Policy Dividend Options

Question 1

What are Dividends?

List 6 characteristics of dividends.

Answer 1

1. Policy dividends are payable only with participating life insurance policies like mutual companies
2. effectively a return of unearned premium allowing the insured to participate in the insurer’s divisible surplus,
3. they are treated as a tax-free (Since life insurance premiums are not tax deductible, it is only fair that a return of premium would be tax free.)
4. Dividends are not guaranteed.

Question 2

Dividend Options

List 5 optional ways you can receive or apply dividends?

Answer 2

Participating life insurance policies include provisions that enable the policyowner to choose how he or she wants to apply any declared policy dividends.

1. receiving the dividend in cash;
2. applying the dividend to reduce the premium;
3. leaving the dividends with the insurer to accumulate at interest;
4. using the dividends to buy additional paid-up life insurance; and
5. using the dividends to buy one-year term insurance

Policyowners may change their selected dividend option at any time. However, if the new dividend option increases the pure insurance risk to the insurer (e.g., to the one-year term option), the insurer can require the insured to submit evidence of insurability.

Question 3

List the 3 characteristics of Buy Paid-Up Additions

Answer 3

• Under the paid-up additions option, the dividend buys additional paid-up insurance of the same type as the base policy.
• And because the insured’s age increases, the premium rates increase for the additional insurance each year, too.
• Upon the insured’s death, the total death benefit equals the face amount of the original policy plus the face amount of the paid-up additions.

Over time, the cumulative effect of these expanding policy values can greatly enhance the policy’s total value—all for the same premium in effect when the policy was issued.

Question 4

Buy One-Year Term Insurance

What is the 5th Dividend Option?

Answer 4

The 5th dividend option refers to the combination option that involves one-year term.

• policy dividends are used to first purchase one-year term life insurance, then
• the unused portion of the dividend can be applied to any of the other four basic dividend options
• changes to this option will require evidence of insurability

Because the term life face amount consists entirely of pure insurance protection, it represents a greater risk to the insurer than any other dividend option.

Question 5

What is the difference between Paid-Up Insurance and a Paid-Up Addition?

Answer 5

A less common dividend option, the paid-up insurance option, lets the policyowner use the dividends to pay up the life insurance policy early..

A “paided-up addition” to a policy will increase the death benefits and the cash value will grow. Not the case with paid-up insurance.

Question 6

Are dividends taxable?

Answer 6

While dividends are generally not taxable, the interest earned on dividends held at interest is taxable income in the year credited.

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