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  • If you are looking for life insurance, you may have heard that some policies pay dividends to policyholders. Understanding how dividend-paying life insurance policies work will help you make the best coverage choice for you and your family.

    Definition

    A dividend-paying life insurance policy is coverage issued by a mutual insurer. The company issues dividends to policyholders when its business is profitable.

    Mutual Insurer

    A mutual insurer is "owned" by its policyholders, rather than by private investors. Policyholders elect a board of directors to manage the company's operations.

    Dividends

    Dividends are amounts paid back to policyholders during profitable years. Typically, dividends represent a set percentage of the insurance company's profits for the previous year.

    Application of Dividends

    Dividends may be sent directly to policyholders in the form of checks, or they can be applied to future premiums due on recipients' policies.

    Benefit to Company

    Dividends benefit insurance companies because they encourage responsible behavior among policyholders. Since they have a vested interest in keeping claims costs down, they are less likely to engage in dangerous and irresponsible behavior.

    Source:

    Texas National: Policyholder Dividends

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