As the term dividend relates to a corporation’s earnings, a dividend is an amount paid per share from a corporation’s after tax profits. Some dividends are paid in the form of additional shares of the corporation. Dividends paid by Canadian corporations qualify for the dividend tax credit and are taxed at lower rates than other income.
As the term dividend relates to a life insurance policy, it means that if that policy is “participating”, the policy owner is entitled to participate in an equitable distribution of the surplus earnings of the insurance company (or one of their specific designated funds) which issued the policy. Surpluses arise primarily from three sources: (1) the difference between anticipated and actual operating expenses, (2) the difference between anticipated and actual claims experience, and (3) interest earned on investments over and above the rate required to maintain policy reserves.
Owner of “participating” life insurance policies usually have four and sometimes five dividend options from which to choose:
(1) take the dividend in cash,
(2) apply the dividend to reduce current premiums,
(3) leave the dividends on deposit with the insurance company to accumulate at interest like a savings plan,
(4) use the dividends to purchase paid-up whole life insurance to mature at the same time as the original policy,
(5) use the dividends to purchase one year term insurance equal to the guaranteed cash value at the end of the policy year, with any portion of the dividend not required for this purpose being applied under one of the other dividend options.
