Whole Life Insurance Dividend Options
Whole Life Insurance applies to a policy holder’s whole lifetime. There are two types of Whole Term Life Insurance: participating and non-participating. The major difference is that policies that are called participating pay out an annual dividend to the holder. Policies that are called non-participating do not pay a dividend; the trade-off is that this type of policy generally has a much lower premium than participating policies do.
Whether a participating policy’s dividend is paid out and how much it pays out depend on interest rates and the strength of the insuring organization over the long term. Interest rates always fluctuate over time, so it’s advisable to verify the interest rate that applies to the policy at least once a year.
However both types offer lifetime protection, a dependable cash value and premiums that don’t change in price over the insured’s lifetime. Consumers have to be on their toes, however, to keep up with financial finagling that is common in financial institutions.
Evaluating the Options
The dividend choices for participating policies are many and varied, depending on the insurer, the insured, and the market rate. One option for management of dividends is called Dividends on Deposit, in which funds generated by the policy are retained within the policy’s balance. This adds the money generated by the policy directly back into the policy holder’s account, increasing their overall benefit.
Paid to You In Cash
On the other hand, the Paid to You in Cash option does as its name suggests and disburses the funds annually as they are generated. The tax ramifications of electing for this option may be complex, and therefore consultation with a tax professional is advised. There are three steps to setting this option up:
- Have the Whole Life Insurance policy’s contract number in hand. These are usually printed on policy statements or the policy itself.
- Armed with this information, the policy holder should contact the company’s customer service or policy holder service department.
- With the support personnel on the line, ask to change the dividend disbursement type to be paid out annually in the form of a check sent to the policy holder.
Another possibility is known as Premium Reductions, in which the dividend contributes to the payment of the annual premium. This option gives policy holders a bit of a respite from otherwise steep premiums. To set up premium reductions, the insurer’s customer service can get the ball rolling.
Contract number in hand, the insured calls the service division and indicates a desire to change dividend payout to type Premium Reductions. Alternatively, dividend payment can be set up to initially pay off the policy loan’s interest and then apply to Premium Reductions, reducing the overall cost of the loan.
It’s always a good policy to then go back and verify that these changes have actually been enacted by the insurer just as the insured requested them at the end of the year. Most insurers will include notes on different ways to use dividends on annual statements; a close inspection of the fine print applying to dividends will let the policy holder know if there are any new options offered. According to New York Insurance Agent, Richard O’Boyle, “Each company computes the actual dividend differently, so accurate comparisons between whole life policies should be handled by your agent.”
Under this plan, dividends are applied to a death benefit, which is owned outright by the policy holder. Paid-Up Additions themselves pay out dividends, so the overall dividend that is paid to the holder (or applied to their balance) is increased. Policy Dividends are also available. Keeping track of Paid-Up Additions is mildly troublesome, but a good practice. On the annual statement for the Whole Life Insurance policy, the death benefit of last year’s policy should be compared with this year’s. Subtracting the smaller amount from the larger yields the count of Paid-Up Additions whose purchase dividends were applied to in the previous year. It’s a good idea then to record the result, which is a higher death benefit payable to beneficiaries in after the policy holder’s death.
Author: Sheila Martin
Publish Date: Tue, 10/11/2011 - 16:05