If you’re licensed to sell securities and life insurance, you may have had dividend conservations with prospects and clients about stocks, mutual funds, ETFs and cash value life insurance (participating whole life and indexed universal life or IUL) Security dividends, if distributed, are taxable and depending upon the duration of ownership of the fund, ordinary income and/or capital gains will apply when the dividend is taken in constructive receipt by the fund owner.
Participating whole life insurance may declare annual dividends, special persistency dividends and terminal dividends. Generally speaking, annual dividends are a return of unused premium by the issuing carrier and not taxable up to basis under constructive receipt. Usually, special and terminal dividends exceed basis and under constructive receipt are an ordinary taxable event.
The vast majority of tax-free distribution strategies rely on the withdrawals of basis, policy loans of gain and keeping the contract in force for the life of the insured. In conversations with prospects and clients, it’s important to make the definitions and distinctions of dividends as it relates to securities and cash value life insurance to the consumer. One last thought: IUL doesn’t pay dividends, but it inevitably is brought up in IUL discussions. Dividends can be tricky so mindful.