Thursday, March 01, 2018

5 Dividend Options for Whole Life Insurance

If you have a whole life policy with a mutual insurance company, you are in luck because those policies may pay dividends. That's great news but what are you going to do with all that newfound cash? Well, the insurance company may give you up to five different dividend options to choose from.

Below, I'll talk about the dividend options you can choose from along with some other things about dividends you might want to know.

What are Whole Life Insurance Dividends?

Mutual insurance companies are owned by their policyholders. When a mutual company earns a profit, it may share some of that profit with you the policyholder.

Your share of that profit is called a dividend.

Since you pay a premium to the insurance company, any dividend you receive back is considered a return of premium.

Dividends are declared annually by the board of directors of mutual companies. Then it's paid to you. Dividends are not guaranteed. The board of directors is under no obligation to pay you a dividend nor give you a set amount.

There are up to five dividend options you can choose from.

Let's talk about those options.

The Five Dividend Options

At the time you apply for your life insurance, you tell the insurance company how you want to be paid your dividend. Don't worry, your choice isn't locked in forever. You can change the option down the road if you want.

  1. Paid in cash The insurance company will send you a check in the amount of your dividend. You can cash that check and do whatever you want with it.
  2. Purchase paid up additions Instead of receiving a dividend check, you can ask the insurance company to keep your dividend in your policy and use it to buy what are called paid up additions. Paid up additions are like little tiny life insurance policies above and beyond your base policy. Each dollar of paid up additions, buys more than a dollar of paid up additions. Not a whole lot but slightly more than your dollar. That means, paid up additions increase the face amount of your policy.
  3. Accumulate at interest The next option is to let the insurance company keep the dividend you received in an account that earns interest. 
  4. Reduce premiums You can choose to have the insurance company reduce your premium by the amount of the dividend.
  5. Purchase one year term insurance In some cases, insurance companies will let your dividends by an additional amount of one year term insurance. This will also increase the face amount of your policy.

Those are the dividend options you can choose. But which one makes sense?

Which Dividend Option Should You Choose?

On whole life insurance, I personally would set up my dividend option to buy paid up additions. I'd keep it that way until I was confident that the dividend was declared each year was more than my premium. Then I might consider switching it to the reduce premium option.

I'd set up my term policies dividend option to reduce premium although I wouldn't expect a dividend on a term policy.

Do All Life Insurance Policies Pay Dividends?

Only policies issued by mutual companies pay dividends to their policyholders and not all mutual life insurance polices pay dividends. Not even at a mutual company. The policy has to be a participating policy. Only participating policies pay dividends.

Also, a policy can be a participating policy but not expect to receive dividends. A good example of this might be a term policy. It's more likely, the whole life policy will pay dividends but not always. In order to know for sure, you have to read your policy to find out.

If you have a policy with a stock company, you won't receive dividends. Only the shareholders would.

Are Dividends Taxable?

Generally, dividends are considered a return of premium up to the amount of your premiums paid. 

Dividends Are NOT Guaranteed

It's really important to understand that dividends are not guaranteed. The performance of the insurance company, the economic conditions and the board of directors of the insurance company all are a factor here.

It's possible, you might not receive a dividend at all.


So those are your five potential dividend options. It's a good idea to review how your dividend options are set up.

Let me know how you've set up your dividends or if you have any questions in the comments below.

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Michael is a champion of guaranteed issue for employees in the workplace. He's been an insurance agent since 1992 and has worked with thousands of employees.