Flip through a whole life illustration and you'll see the word participating, usually shortened to par. It's not decoration. It describes a specific legal arrangement, and understanding it explains where dividends come from, which is a question every policyholder should be able to answer.
A participating policy shares in the insurance company's actual results. Each year the company compares how things really went against the conservative assumptions built into your guaranteed values. Did fewer insured people die than the mortality tables assumed? Did the company spend less running itself than projected? Did its investment portfolio earn more than the guaranteed rate requires? Favorable results in those three areas create a surplus, and participating policyholders receive a share of it as a dividend.
This is why a dividend from a life insurer is a different animal from a stock dividend. The IRS generally treats it as a return of premium you overpaid, which is why dividends typically arrive income tax free up to your basis. I'm a broker, not a CPA, so run your specifics past a professional, but the logic is tidy: the company charged conservatively, reality came in better, and you got the difference back.
Company structure sits underneath all of this. Many participating policies come from mutual insurers, companies owned by their policyholders rather than by shareholders. In a mutual, there's no outside shareholder standing between surplus and policyholders. Stock companies can issue participating policies too, so the labels aren't perfectly clean, but the ownership question is one to ask whoever designs your policy: who gets the surplus this company generates?
Something to be aware of before anyone gets carried away: dividends are not guaranteed. The guaranteed column of your illustration assumes every dividend is zero, and that's the only column the company must honor. What's fair to say is that the large mutuals have paid dividends continuously for a very long time, through wars and depressions, because conservative assumptions leave room for surplus in most years. History is a track record, though, never a promise.
Once a dividend arrives you have four choices for it, and the default most designs use, buying paid-up additions, is what turns a decent policy into a compounding one. We covered the options in The Four Things You Can Do With a Whole Life Dividend, and the bigger growth picture lives on our how it grows page.