could choose to take your dividend as cash. If so, your insurance company will make an automatic deposit (or send you a check) if your policy has earned a dividend.

Pay your premium with your life insurance dividend

This option can help to reduce what you’ll owe on your policy each year. In some cases, the policy grows to the point that the dividend can cover the entire cost of the life insurance for the year.

Accumulate dividends inside the policy

With certain types of permanent life insurance policies, you can opt to accumulate dividends with the company with interest credited at a rate set by the company.

If your policy is eligible for a dividend, you usually get it on the policy anniversary—the date your contract started. For example, a policy that started July 1 will get its dividend credit near that date.

Purchase additional coverage

Your final option is to use your dividend to buy additional paid-up life insurance. That’s essentially more coverage that you pay for right away. This option can allow the death benefit and cash value of your policy to grow more quickly over time. That’s particularly beneficial because this growth compounds and is typically tax-deferred.

Talk with your financial advisor

Your Northwestern Mutual financial advisor can help you find the life insurance coverage that works best for you. Or if you’ve already got a policy, they can help you better understand how your dividends could work for you. They'll explore different scenarios and project how they might play out over time, so you can make informed decisions. Together, you can choose the best option for any dividends coming your way.