How Dividends are earned on a Whole Life Insurance Policy:
Dividends are not guaranteed.
Purchasers of whole life insurance are eligible to receive
a portion of the company's earnings,
known as "divisible surplus", in the form of didvidends.
An insurance company must achieve a surplus in order to pay out dividends.
Dividends may be used a number of different ways:
Most insurance companies return dividends automatically to your policy
unless you exercise your option for cashing them out.
• Purchase additional insurance – This allows the policy owner to use policy dividends to purchase
additional insurance on the insured’s life. The paid-up additional insurance is issued on the same
plan as the basic policy and in whatever amount of coverage the dividend can provide for at the
insured’s attained age.
• Reduce premiums – A policyholder can use their life insurance dividends to pay policy premiums.
This reduction can be considerable over a period of years, making premium payments easier to handle.
• Paid in cash -- A policyholder can have their dividends paid in cash. The life insurance company
will send a check each year if the owner chooses this option.
• Dividends to accumulate at interest -- Many people like this dividend option since it operates
similar to a savings account. If left to accrue interest, the accumulated dividends could grow into
a large sum of money. Of course, the amount depends on the size of the policy you own. However,
the interest earned in this account is taxable. Of these, the most efficient option may be
purchasing paid up insurance. It avoids current taxation, increases the death benefit, has cash value,
and it may also be referred to as additional insurance. The dividends are not guaranteed,
but the benefit is guaranteed once the death benefit is purchased. Purchasing paid-up additions is the
dividend option of choice for the person who is looking for cash value and death benefit performance.