Premium refunds are given to policyholders by their insurance companies based on earnings. Dividends are generated when premiums charged exceed actual losses, enabling the insurer to share the proceeds with those they insure tax-free. The more the company earns, the higher the dividend.
Many life insurance policies pay their owners dividends and are known as ‘participating policies.’ Some property and casualty insurers also return premium refunds to customers, who can spend or invest the money however they see fit. For example, smaller dividends might be used as back-up funds to help pay household bills, while larger dividends might help pay student tuition or book fees.