How to Use Dividends in a Whole Life Insurance Policy

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Use Dividends in a Whole Life Insurance Policy
Use Dividends in a Whole Life Insurance Policy

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.

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

Determining Paid-Up Additions of Insurance

Find the latest annual statement for your whole life policy.

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

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.

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

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

Taking Dividends as Cash

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

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

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

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

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

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

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.

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

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.

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

  • Virtually all whole life insurance policies automatically use dividends to purchase PUAs, which is why sales illustrations or in-force ledgers show an increasing death benefit each year.
  • PUAs add to the face value of your insurance policy and provide more money to your beneficiary in the event of your death.
  • PUAs can also be surrendered for cash.
  • Under the current tax code, the Internal Revenue Service does not require insurance companies to report dividends or the PUAs they purchase for calculating your income tax, and there's no need for you to declare them on your annual income tax return as long as you leave them to accrue with the insurance company.
  • If you die, your beneficiary receives the total death benefit of your life insurance policy, including PUAs, without having to pay income tax on the amount.
  • Fully document your phone call to the home office of the insurance company, noting the date of call, phone number and full name of the representative.
  • 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.
  • Not all insurance companies use the same terminology in their contracts.
  • Dividends are not interest, so an 8 percent dividend does not add 8 percent to your death benefit or cash values.
  • Because dividends are not guaranteed, neither are the PUAs that they may buy.
  • Surrendering PUAs may trigger an income tax event on the cash amount you receive.
  • If your policy lapses or is surrendered with a loan against it, income taxes may be due for that tax year.
  • If you're considering the purchase of a whole life policy, have your agent fully explain any "paid-up additions" riders before you add them to your policy - you may not need or want them.
  • Remember to check on where and how to report receiving the dividend on your income tax return.
  • Once the dividend option is changed, it stays that way until you notify the insurance company otherwise.
  • A policy change like this can be made only once a year and takes effect on the policy anniversary date.
  • Dividends not left to accrue with the insurance company will affect the growth of your cash values and death benefit.
  • 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.

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