Flip through a whole life illustration and you'll see the word participating, usually shortened to par. It's not decoration. It describes a legal setup. Once you see how it works, you know where dividends come from. That's a question every owner should be able to answer.
A participating policy shares in how the company actually did that year. 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? Good results in those three areas create a surplus. Participating policyholders get a share of it, and that share is the 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 of these policies come from mutual insurers. A mutual insurer is owned by its policyholders instead of by stockholders. In a mutual, no outside stockholder stands between the surplus and the owners. 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?
Dividends are not guaranteed, though. The guaranteed column of your illustration assumes every dividend is zero. That column is the only one the company has to honor. What's fair to say is that the large mutuals have paid dividends for a very long time without a break. Through wars and depressions. Careful pricing leaves 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. Most designs default to buying paid-up additions. That's the choice that 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.