We all understand that having insurance is important because without it, we could face serious financial trouble if something goes wrong. Many of us spend time searching online for the best insurance deals to get the most value for our money. Yet, it often feels like our insurance premiums are just disappearing without any real benefit.
But did you know that your insurance policy can actually give you something back? By choosing the right kind of policy, you could receive an annual dividend that you can use however you like. So, what exactly is an insurance dividend? It’s an annual payment that the insurance company returns to you, which the IRS considers a partial refund of your premium. This means it’s tax-free.
Who can get these dividends, and how do they work? You need to buy a ‘participating’ policy from a ‘mutual’ insurance company to be eligible. Once you have this policy, you have four options for using your dividends:
1. Take cash as a dividend.
2. Use it to help pay your annual premium.
3. Buy extra paid-up insurance.
4. Let your dividend earn interest. Keep in mind, if you choose this last option, the interest will be taxable, and you’ll need to fill out a 1099 form at the end of the year.
How does the insurance company decide how much your dividend will be? There’s no fixed percentage or amount. Each insurance company figures this out on their own, subtracting their operating costs, contingencies, and other obligations from their earnings. Whatever’s left, known as a divisible surplus, is split among the policyholders. Unlike stock companies, traditional dividend yield and payout ratios don’t apply here.
However, dividends aren’t guaranteed. There could be years when the insurance company doesn’t have any surplus to divide, which means no dividends for that year. Even so, many reputable companies have a strong track record of paying out dividends each year.
Choosing an insurance policy from a mutual company that pays dividends can help reduce your out-of-pocket costs and give you a more tangible return on your premiums. You can easily find affordable insurance quotes online, helping you secure great coverage and the best dividend options.