Life Insurance Dividends Left to Accrue Vs. Paid Up Insurance
Life insurance dividends are part of some whole life insurance policies. Dividends represent a return of premium and favorable investment experience on the part of the insurance company. You generally have two options when you receive dividends. You may allow them to accrue at interest with the insurer or you may purchase paid up additional insurance.
Other People Are Reading
-
Process
-
If you leave your life insurance dividends to accrue interest with the insurance company, then the insurance company invests your dividends. The insurer normally invests the dividends into their general account. The general account consists of bonds and bond-like investments. Dividends can also be used to purchased paid up additional insurance. This, in turn, increases the death benefit of the policy.
Significance
-
The significance of allowing dividends to accumulate at interest is that the dividends generate investment income instead of growing the death benefits of the policy. Dividends that increase the policy death benefit through paid up additional insurance grow the policy over time without any further cash outlay from you.
-
Benefit
-
The benefit of allowing dividends to accumulate at interest is that you may generate consistent investment income. This income may be used to supplement any existing income you have. The benefit of additional paid up insurance is that you don't have to pay any out of pocket money to grow your death benefit. Additionally, this paid up insurance builds its own cash reserve that can be used in the same way as the rest of the cash value in the policy. Regardless of how dividends are used, they are received tax-free up to your cost basis (the total amount of money you've paid in premiums).
Disadvantage
-
The primary disadvantage associated with dividends lies in leaving dividends to accumulate at interest. This is because the interest generated is normally a low fixed interest rate. Additionally, in the early years of a dividend paying life insurance policy, the dividends themselves are small. Unless you wait for 20 years or more, the income generated from invested dividends may not amount to much money.
Considerations
-
When deciding what to do with your life insurance dividends, keep in mind that any interest generated from the dividends left to accumulate with the insurer will be taxable as ordinary income. While paid up additional insurance does not provide any immediate cash benefits, you will normally realize better long-term benefits from purchasing paid up additional insurance.
-
