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.
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.