What are "policy dividends" in life insurance policies?

Policy dividends refer to a type of bonus payment that policyholders receive from the surplus earnings of a mutual insurance company. In mutual insurance companies, the policyholders are also the owners of the company and can benefit from the financial performance of the insurer. When the company generates a surplus beyond its operational needs for claims and expenses, it can distribute a portion of that surplus back to policyholders in the form of dividends. These dividends are not guaranteed, and their amount can fluctuate based on the company's performance, investment income, and mortality experience.

This concept is essential because it highlights the cooperative nature of mutual insurance companies, where the profits are shared with policyholders rather than distributed to shareholders. Understanding policy dividends is crucial for policyholders as it can influence their financial decision-making regarding premiums, potential cash value accumulation, and overall value derived from their life insurance coverage.