4 Methods Used by Life Insurers to Pay Dividends to Policyholders

Although most companies provide the basic four dividend options—(1) cash, (2) reduced premiums, (3) dividend accumulations at interest, and (4) additional paid-up insurance—some do not provide all these options. In fact, one large New York company provides no options: the company uses dividends exclusively to reduce premiums. Many other companies, but certainly not most companies, also permit the policyowner to use dividends to buy one-year term insurance. In most cases, the insurer limits the term amount to either the cash value or the total of premiums paid to date. However, some companies are more liberal and will permit the policyowner to use dividends to buy as much term insurance as the dividends will purchase. Also, many companies permit the policyowner to apply dividends as additional premium to more quickly pay up the policy and to accelerate the period until the premiums vanish.

Most state laws require insurance policies to clearly indicate which option is the default option if the policyowner does not make an election at the time the insurer issues the policy. The paid-up option is used most frequently as the default option, but some states mandate the cash option, reduction-of-premium option, or the accumulation option. Although policyowners often take dividend options for granted, to assure maximum flexibility it is wise to carefully inspect the dividend options provided in any participating policy being considered and to actively select the desired option when the insurer issues the policy.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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