How do life insurance policy dividends work on a whole life policy?

Dividends are payments a participating whole life policy may distribute when the insurer's investment, mortality, and expense experience beats its conservative assumptions. They are not guaranteed. You typically choose how to use them: take cash, reduce your premium, buy paid-up additions (small chunks of extra permanent coverage that themselves earn dividends and compound over time), or leave them to accumulate at interest. Because dividends are treated as a return of your own premium rather than income, they are generally not taxable until total dividends exceed what you have paid in. Paid-up additions are the most popular option for growth. Remember that illustrated dividends are projections; actual amounts can be lower, so do not treat them as a promised return.