Glossary
Dividend options, defined
The ways an owner of a participating whole life policy can take the annual share of surplus the carrier returns to policyholders. The common choices are cash, a reduction of the next premium, leaving it on deposit at interest, buying small blocks of extra permanent coverage, or buying one-year term coverage.
In practice
Dividends are not promised; they reflect the carrier's mortality, expense and investment results against the assumptions priced into the policy, and the scale can be cut. The choice can be changed by writing to the carrier and does not require underwriting. Paid-up additions grow the policy; premium reduction lowers the outlay; cash is taxable only once cumulative dividends exceed the premiums paid. Leaving dividends on deposit produces interest that is taxable each year. Some owners combine one-year term with additions to hold a target death benefit at a lower base premium, a design that depends on the scale holding. Review the choice when the policy's purpose changes.
A worked example
Suppose a participating policy with a $2,400 annual premium pays a $600 dividend. The owner can take $600 in cash, pay $1,800 for the year instead, leave it earning interest, or buy about $1,500 of extra fully paid coverage that never needs another premium. Hypothetical figures.
Applies to: Life Insurance