Why Are Dividends from a Mutual Insurer Worth Considering

Dividends from a mutual insurer are a unique benefit that sets them apart from other types of insurance companies.

Mutual insurers are owned by their policyholders, not by shareholders, which means that any surplus funds are distributed back to policyholders in the form of dividends.

In fact, mutual insurers have historically been more likely to pay dividends than other types of insurance companies, with some paying dividends for over 100 years.

Dividends can be a significant source of additional income for policyholders, especially those who have been with the insurer for a long time.

Whole life insurance is the most popular form of permanent coverage because of its contractual guarantees and dividend potential.

Dividend-paying whole life insurance policies are available, offering a way to earn back some of the premiums paid over time.

These policies are often preferred by those who value the potential for long-term savings and financial security.

Non-participating whole life insurance policies, on the other hand, do not pay dividends and consequently offer lower premiums.

This type of policy is a good option for those who prioritize the lowest possible premiums over the potential for dividends.

Understanding the differences between these types of policies is crucial before deciding which one is right for you.

Cash Value and Dividends play a crucial role in a mutual insurer's dividend payments. Your insurance company's dividend scale can significantly impact the future value of a life insurance policy. Since your dividend is usually calculated as a percentage of your current cash value, policyholders who receive more dividends will have more cash value over time.

A policyholder's present cash value can affect their dividend payout. For example, if the present cash value is $100,000 and the dividend yield is 5%, the payout would be $5,000. Consistently reinvesting dividends back into the cash value can accelerate distributions.

The way a company calculates a dividend is also important. Northwestern Mutual calculates a whole life policy's annual dividend by starting with the guaranteed accumulated value of the policy at the beginning of the year. They then add the gross annual premium, subtract a mortality and expense charge, and credit the balance with the current dividend interest rate.

Here's a breakdown of how Northwestern Mutual calculates a dividend:

A company's history of dividend payments is a strong indicator of its reliability. MassMutual, for example, has paid dividends every year since 1869. Similarly, Guardian has maintained a steady dividend payout since 1868.

Here's a comparison of the historical dividend rates from 2014 to 2023 for four leading insurers:

You may have flexibility on how to use your dividends. For example, you can use dividends to grow the policy using paid-up additions, which increases your cash value and face amount. Other clients want to reduce premiums or take dividends as cash.

Dividends from a life insurance policy are considered a return of premium and are subject to specific tax rules.

If you own a life insurance policy, the IRS gives preferential tax treatment to dividend distributions, making them nontaxable when paid to you in cash, used to reduce your payments, used to repay policy loans, or utilized to buy paid-up additions.

Dividends are only taxable if they exceed the total amount of premiums you've paid or if you withdraw cash value beyond your total payments.

You won't owe taxes on policy loans, regardless of premiums paid, dividends acquired, or interest earned.

The tax implications of dividends depend on whether your policy is classified as a Modified Endowment Contract (MEC).

Here's a breakdown of the tax treatment of dividends for MEC and non-MEC policies:

Dividends used to purchase paid-up additional insurance or to pay premiums on the same policy are not taxable.

The Closed Block is a mechanism established to provide for the reasonable dividend expectations of policy owners, but termination dividends are not guaranteed and may not be paid upon death or surrender.

Northwestern Mutual calculates a whole life policy's annual dividend by adding the gross annual premium, subtracting a mortality and expense charge, and crediting the balance with the current dividend interest rate.

The dividend interest rate for most policies in 2025 is 5.50%. This rate is used to determine the end-of-year accumulated value. The annual dividend is paid on the policy anniversary.

MassMutual has paid dividends every year since 1869, and Guardian has maintained a steady dividend payout since 1868. A company's history of dividend payments is a strong indicator of its reliability.

Historical dividend rates from 2014 to 2023 for four leading insurers show that Northwestern Mutual has consistently paid dividends. The ability to pay dividends is a result of efficient operations, careful risk selection, and successful investment management.

Through dividends, Northwestern Mutual's goal is to provide policyowners with world-class insurance protection at the lowest possible cost over time. Dividends provide a true "net cost" by reflecting the company's actual performance, which is often better than the conservative assumptions used to set policy values and premiums.

In retirement, you can modify your dividend election yearly to suit your needs.

Taking dividends in cash creates a predictable income stream, and it doesn't reduce your death benefit or guaranteed cash value accumulation.

You can also surrender paid-up additions to increase income, which will reduce your death benefit.

Non-direct recognition policies credit you the same dividend even when you've borrowed from your policy.

A small death benefit remains when you die, and no income tax is charged on any prior withdrawals and loans.

Dividends from a mutual insurer are a unique benefit that sets them apart from other types of insurance companies.

Real-life examples show how dividends are calculated and paid out to policyholders. For instance, a policy issued in 1991 had a guaranteed accumulated value of $95,026 at the beginning of the year.

A snapshot of the calculation process shows the impact of various factors on the policy's value. Here's a breakdown of the key steps:

The calculation process begins with the guaranteed accumulated value of the policy at the beginning of the year. This value is then adjusted by adding the gross annual premium and subtracting a mortality and expense charge. The balance is credited with an interest rate, resulting in the end-of-year accumulated value. The dividend is the difference between the accumulated value and the guaranteed accumulated value at the end of the year.

Many mutual insurance companies pay consistent dividends to their policyholders.

The top dividend-paying whole-life companies have excellent financial ratings from the four major rating agencies: A.M. Best, Fitch Ratings, S&P Global Ratings, and Moody’s.

Northwestern Mutual and New York Life are captive insurance companies, meaning their agents can only sell their policies.

MassMutual and Penn Mutual are committed to marketing through independent agents, offering more options for policyholders.

In 2022, MassMutual had a dividend yield of 6.0%, while Penn Mutual had a dividend of 5.75%.

Several fantastic mutual companies, including Northwestern Mutual, New York Life, MassMutual, and Penn Mutual, offer participating policies that pay dividends.