What does a dividend in insurance refer to?

A dividend in insurance specifically refers to the return of part of the premium for a participating policy. This is a unique feature of certain insurance products, especially whole life insurance, where policyholders, also known as participants, share in the insurer's surplus profits. If the company performs well financially, it may distribute some of that surplus back to the policyholders in the form of dividends.

These dividends are not guaranteed; rather, they depend on the insurer's profitability and overall financial performance. Participants can use their dividends in several ways, such as taking them as cash, using them to pay premiums, or accumulating them with interest.

This concept is fundamental because it differentiates participating policies from non-participating ones, which do not provide dividends. Understanding the nature of dividends helps policyholders make informed decisions about their insurance options and expectations regarding potential returns.