Insurance dividends are a “return of premium,” which will be partially given to the policy holder for the premium paid on the insurance policy. An insurance dividend is considered to be an annual fee an insurance company pays to its whole life policy-holders. The insurance dividend can be given in cash also, but often it is applied as a discount against future premium payments.
Normally, insurance dividends are tax free since they are not reported on the tax returns. Life insurance dividends are a return of premiums that are paid previously for the life insurance policy. They cannot be included in the gross income until they exceed the total of all net premiums paid. If the premium is more than adequate, the owner of a participating policy is eligible to receive an equitable portion of the company’s earnings. Dividends on the common stock of a life insurance company and interest on the corporate bonds of a life insurance company are taxable.
If life insurance premiums in business are deducted from the tax return of a person and later s/he receives life insurance dividends, then the current tax year’s life insurance premium tax deduction on the tax return by the amount of life insurance dividends should be reduced, or the person should claim them to be taxable income on his/her tax return. Insurance dividends come from mortality savings, investment results, and savings on expenses.