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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.

Why is it common to limit the amount of term insurance that can be purchased under the fifth dividend option to the current cash value of the contract?

The original purpose for developing the fifth dividend option was to allow a policyowner to fill the gap in coverage created by borrowing on life insurance contracts. Thus the option limits the amount of term insurance available to the maximum amount that can be borrowed on the contract in order to be consistent with the purpose for which the option was developed and to protect the insurer from potential adverse mortality experience.