How to Use Dividends in a Whole Life Insurance Policy

Whole life insurance policy dividends can be used in a number of ways, but be sure you know the tax consequences of each by consulting with a qualified tax adviser before you act.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Financial Manager
• Tax Consultants
• Tax Services
• Paper And Pencils
• Personal Financial Software
• Tax Preparation Software

Determining Paid-Up Additions of Insurance

1. Find the latest annual statement for your whole life policy.

2. Compare the death benefit of your policy last year with the death benefit of your policy this year.

3. Subtract the lesser from the greater to determine the number of paid-up additions (PUAs) of insurance that your dividends purchased during the last year.

4. Make a notation in your records or financial software of the new, higher death benefit that your beneficiary will receive if you die.

5. Include this higher death benefit in any financial planning calculations you might make.

Taking Dividends as Cash

6. Find the contract number of your insurance policy either on the policy itself or on your latest annual statement.

7. Call the customer service or policy owner service division at the home office of the insurance company.

8. Tell the representative that you want to change the way your dividends are used and that you want to get the next dividend to be credited to your policy as a check to be mailed to you directly.

Other Dividend Uses, Including Using Dividends to Reduce Premiums or to Pay Interest or Principal on a Policy Loan

9. Find the contract number of your insurance policy either on the policy itself or on your latest annual statement.

10. Call the customer service or policy owner service division at the home office of the insurance company.

11. Tell the representative that you want to change the use of dividends to reduce premiums.

12. Or, tell the representative that you want to use your dividends to, first, pay interest on the policy loan and, second, reduce the principal of the loan.

13. Check your annual statement or policy loan notice to make sure the change takes place.

14. Look in your insurance policy and find the "Dividends" section to see if the company has provided other ways to use the dividends credited to your account.

15. Call policy owner services at the home office of the insurance company to find out if any newer dividend uses have been added by the company, and ask for a written explanation or "policy amendment," if available. Insurance companies can and do add dividend options to in-force policies.

Tips & Warnings

• Your annual dividend can be used to reduce or eliminate the premiums that must be paid to keep the policy in force.
• If the dividend exceeds the amount needed to pay premiums, direct the insurance company to use the remainder in one or more of the other dividend options.
• As with other dividend options that leave the dividend with the company, there should be no income tax consequences under the current tax code.
• If the dividend is not sufficient to pay off your loan over time, you may want to pay back the loan yourself to fully restore policy values and benefits.
• Again, under the current code, there should be no income tax consequences to leaving the dividend with the company to use in this manner.
• Using dividends to reduce premiums will affect the growth of your cash values and death benefit.
• Excess dividends beyond the premium payment usually go to purchase PUAs.
• If the dividend is not sufficient to pay the entire premium, you must pay the balance when due to avoid policy lapse or a policy loan (automatic premium loan, or APL).
• Payment of interest on policy loans is not tax-deductible.
• Unpaid loan balances continue to be charged interest and are deducted from the amount paid to beneficiaries at the death of the insured.
• Policy loans may occur if you don't fully pay your premiums on time.
• Be careful of any proposals that suggest the use of dividends to buy a separate life insurance policy, as such uses could trigger an unexpected income tax event.

[jacobtho]

on 8/20/2008 Use a paid up additions rider and create a maximized policy. It will become self-sustaining and will have incredible growth. We use these policies as banking solutions, and it is incredibly profitable. Its called the infinite banking concept, or becoming your own banker.

http://www.becomingyourownbank.com

on 11/22/2005 Don't use the dividends for anything. Buy term insurance. Dividends are nothing more than a return of an overpayment. Otherwise you would pay tax on them, wouldn't you?