Whole Life Insurance Dividends: What They Are and How They Work

I heard whole life pays dividends — but what does that really mean?

This question comes up constantly when we talk with business owners and high-earning professionals about Privatized Banking. And honestly, I get it.

The world of whole life insurance dividends can feel a little murky. Confusing. 

So we brought in someone who knows this stuff inside and out: Perry Miller, former Regional VP of Lafayette Life Insurance Company. Perry spent decades in the trenches, helping advisors and families navigate the complexities of whole life insurance.

So if you want to see how dividends work, understand how they will impact your policy in the future, and make the best decision when starting your Privatized Banking policy now, so you’ll get the most use out of your money later, tune in below!

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Quick Highlights

In this article, you’ll discover:

• What whole life dividends actually are (and why they’re completely different from stock dividends)
• The 4 biggest myths about dividend rates 
• Why comparing dividend rates between companies is almost meaningless
• How to use dividends strategically to build generational wealth
• The track record of mutual companies paying dividends for 150+ years through every economic crisis
• What’s guaranteed vs. what’s not in your whole life policy

Where Whole Life Insurance Fits Into the Bigger Picture

Privatized Banking with whole life insurance is just one part of the bigger journey.

That’s why we’ve developed the 3-step Cash Flow System. It’s your roadmap to go from just surviving to a life of significance, purpose, and financial freedom. 

The first stage is the foundation. You first keep more of the money you make by fixing money leaks, becoming more efficient, and profitable. 

Then, you protect your money with insurance, legal protection, and privatized banking. 

Finally, you put your money to work, increasing your income with cash-flowing assets.

What Are Whole Life Dividends?

There is some confusion in the marketplace equating whole life insurance dividends with stock dividends; however, they’re not the same. 

So, does whole life insurance pay dividends?

Yes. But here’s what they actually are: returns of excess premium from mutual insurance companies to their policyholders.

These dividends are a calculation of a few factors, including expense and interest rate forecasts, portfolio performance, and mortality rates.

If they do better than expected on any of those fronts, they share some of that “extra” with you. That’s your dividend.

In short, stock dividends come from profits from investments. Dividend insurance comes from the insurance company’s operational performance.

The Guarantees of Whole Life Insurance

Your whole life policy guarantees three things, period:

• Your premium (it won’t go up)
• Your death benefit (it won’t go down)
• Your cash value growth (it will happen)

Everything else? Including dividends? NOT guaranteed.

Dividends are the icing on the cake. By charter and by law, insurance companies must pay contractual guarantees. If rates, mortality, and expenses change or fluctuate, that can affect the company’s ability to pay those guarantees.

So the dividend is like the safety valve. If something doesn’t work out as expected, companies will lower dividends to compensate. On the flip side, if those factors do better than projected, you get to participate in higher rates as well.

Most companies can boast that they pay dividends regularly, yet do they meet the projections? Not always. However, that flexibility allows them to meet their guarantees.

This mechanism allows the companies to give policy owners the certainty of the death benefit and other guaranteed provisions. So not only are the dividends a bonus, they act as an assurance that the company will meet their contractual obligations.

How Dividends Are Calculated

Companies look at three main buckets:

Company profits and how their investments performed. If they projected 4% returns and actually earned 5%, that extra 1% factors into dividends.

Interest earnings on their portfolio. Insurance companies invest VERY conservatively – think bonds, real estate, blue-chip stocks. When these perform well, you benefit.

Operating expenses and mortality experience. If fewer people died than expected, or if they ran their business more efficiently than projected, some of that savings flows to dividends.

Right now, current gross dividends run somewhere between 4% and 6%. But we’ll show you later why that may not be what it seems. 

Dividend Payment Options Explained

When your policy earns dividends, you’ve got four choices for what to do with them.

Paid-Up Additions

This is where the magic happens, and honestly, it’s what most wealth-building families should choose.

When you take dividends as paid-up additions (PUAs), you’re buying more life insurance with that dividend money. More insurance means more cash value.

AND if you want to know which dividend option will increase the death benefit? You’ve got it, PUAs.

You see, those PUAs earn dividends too. So next year, you’re earning dividends on your original policy PLUS dividends on all the PUAs you’ve accumulated.

It’s like a snowball rolling downhill, getting bigger and faster every year.

Taking Cash

You can take dividends as cash, and sometimes that makes sense if you have cash flow needs that have to be met. Otherwise, it’s an immediate gratification trap.

But every dollar you take as cash is a dollar that’s NOT compounding for the next 20, 30, 40 years.

It’s the difference between instant gratification and long-term cash value growth that changes your family’s financial trajectory.

Premium Offset

Some people use dividends to reduce their premium payments. This can provide cash flow relief, especially in tight years.

But again, you’re trading long-term compound growth for short-term cash flow improvement. Sometimes that trade makes sense. Usually, it doesn’t.

Accumulate at Interest

Your dividends can stay with the company, earning interest. This is safer than taking cash and more flexible than PUAs, but it typically generates lower long-term returns.

This might work if you’re planning to use those accumulated dividends for something specific down the road.

Why Dividends Actually Matter

Here’s where we get to the heart of why this matters.

Let’s start by answering the following question: What is the difference between cash value and dividends?

Your cash value is the guaranteed foundation – the money that will be there no matter what. Dividends are the accelerator that can turn a solid policy into a generational wealth-building machine.

When you understand how to use dividends strategically, three things happen:

Your Money Compounds Faster

Every dividend reinvested as PUAs creates more insurance, which creates more cash value, which generates more dividends. It’s geometric growth, not arithmetic.

Your Family Gets Better Protection

More death benefit means more financial security for your spouse and children. But it’s also a more tax-free wealth transfer when you’re gone.

You Get More Financial Scope

A policy with strong dividend growth gives you more borrowing capacity for investments, business opportunities, and more. Your policy becomes the engine that funds other wealth-building activities.

4 Myths of the Whole Life Insurance Dividend

1. The highest declared dividend means you’ll get more growth in the long term.

When comparing policy illustrations, the numbers can be complex. And on occasion, policies will be nearly identical, and the only major difference appears to be the dividends. On the surface, you’d think that makes the decision simple. 

However, dividends are not guaranteed, and as noted above, are not always paid as projected. Just because company A has higher projections than company B now does not mean that will always be the case.

Dividends will fluctuate, so you cannot rely on current projections to accurately determine future growth. Rates you see this year can change in the next. Over time, these projections will likely even out between the companies.

When comparing policies, look at the details of the contract, policy and company history.

2. Dividend rates mean the same thing from one company to another.

When companies declare dividends, they show either a Gross rate or Net rate. And the companies won’t specify which one they’re showing. This is yet another reason it isn’t ideal to compare company dividends.

The Gross rate is the company’s higher rate, which is calculated before considering any expenses. The Net rate is the projection after companies have calculated average mortality and expenses.

Some companies believe that the Gross rate is more honest, while some believe that the Net rate is. Both arguments have some validity.

The key takeaway is that dividends between companies won’t always be a valid comparison.

3. Today’s dividend rate on the illustration means guaranteed dividend rates in future years.

Unfortunately, this isn’t the case. Fortunately, regardless of what today’s dividend rate is, future dividends are highly likely to be paid. Mutual life insurance companies like to boast their track records of paying dividends throughout the last century (or longer).

That means that through wars, recessions, and pandemics, most mutual companies paid dividends.

No company, however, has paid dividends at the same rate year after year. Illustrations are meant to show what your policy could look like in the future, with current projections.

So while it won’t be 100% accurate, it’s the simplest way for companies to get the message across effectively. The projection holds water because it allows you to visualize your growth while maintaining expectations.

Dividends are something you can be confident in, thanks to the structure of the contract and the ability dividends give to meet the guaranteed provisions.

4. Everyone gets the declared dividend.

Another myth of the dividends is that if the rate is declared at 5.5%, your account will increase by exactly 5.5%. In reality, the projections are the average of the payout.

Some policyholders are going to find that they’ve received more than the declared dividend, and some will receive less. This happens for several reasons, including the underwriting and age of the policy. 

Age, policy design, and mortality also will all have a direct effect on the dividends received.

In addition, loans and dividends can impact each other.

From year to year, loan rates will change based on dividends, though whether the rates are fixed or variable is determined at the time of the loan.

Also, outstanding loans can change the dividend received, depending on the company.

Direct Recognition vs. Non-Direct

When policy loans come into play, your dividend can be affected by direct or non-direct recognition.

Direct recognition is when the dividend recognizes an outstanding loan and pays a lower dividend on the portion of the cash value borrowed against.

Non-direct recognition is when the company does not recognize an outstanding loan, and continues to pay a full dividend on all cash value, even the portion borrowed against.

Usually, direct recognition companies will have a higher declared dividend. Meanwhile, non-direct recognition companies will have a lower declared dividend, to accommodate for future loan activity.

Historical Reliability and Future Outlook

As we mentioned in myth 3, dividend rates will fluctuate, but what really matters is the track record of actually paying dividends.

Most mutual life insurance companies have been paying dividends for well over a century. These are companies that have maintained dividend payments through the Great Depression, two world wars, the 2008 financial crisis, and the COVID-19 pandemic.

The best mutual life insurance companies have track records spanning 150+ years of consistent dividend payments while maintaining their financial strength ratings and meeting every contractual guarantee.

The stability comes from their business model. Mutual companies are owned by their policyholders, not outside shareholders demanding quarterly profits. This means they can take a long-term view, investing conservatively and building reserves that weather economic storms.

Will dividend rates stay exactly where they are today? Absolutely not. They’ll fluctuate based on interest rates, economic conditions, and company performance.

But will mutual companies continue paying dividends? Based on 150+ years of evidence through some of the worst economic periods in history, the answer appears to be yes.

That’s the kind of reliability around which you can build a generational wealth strategy.

Looking Deeper than Whole Life Insurance Dividends

Understanding dividends is important, but it’s just one piece of building a comprehensive wealth strategy that will serve your family for generations.

The real question isn’t “what’s the dividend rate?”

It’s “how do I create a legacy of more than money for my family?”

Dividends are part of that answer. But they’re not THE answer.

If you’re interested in the benefits of a policy, the best thing you can do is make a decision. The policy you would have bought ten years ago is better than the policy you could buy today. Don’t paralyze yourself with indecision. 

If you’re ready to stop analyzing and start building, if you want to create wealth that lasts generations instead of just accumulating money that might not survive the next market crash…

Book a call with our team.

Who is Perry Miller?

Looking to make his mark in the financial world, Perry earned a B.S. in Business Economics and Finance and then an M.B.A. with a focus on Management and Business Economics. 

He first started helping individuals and small businesses maximize their cash flow and protect their assets. For the last 16 years, he has served as the Regional Sales VP for Lafayette Life Insurance Company.

He has been fortunate to work with talented advisors who have helped make his region one of the most productive in the country. For the last six years (with 2020 being the exception), he has hosted the advisor-focused Colorado Business Retreat.

In June of 2024, he retired from Lafayette Life and now owns a boutique financial practice focused on protecting retirement assets and planned charitable giving. He continues to speak and teach classes on a broad scope of financial topics.