Thursday, July 12, 2007

Life insurance: What is a dividend?

When a life insurance agent says your life policy will pay dividends, you have to know that dividends are never guaranteed. There are three reasons why your life policy may pay dividends:

1) You have overpaid your premiums, so the insurance company refunds the excess premiums to you as a "dividend."

2) Many life insurance companies during the 1990s were fined by individual states for lying and deceiving consumers about cash value life insurance. Many companies were able to pay the fines and many were not able to. Some companies opted to sell stocks to its customers to recoup the loss. Of course, the company will have a sales charge and have high annual expenses. You will never get a good rate of return if you have investments in life insurance policy. It's just not physically possible.

3) Your life policy is a "participating policy." The dividends represent the favorable experience of the company and result from excess investment earnings, favorable mortality and expense savings.

In all cases, you must know that dividends are never guaranteed. Any agent that says otherwise would be subjected to fines set by the SEC.