Life Insurance: What Are Life Insurance Policy Dividends?
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life insurance: related information
what are life insurance policy dividends?
If you own a participating life insurance policy from Massachusetts Mutual Life Insurance Company (MassMutual), you are entitled to receive dividends. Not all policies are participating.1

Mutual companies have no stockholders; instead, they are owned by their policyholders. Mutual companies set their initial premium amounts at a level that will cover their contractual obligations, operating expenses and unexpected losses. If the premium is more than adequate, you, as a MassMutual participating policyholder, receive an equitable share of the distributable surplus. Your share in any distribution of surplus is your dividend.

Of course, it is important to understand, the payment of dividends is not guaranteed; dividends are a reflection of conditions affecting the company and the cost of insurance.

What determines the size of dividends?
The surplus from which dividends are paid comes principally from three sources: mortality savings, investment earnings and savings on the company's operating expenses.
Mortality savings
This occurs if the actual death claims experience is less than what was expected in the product pricing.
Investment earnings above guarantee
This happens when earnings on company investments exceed the guaranteed interest required to build up death benefit reserves and meet contractual obligations.
Savings on company's operations
This is the result if actual operating expenses are less than those assumed in the premium rate.

Depending on the type of policy you purchased and the loan provision you have chosen (fixed interest rate or variable interest rate), the size of your dividend may reflect the amount you have borrowed as policy loans.

How can my dividends be used?
You may elect to receive your dividends in cash, or, depending on the type of policy you have purchased, you may elect to use dividends to:
reduce your premium
purchase paid-up additional insurance
accumulate at interest
purchase additional one-year term insurance (you may elect this only at time of issue)
repay a policy loan and interest

Are dividends taxable?
An insurance dividend, unlike a stock dividend, is usually considered a return of premium, and as such is not taxable income until dividends received exceed premiums paid. If dividends are left to accumulate at interest, however, the interest credited each year is taxable income, which MassMutual must report to the Internal Revenue Service (IRS) each year.

There are circumstances when dividends are not considered a return of premium and, therefore, are taxable. One such circumstance involves policies where large amounts of additional premium have been added to the policy. These policies are classified with the IRS as Modified Endowment Contracts (MEC) and are considered savings vehicles rather than life insurance. Under these policies, the dividends are taxable as income to the policyholder, to the extent there is gain in the policy. The only exceptions are for dividends applied to reduce the policy premium or to purchase additional insurance under the policy.

What is an illustration?
An illustration is a presentation that shows hypothetical policy performance based on both guaranteed and nonguaranteed elements of a life insurance product over a number of years. Illustrations demonstrate how a life insurance product works and how policy values (premiums, dividends, cash values, death benefits, etc.) would emerge under the current dividend schedule, which is not guaranteed, and may change over time.

The illustration's nonguaranteed policy values and dividends are subject to change over the life of the policy, because the dividends are based on assumptions concerning factors - primarily mortality, interest and expenses - likely to change over time.

Are illustrations a good way to anticipate future performance?
No, illustrations should not be used to project future performance or as a means to compare products.

Illustrations of nonguaranteed policy values and dividends reflect current assumptions of performance for the underlying sources of dividends - mortality savings, investment earnings and savings on expenses.

Dividend performance may - and most likely will - change over time. Since future policy values almost certainly will be different from those illustrated, illustrations of dividends and nonguaranteed values are not intended to be and should not be used as "estimates" of future performance.

You are strongly encouraged to use illustrations based on dividend interest rates one or two percentage points below the current rate to see how policies would react to changes in dividends, especially when illustrating scenarios that are particularly sensitive to dividend schedule changes.

Which dividend option is the best?
There is no best dividend option. Your choice of option will depend on your particular situation and the type of policy you purchased. You should consider your current needs, as well as your needs at retirement and at death, and the purpose for which you purchased your policy. Your MassMutual financial professional will be able to advise you about your dividend privileges and options.

If you have been a MassMutual policyholder for many years or if your circumstances have changed since you purchased your policy, you should consider contacting your MassMutual financial professional to reevaluate your dividend options.

Other facts you should know about your dividends
If you choose to use your policy dividends to purchase paid-up additional insurance, the additional insurance also will earn dividends.
If a first year dividend is payable, MassMutual will pay it on receipt of your second year premium.
You may withdraw dividend accumulations and the cash value of dividends used to purchase additional paid-up insurance, partially or totally at any time, unless they are needed to secure a policy loan.
Dividend accumulations and the value of paid-up additional insurance are included when computing the maximum loan that can be secured by your policy.
When you choose to use your dividends to reduce your premium and the policy is in danger of default, your premium payment frequency will be changed automatically to semiannual or quarterly to prevent policy default if the dividend will cover the smaller premium.

For more information about your MassMutual dividends or other policy features, contact a MassMutual Financial Professional.

1 MassMutual's stock subsidiaries, C.M. Life Insurance Company and MML Bay State Life Insurance Company, do not issue participating contracts.
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