The profits of the insurance company that are shared with the policyholder are in the form of dividends. The type of policy for this whole life insurance must be participating for the policy to accumulate dividends. There are different options for how this dividend can be disbursed to the policy owner.
Cash Payment or Cash in Hand
In this option, the dividends will be paid to the policyholder by issuing a company check. This payment will be paid directly to the policyholder, who may use that cash for her own purposes.
Premium Reduction
In this option, the policyholder will use the dividend to pay a part or all of his premium, depending on the amount of the dividend payment. Remember, the dividend is based on investment performance, so the amount of the dividend fluctuates. If the dividend payment is lower than the total amount of the premium, then the policyholder still needs to pay the rest of the premium. If the dividend payment is equal to or more than the premium amount, then the policyholder has no need to pay the premium out of his pocket as the dividend payment is already enough to pay the total amount of the premium.
Accumulate at Interest
In this option, the dividends are left in the account to accumulate interest. The policyholder can withdraw this accumulated interest later. Dividends are considered not taxable, but this can be regarded as taxable income once there is an accumulation of
interest even if there was no withdrawal of funds.
Buy Paid-Up Addition
In this option, the policyholder purchased another life insurance policy that is attached to the original policy. This paid-up addition earns dividends and has cash value, thus maximizing the return on your premiums. Using the dividend payment in this option is an excellent investment that comes with cash value and a death benefit if the policyholder passes away. Since dividend payment is used in purchasing an additional policy, this type of paid-up life insurance is fully paid, with no premium to pay. Most importantly, this policy remains in force.
Buy a Renewable Term Insurance
In this option, called the ‘fifth dividend option,’ the policy owner can use the dividend payment to purchase renewable term insurance. Term insurance guarantees death benefit payment if the insured dies within the specified period, but if the insured did not die, there would be no payout. Thus this term insurance has no cash value or savings but only the guaranteed death benefit. This type of insurance is renewable.
Knowing all the options of using your dividend in your participating whole life insurance, make sure to use that dividend to the advantage of your need.
Maximizing Benefits: Understanding Dividend Options in Participating Whole Life Insurance
Participating whole life insurance is a robust financial product that not only provides a death benefit but also allows policyholders to share in the insurer’s profits through dividends. These dividends offer a range of options that can enhance the policy’s value and provide additional financial flexibility. In this article, we’ll explore the various ways you can utilize dividends from your participating whole life insurance policy to best suit your financial goals and needs.
Overview of Dividend Payment Options
Participating whole life insurance policies generate dividends when the insurance company performs well financially. These dividends, while not guaranteed, can be used in several beneficial ways. Understanding each option will help you make informed decisions that align with your long-term financial strategy.
Cash Payments
- Direct Benefit: Receive dividends as cash payouts, which the insurance company typically sends as a check. This option provides immediate liquidity and can be used for any purpose, such as funding an emergency expense or investing independently.
Premium Reduction
- Cost-effective Strategy: Use dividends to offset premium payments, reducing out-of-pocket expenses. This is particularly advantageous if you wish to lessen the financial burden of ongoing premium payments.
Accumulate at Interest
- Growth Potential: Allow dividends to accumulate within the policy at a competitive interest rate. This approach can significantly increase the policy’s cash value over time, providing a larger fund to draw from in the future.
- Tax Implications: While dividends themselves are not typically taxable, the interest earned on accumulated dividends may be taxable when withdrawn, making it crucial to plan accordingly.
Purchase Paid-Up Additions
- Enhancing Coverage: Use dividends to buy additional paid-up life insurance coverage. These paid-up additions increase both the death benefit and the cash value of your policy, enhancing its overall value and effectiveness.
- Compounding Growth: Paid-up additions also earn dividends, potentially leading to exponential growth of the policy’s value over time.
Purchase Renewable Term Insurance
- Flexible Coverage: Apply dividends to buy term insurance, increasing your overall death benefit for a specified term. This is an excellent way to temporarily enhance coverage during periods when financial liabilities are higher, such as when you have young children or significant debts.
- Renewable Terms: This option provides flexibility as it can be adjusted annually based on your changing insurance needs and the dividends available.
Strategic Considerations for Using Dividends
Personal Financial Planning
- Aligning with Goals: Choose a dividend option that aligns with your financial goals and life stage. For example, young families might prefer using dividends to increase coverage, whereas those closer to retirement might prioritize cash accumulation.
Long-term Impact
- Evaluate Long-term Benefits: Consider how each option impacts the long-term growth and usefulness of your life insurance policy. Accumulating dividends or purchasing paid-up additions might offer more substantial financial security over time.
Professional Guidance
- Consult with Experts: Discuss your dividend options with a financial advisor or insurance professional. They can provide personalized advice based on your financial situation, helping you maximize the benefits of your participating whole life insurance.
A Flexible Financial Tool
Dividends from participating whole life insurance provide a versatile set of options that can significantly enhance the policyholder’s financial strategy. Whether you choose to receive cash, reduce premiums, accumulate value, or purchase additional insurance, these options offer powerful ways to adapt your life insurance policy to meet evolving financial needs. By carefully selecting the right dividend option, you can ensure that your life insurance policy not only provides security for your loved ones but also contributes positively to your overall financial health.