What is Dividend? Meaning, Types, and Dividend in Life Insurance

What is dividend? Is it a share in profits earned by a company or a bonus credited by life insurance providers? The answer depends on the financial product. In the stock market, a dividend refers to earnings distributed to shareholders after approval by the board.

In life insurance, especially in participating policies, it is a non-guaranteed bonus from the surplus generated through premium investments. In India's current investment climate, the appeal of dividends has grown stronger. Stock dividends generally offer a yield between 1.5 to 2 percent, while life insurance bonuses range from 4 to 6 percent.

For instance, well-established Indian insurers have a history of declaring bonuses on participating life insurance policies based on long-term investment performance. In recent years, PNB MetLife has offered participating insurance schemes where bonuses are credited per ₹1,000 of sum assured, depending on policy type, term, and overall surplus generated.

These bonuses are non-guaranteed and reflect prudent fund management and stable investment practices. This article explores the meaning of dividends, their types in the stock market, and how similar surplus-sharing mechanisms function within PNB MetLife’s participating life insurance policies.

What is Dividend?

A dividend is a portion of an organisation’s net profit distributed to its shareholders or policyholders. This distribution takes place only after necessary reserves and taxes have been accounted for. It is a form of reward for holding equity in a company or being a participating policyholder in insurance.

Key dates associated with stock dividends include:

• Declaration Date – when the board announces the dividend
• Ex-dividend Date – the cutoff for share purchase eligibility
• Record Date – the date used to identify eligible shareholders
• Payable Date – when the dividend is credited

Dividend yield is calculated as (Dividend ÷ Share Price) × 100. Although a dividend signals company maturity and profitability, it is not mandatory. Any unexpected cut may indicate deeper financial trouble. Since the abolition of the Dividend Distribution Tax (DDT) in India, dividend income above ₹5,000 is subject to 10% TDS as per 2026 tax rules.

Also Read: Financial Freedom in India: Steps to Build Wealth and Achieve Independence

How to Get Dividends

Investors can earn dividends through multiple routes, depending on how actively they want to manage their investments and the level of diversification they seek.

Buying individual dividend-paying stocks before the ex-dividend date allows investors to receive company payouts directly, but this approach requires continuous tracking of company performance and dividend policies.

Another route is through participating life insurance policies offered by PNB MetLife, where bonuses may be declared based on the insurer’s performance and policy structure. These payouts are typically long-term in nature and linked to policy tenure.

A more structured and diversified approach is investing through dividend-focused index funds. These funds follow a predefined index of consistently dividend-paying companies, offering passive exposure without the need to select or monitor individual stocks. The PNB MetLife Dividend Leaders Index Fund is one such option, designed for investors seeking regular income potential along with long-term capital appreciation through an index-based strategy.

What are the Types of Dividends?

Understanding the types of dividends is crucial for making informed financial decisions. While cash remains the most common form of dividend, companies also opt for alternatives to preserve liquidity.

Cash Dividends

This is a direct payout to shareholders, credited in their bank accounts. For example, if a company declares ₹5 per share, a holder of 100 shares receives ₹500. These may be:

• Final Dividends – issued post annual audit, generally year-end
• Interim Dividends – declared during the year, often quarterly or half-yearly

Example: In participating life insurance policies from PNB MetLife, bonuses are declared annually. For instance, a bonus of ₹45 per ₹1,000 sum assured adds ₹4,500 to a ₹1,00,000 policy for that year.

Stock Dividends

Instead of cash, shareholders receive additional shares. For instance, in a 2:10 bonus, an investor gets 2 extra shares for every 10 held. While this expands shareholding without immediate cash outflow, it dilutes the Earnings Per Share (EPS).

Other Types of Dividends

• Special Dividends: One-time payouts during extraordinary events such as mergers or asset sales
• Property or Scrip Dividends: Rare instances where companies offer assets or promissory notes. An ideal payout ratio is between 30 to 60 percent of earnings, balancing reinvestment needs and shareholder returns.

What is the Role of Dividend in Life Insurance?

In life insurance, dividend becomes a slightly different concept. Here, it is a share of the surplus generated after investment gains, claim payouts, and administrative expenses are considered.

These are only applicable to participating (par) policies, such as endowment or whole life plans. Non-participating policies offer fixed benefits with lower premiums but do not share in the surplus.

These bonuses are not guaranteed and depend on the insurer’s overall performance and investment returns. In line with regulatory guidelines issued by the insurance authority in India, PNB MetLife declares bonuses annually for its participating life insurance schemes, based on actuarial evaluation and board approval.

How It Works

1. Purchase of Participating Policy: Policyholders pay regular premiums, which are invested in low-risk instruments like bonds or equities.
2. Surplus Calculation: An actuary determines the surplus after accounting for claims, reserves, and operating costs.
3. Declaration: The board approves the bonus rate for the year (e.g., 4.5% in 2025).
4. Payout: Bonuses are either paid on maturity, death, or applied through other available options.

For example, a ₹50 lakh sum assured policy could accrue ₹25 lakh in bonuses over 15 years.

What are the Types of Life Insurance Dividends ? (Bonuses)

Life insurance dividends, referred to as bonuses in participating policies, come in distinct forms based on when and how they are declared or paid. Each type serves a specific purpose and has its own calculation and payout logic.

Below are the three key types of bonuses offered by insurers in India:

Reversionary Bonus

A reversionary bonus is a declared annual bonus added to the policy's sum assured, but it is not immediately paid out. Once declared, it becomes a permanent part of the policy benefit and is payable only at the time of maturity or death claim.

• Calculation: Typically expressed as ₹X per ₹1,000 of sum assured.
  • Example: If your policy has a ₹10,00,000 sum assured and the declared bonus is ₹45 per ₹1,000, the bonus for that year will be ₹45,000.
• Compounding Impact: Reversionary bonuses accumulate each year and can significantly increase the total payout over time.
• Guaranteed Once Declared: After declaration, the insurer cannot reduce or reverse it, even if future bonuses are lower or skipped.
• Paid On: Death claim or maturity, not during the policy term.

This bonus encourages long-term retention and rewards the duration of the policy.

Terminal Bonus

A terminal bonus is a one-time final bonus paid only at maturity or on death, and not declared annually. It is discretionary and depends on the insurer’s long-term performance over the life of the policy.

• Eligibility: Usually applies only if the policy is in force for a minimum number of years, often 10–15 years.
• Purpose: To reward policyholders who stay invested for the entire policy duration.
• Size: Often higher than annual bonuses but variable. There is no standard rate like reversionary bonuses.
• Paid Only Once: It is not cumulative and does not get added year after year.

Example: A ₹20 lakh policy may receive a terminal bonus of ₹2–4 lakh on top of accumulated reversionary bonuses, depending on the insurer’s surplus and investment performance.

Interim Bonus

An interim bonus is provided when a policyholder exits the policy before the next annual bonus declaration, either due to death or early surrender.

• Pro-Rated Basis: It is calculated for the part of the year between the last declared bonus and the policy exit date.
• Why It Exists: Since reversionary bonuses are declared annually, this ensures that policyholders who exit mid-year still get a fair share of that year's earnings.
• Example: If the last declared bonus was for FY 2025, and the policyholder dies in September 2026 before the next bonus is announced, an interim bonus will apply for the April–September period.

Interim bonuses help avoid loss of value in case of claims or surrender within an ongoing financial year. Under Section 10(10D) of the Income Tax Act, such payouts are tax-free if the policy term exceeds two years. With 2026 interest rates rising, bonus rates above 5 percent are increasingly common in the Indian market.

What are the Benefits and Risks of Dividend?

Both forms of dividends offer benefits, but also carry associated risks. In stocks, dividends provide periodic income and portfolio diversification. Reinvestment through dividend reinvestment plans helps long-term wealth creation. In insurance, bonuses enhance the policy's maturity value and serve as a low-volatility wealth builder.

However, risks exist. In equities, companies may cut dividends during downturns, affecting income. In insurance, low insurer solvency may reduce bonuses. It is advisable to choose insurers with a solvency ratio above 150 percent to ensure bonus stability.

Conclusion

Dividends represent a share in success, whether it is a company rewarding its investors or an insurer returning excess gains to policyholders. In the stock market, dividends add value through income and compounding. In life insurance, they offer stable, performance-linked benefits over time. For 2026, choosing products with reliable dividend or bonus track records is essential for consistent returns.

Looking to build a secure future with reliable financial products? Choose PNB MetLife's wide range of savings and life insurance plans tailored to your life goals. Visit your nearest branch or explore PNB MetLife digital life insurance services today to start your journey toward steady growth and peace of mind.

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