Using Whole Life Insurance Dividends

By Compuquotes Team on October 15th, 2009

If you are buying life insurance, consider a participating whole life insurance policy which offers dividends. The use of dividends in your whole life insurance policy is beneficial both to you and the insurance company. It can provide you with many tax benefits while at the same time protecting the cash reserves and integrity of the insurance company. Check with your professional insurance agent on the tax advantages of your policy.

What Is a Whole life Policy?

According to the New York State Life Insurance Resource Center, "Traditional whole life policies are based upon long term estimates of expense, interest and mortality. The premiums, death benefits, and cash values are stated in the policy." It is important to know that all of these components are guaranteed. That is why your life insurance company is required by law to have large sums of cash on hand (cash reserves) in order to pay out potential claims.

Participating Whole Life

There are six basic variations of traditional permanent (whole life) insurance. However, the policy that pays dividends is called "participating" whole life insurance because the policy holders participate in the good fortunes of the company. The dividends represent the favorable experience of the company with regard to mortality expenses, investment earnings, and expense savings.

It is important to know that dividends are not guaranteed. If the company has a bad year, it will need the cash to bolster its reserves. If there is a deadly influenza epidemic, significantly increasing mortality among the policy holders, the company need to keep its earnings for the year to pay the death benefits, thus negating any dividends to the policy holders. However, it is important to note that your death benefit and your premiums are guaranteed.

Dividend Payment Options Available

You can use your dividends in many ways--most of which are tax-free or tax-deferred. Following are four of the most common:

� Pay your annual premium with your dividend. In a good year, you may get additional cash back or use your dividend to pay a policy loan or lien if you have one. In a down year, you get a bill for the portion of your premium not covered by the dividend.
� Buy more insurance coverage. The dividend used in this way increases your coverage (at any age) and also increases your dividends, a win-win situation. Furthermore, these interest earnings are not taxable.
� Leave dividends to accumulate interest like a savings account. Check with your agent about tax liability. When you need cash, access it either by withdrawing your dividends or taking a loan against your policy.
� Get your annual dividend in cash. It is paid on the policy anniversary date. Again, check with your agent about any tax liability.
A participating whole life insurance policy with dividends isn't for everybody. It is a more complex policy requiring that you pay attention to the many available options. In addition, the cost is higher.

Fortunately, there are great advantages. Possible tax-free interest and flexibility are very attractive reasons to purchase a participating whole life insurance policy. See your professional insurance agent for advice on these flexible policy options.

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