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  • Writer's pictureDavid H. Kinder, RFC®, ChFC®, CLU®

Myth #6: Dividends Are Just A Return Of Unused (Overcharged) Premium

Updated: Jan 18, 2023

And here's another myth to be busted. "Dividends are just a return of unused (overcharged) premium." This is a myth perpetuated by those who do not understand the underlying economics within a cash value life insurance contract, but we'll go ahead and explore where this came from and why it's true... and false, all at the same time.

Cash value life insurance has some of the GREATEST benefits in the tax code. As such, every few years, it comes UNDER ATTACK by members of the United States Congress in order to raise more revenues (increase taxes).

NAIFA and other life insurance lobbyists helped to define the tax treatment of dividends to let the Internal Revenue Service classify dividends as a "refund of unused premium" rather than a taxable return, so that the tax benefits can be preserved and protected for current and future policy holders.

Those who continue to perpetuate this myth claim that "whole life insurance is a ripoff because they are just returning your own money back to you and call it a 'dividend'." If that was really the case, common sense would say that the dividends STOP after they refunded all your money back, right?

But the dividends DON'T stop! (Okay, let's be clear - they are not guaranteed because they are based on the mortality experience (death claims) of the past year, operating expenses, and general investment account performance.)

Here is a page from a maximum-funded whole life insurance illustration. This was a male, age 35, standard non-smoking illustration paying $10,000 a year for 30 years (until age 65). The neat thing about this particular illustration is that it has a column for cumulative dividends (total dividends being paid to the contract owner per the illustration using the current dividend scale. Dividend scales can be increased or decreased according to the performance of the company).

Here is the page out of the illustration. (Obviously this is not a quote for coverage, nor a solicitation, nor an official policy. The name of the company and other information has been removed.)

By age 65, we would've paid in $300,000 into the contract. By end of age 76 (11 years later) the total dividends paid to the contract owner says $308,068!) So let's total up the total benefits, shall we? - Paid in $300,000 over a total of 30 years. - Age 76, we have an estimated $834,242 in cash values.

- Age 76, we have an estimated total dividend payments of $308,068. - Age 76, (assuming no loans), we have a total net death benefit of $1,250,194 payable to your beneficiaries income tax free!

- And the dividends, cash values, and net death benefit continue to grow, even though we stopped paying into the policy.

The bottom line on dividends is this: Even after you "got all your money back"... you still have tremendous values built into this contract that continue to grow for you. I once heard it said that "Life insurance is essentially FREE... because we PAY YOU to keep it!"

UPDATE AS OF APRIL 13, 2022: It saddens me to write this, but one of the shining stars in the life insurance space... completely changed how they are treating dividends. This is unprecedented in the history of life insurance.

This particular company (which I am leaving nameless, but it will be obvious), is demutualizing as of 2021 and the sale has been voted through by policyholders and the board of directors. I am not opposed to the sale as the company has too much risk on their books regarding their annuity business and lifetime benefits promised. The problem I have... is the way they plan to treat their cash value life insurance policyholders. I'll use my mother's policy as an example. My mother has a 10-pay whole life policy. That means that, after 10 years, no more premiums are due. It was expected to continue to grow with increasing dividends (such as what is illustrated above). When I originally sold my mother's policy, it had a projected dividend in year 11 of $2,198. Now, I know that dividends are NOT guaranteed... but you could reasonably expect that, if a company was going to continue to pay dividends, that they would be somewhere in that ballpark. With the updated illustration system as of early February... the projected dividend is NOW... $108.

That's a 95% decrease of the projected dividend! That's not just a dividend scale adjustment. That's a slap in the face!

Below is an image of the Excel spreadsheet I used to compare the ORIGINAL dividend projection with the ADJUSTED dividend projection. It ain't pretty:

Remember when I said that dividends are not just a return of unused premium? Well, THIS particular company has decided to make that the mantra of how they treat dividends going forward.

In short: "If you're not paying a premium, you don't get a dividend. You'll get the guaranteed contract increase... but no dividends."

It's completely unfortunate that this has happened to this company. It used to have such a sterling reputation among agents. They have destroyed themselves.

This is the only company in the history of the industry to ever do such a thing. Why? Because they are being bought out by a non-public company, so there's no publicly traded stock to issue to policyholders for their ownership in the company.

It's truly sad when I think about it.

What can policyholders do? 1. If you are insurable, you can look at other companies that are more sound and do a 1035 exchange of your current values to another company.

2. If you are NOT insurable, then I need to ask you if you bought the policy for protection or cash value accumulation purposes. - If you bought it for protection... the guarantees are still as strong as before. They will pay out a death benefit..

- If you bought it for cash value accumulation, and you're not insurable, then you may want to consider various kinds of annuities to transfer your policy values to.

As you can see, I believe there's going to be a mass exodus from this company. The industry term is "Adverse Selection" where the healthy people leave and those who are now uninsurable... stay. It can be a problem.

If you'd like to read a true insurance industry's expert opinion and synopsis about this company... <click here>.



Unknown member
Feb 15, 2021

If you are talking about "constructive receipt" as it being recognized as income by the IRS, then you're correct. 'You' did not receive the dividend. It was paid to the policy. However, since you own the policy, you did have it added to the policy's values and you still benefit from that increase within the policy. If you are withdrawing the dividends and taking them as cash flow payable to you, then yes, the CV and DB would be lower. My whole article was about the policy receiving the dividends and those dividends continuing to grow as the policy grows.


Unknown member
Feb 14, 2021

It appears that dividends are being reinvested as Paid-Up Additions. If that's the case, then you aren't actually receiving the dividend directly, rather increasing cash value and death benefit through dividend reinvestment. Therefore, the statement of receiving the dividend, CV and DB in the amounts stated would be incorrect. If taking dividends, the CV and DB would be lower. Would appreciate your thoughts on this.

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