Intellectually, we all know the importance of having insurance. We understand the dire consequences that would occur if we suffered a loss and didn’t have this protection.
We search for online cheap insurance quotes in order to get the best rates and still, we sometimes have a tendency to feel that our insurance premiums are wasted money. Month after month and year after year, we pay out our hard-earned money and get nothing tangible in return.
There is a way to have your insurance policy pay you. By choosing the right policy, you can receive an annual dividend, which you can use in any way you choose.
What is an insurance dividend?
An insurance dividend is a payment made by an insurance company to the policy holder, usually once a year. These payments are considered, by the IRS, to be a partial refund of the premium. As such, they are not subject to income tax.
Who can get it and how does it work?
In order to qualify for a dividend, you must purchase a “participating” policy from a “mutual” insurance company. Once you own one of these policies, you can elect to receive your dividends in one of four ways.
1. You can receive the dividend in cash
2. You can use it as a partial payment on your annual premium
3. You can use the dividend to purchase additional, paid-up insurance
4. You can allow your dividend to accumulate at interest. If you choose this option, the interest will be subject to income tax, and you will receive a 1099 form at the end of the year.
What determines the amount of your dividend?
There is no set amount or percentage for dividends. Each individual insurance company determines the amount it will pay. It does this by subtracting the funds it requires for operating expenses, contractual obligations and contingencies from its earnings. The amount remaining is called a divisible surplus. This amount is then divided among the policyholders owning a participating policy. Dividend yield and payout ratio calculations, normally used when evaluating a stock company, do not apply in the case of insurance.
Dividends are not guaranteed. It is remotely possible that an insurance company would experience a year where there was no divisible surplus remaining. In that case, no dividends would be paid in that year. However, most of the reputable companies have paid dividends every year for many decades.
Buying insurance from a mutual company that pays you dividends can reduce your costs and make you feel that you are getting a return for your premium. By searching for cheap insurance quotes online, you can find both the best prices and the best dividends available.