Whole life insurance is a form of permanent life insurance that lasts your entire life. Participating whole life insurance is a form of a permanent life insurance that lasts your entire life and has the ability to pay out policy dividends on the money held in the “cash account.” This assumes that the policy holder is in good standing and current with their yearly premiums. Not all whole life insurance policies are able to pay out dividends. Only participating policies, generally issued through Mutual Insurers are able to do this. Policy dividends are not guaranteed, however some insurers have continuously paid out dividends for over a hundred years.
Most money paid to a typical whole life insurance policy in the first couple of years is used to pay for mortality and marketing expenses. Therefore the build up in the cash account is typically slow until about year ten. However, once you reach this inflection point more and more of your yearly premium will be deposited into this highly coveted account.
What to do with Policy Dividends?
Not all insurance contracts are the exact same, however most participating whole life insurers allow clients five options for their policy dividends.
The Options Are:
- Cash Payment
- Paid Up Additions
- Pay Part / All Yearly Premium
- Retain Money for Further Interest
- Buy Additional Term Insurance
*This last option, use the money to purchase additional term insurance is the one option that many insurers do not offer.
A cash payment is a check mailed to your house that you then cash and can spend or save it however you like. This option frankly requires the least explanation.
Paid Up Additions:
Using your whole life policy to buy paid up additions, is typically how many insurance agents will suggest that clients use their potential dividend. Paid Up Additions go by the acronym PUAs. Simply put a paid up addition is using your participating policy dividend to purchase more whole life insurance. In theory buying paid up additions allow these additions themselves to be paid further dividends. Paid up additions are generally the most popular options with insurance agents.
Pay Your Yearly Premium:
Using your policy dividend to pay your yearly premium is also a simple and straight forward concept. Keep in mind that your dividend may be more or less (likely far less) than your premium, so you will still need to pay the remainder of the bill.
Retain Money for Further Interest:
These least good of your options and rather difficult to explain, this option allows your Dividend to keep earning interest.
Buy Additional Term Insurance:
This option is not available with all insurers but seems to be growing in popularity. The way this dividend option really depends on the independent policy. It may allow you to purchase small amounts of temporary insurance. This could be very helpful if you want to purchase small amounts of additional term insurance but do not want to get stuck with PUAs.
If you read around on the internet, you may note that some financial experts can list a few variants of the following five with the addition of paying down a policy loan being a potential sixth option. However this option is so close to taking the dividend as cash / paying down your premium that it seems difficult to establish it as yet another category unto itself.
How to Use This Information When Shopping for Insurance:
When shopping for whole life insurance you will want to discuss with your agent the following:
- Does this whole life policy pay dividends?
- What are the options for using the dividends?
- The financial strength rating of the insurer.
- Ask to see guaranteed whole life insurance charts.
This is of course not a complete list, but in regards to dividends and mutual life insurers, knowing just to ask these four simple questions could save both you time and money.
Conclusion of Whole Life Insurance Policy Dividends:
Whole life policy dividends when used properly can be of huge value for numerous consumers. However clients that purchase permanent life insurance policies that do not correctly understand how these contracts work can often be left not being happy. The real key to whole life insurance is in knowing that it may only be for a select few and not for everyone.