3.12.1 Dividend Options
Dividends are the policyowner's share of the profits of the company and are usually paid on policy anniversary dates. There are a few different options one can choose from to disburse dividend funds.
- Cash in Hand - Dividends can be distributed through a company check.
- Apply Dividends Against Premium Payments - Dividends can be used to pay policy premiums and lessen the policyowner's out-of-pocket expenses.
- Allow Dividends to Accumulate at Interest - Dividends do not necessarily have to be disbursed; the funds can be left in the account to accumulate with interest and be withdrawn later. Dividends are considered a nontaxable return of premium; however, any interest that has accumulated must be declared as taxable income whether or not the funds have been withdrawn.
- Use Dividends to Buy Paid-up Additions - Additional life insurance can be purchased as long as it is of the same kind as the original policy. Premium rates will probably be higher since the insured will be older.
- Use Dividends to Purchase One-Year Term Insurance - This so-called "fifth dividend option" allows the policyowner to use the dividends to purchase one-year term insurance at net rates, usually limited to no more than the current cash value on the contract.
