To understand the source of policy dividends, it’s important to know the difference between participating and non-participating policies.

Insurance policies may be written on either a participating or a non-participating basis. Most term and universal life plans are issued on a non-participating basis. On the other hand, Whole life insurance is generally participating. This means it provides dividends to the policy owner. The cost accounting formulas differ from company to company. However, there are two major factors that influence whether or not dividends are payable. They are the expenses and the claims costs of the insurer. If these items are less costly than anticipated, the policy owner will receive a dividend or refund credit. If the expenses and claims costs are higher than anticipated, the policy owner may not qualify for a dividend or refund credit.