What are dividends in the context of life insurance?

Dividends in the context of life insurance refer specifically to portions of the insurer's profit that are distributed to policyholders of participating policies. When a policyholder holds a participating policy, they share in the financial success of the insurance company, which can result in annual dividends depending on the company's performance. These dividends are not fixed payments like death benefits but rather contingent upon the insurer's revenues and expenses.

Policyholders can usually choose how to receive their dividends, such as taking them as cash, using them to reduce premium payments, purchasing additional insurance, or leaving them to accumulate interest. This concept highlights a unique feature of participating policies, differentiating them from non-participating policies that do not offer dividends regardless of the insurer's profitability. Understanding this distinction is crucial for comprehensively grasping the nature of life insurance products and how they operate financially.