In the insurance industry, a yearly payment given by an insurance company to a policyholder. Annual dividends are most commonly distributed in conjunction with life insurance and disability income insurance policies. Insurance companies may pay their customers an annual dividend when the company’s investment returns, experience (paid claims) and operating expenses in a given year are better than expected. Dividend amounts change each year and are not guaranteed.
Annual dividend calculations are based on the individual insurance policy’s guaranteed cash value, the policy’s annual premium, the company’s actual mortality and expense costs and the dividend scale interest rate. Insurance companies need to make sure they earn enough in premiums each year to cover their expenses, reserves and contingencies, but they may choose to share a surplus with their customers. Policyholders who have borrowed against their policies may receive reduced annual dividends while the loan is outstanding.
Annual dividends can be applied to annual premiums to reduce the customer’s cost of carrying the policy. They can also be applied to increase the policy’s value, used to purchase additional insurance, be distributed as cash or used to repay a policy loan. With some exceptions, dividends are generally considered a return of premium and so are not taxable as income.