How Life Insurance Dividends Work

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How Life Insurance Dividends Work
How Life Insurance Dividends Work (Image: www.pigboom.com)

Permanent, Participating Policies

Life insurance dividends are funds earned from life insurance policies. Not all policies, however, earn dividends. Dividends are only earned by permanent, participating policies. A participating policy is simply a policy that earn dividends if performance is better than the average. Premiums on participating policies are higher than that of non-participating policies.

If you choose to purchase a participating life insurance policy, you will be paying higher premiums in the hope that the stock will do better than expected and you will get some dividends back. Most participating life insurance policies are permanent . This means they cover you until the day you die with no expiration.

The other type of life insurance policy is term life insurance. Term life insurance policies only cover the policyholder for a certain, preset number of years, after which they expire and the policyholder will have to buy a new policy, often at increased premiums due to advanced age.

When Dividends Are Paid

Dividends are not paid regularly. Instead, they are only paid based on the performance of the investment. When performance (meaning expenses and management) is better than the company had projected for a particular fiscal year, dividends will be paid, usually on the anniversary of the policy and one year after the dividends are earned. The dividend amount is the difference between the original policy value and the actual cash value during that year.

How to Use Dividends

Dividends may not come to the policy holder in the form of a check. If the policy holder wishes to have cash dividends, he usually has to ask for them. Most often, dividends are automatically used to purchase paid up additions to the policy. These additions also earn dividends.

It is also possible to use dividends to reduce monthly or yearly premiums. In addition, dividends can be left alone to accumulate interest. Some policy holders prefer to let dividends accumulate interest for up to ten or even twenty years, after which they choose to collect those dividends in cash. This usually ends up being a significant amount of money.

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