What is an Insurance Dividend? | The College Investor

by Robert on December 16, 2011

I was excited earlier this month when I received a ?dividend? from my insurance company.? I was always surprised by this, because I never understood why an insurance company would pay a dividend.? I understood why stocks paid dividends ? to return earnings to shareholders.? Well, insurance companies do the same thing, but they are returning premiums paid to customers, rather than earnings.

Not all insurance companies pay dividends, but many (around 600 nationwide) do return premiums.? Whether you receive a dividend is also not guaranteed by any policy amendments ? just like a regular dividend, it is declared by the board of directions based on the company?s performance.

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What Determines Dividend Payments

For insurance companies, there are three main drivers of whether they will issue an insurance dividend:

• Losses Experienced: Insurance companies are always calculating risk, and usually calculate the financial worst case scenario.? However, a lot of times, they banked more money than they needed, and their losses do not exceed their reserves.? The fewer the claims an insurer has, they more likely they are to pay a dividend.

• Investment Performance: All insurance companies invest their premiums and other reserves to get the most return possible on their money.? That is how they make money ? they charge premiums and invest it over time.? However, sometimes their investment performance exceeds exceptions, and as a result, they have some extra funds.? If their investments perform well, they are more likely to pay a dividend.

• Expenses: As with any company, expenses determine profitability.? This can be everything from commissions, to state legal fees, to even litigation.? If the insurance company has less expenses than expected, chances are you will receive a dividend.

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You Personal Return of Premium

To receive an insurance dividend, you must be a policyholder on the date the company declares the dividend.? This is very similar to owning a stock that pays a dividend.

The amount of return you receive is directly proportional to the premiums paid during the year.? As such, the more policies you have (or larger policies you have), the higher your dividend payment.? For life insurance, it usually depends on the risk class you are in ? the less risky, the higher your dividend.

Furthermore, your individual insurance claims throughout the year usually have no impact on your ability to get an insurance dividend.

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Readers, have you ever received an insurance dividend?? Do you look for companies that pay a return of premium dividend?

Related posts:

1. How Your Credit History Impacts Your Car Insurance
2. A Dividend Stock to Fear
3. Insurance Stocks Look Good
4. The College Investor Insurance Portfolio
5. How Saving Money on Your Car Insurance Can Help You Meet Your Long-Term Financial Goals

Source: http://thecollegeinvestor.com/1892/what-is-an-insurance-dividend/

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