A whole life insurance policy is one can keep for as long as you live and that will pay the face amount to your beneficiaries. Generally there are two types of whole life insurance policies: participating and non participating. A participating policy has cash value and earns dividends if the life insurance company performs efficiently, but dividends are not guaranteed. A non participating policy has cash value. It does not pay dividends. Depending on your policy terms and your insurance company rules, you may have the option to withdraw dividends annually or reinvest them in your policy, raising the death benefit. This is one way of getting money from your policy without reducing the death benefit.
To understand more about the dividends in a life insurance policy, you need to understand the different terminology associated with dividends. Let’s start with dividends. Dividends are the funds earned by the insurance policy that are distributed to the policy holder. This is very similar to interest but an insurance company does not guarantee any dividend or return on their investment. Paid-up additions are purchased by your insurance policy with the dividends made during the year. To determine the number of paid-up additions in your policy, subtract the death benefit listed on last year’s statement from the death benefit on this year’s statement. The difference is the PUA amount purchased in the past year.
Most insurance companies will add the dividends to your policy benefits if you do not exercise the option to cash them out. Once you exercise the option to cash the dividends, all future dividends will be automatically sent to you and not added to your policy benefits. You can however at any time after cashing the dividends apply to the insurance company to add future dividends to your policy benefits. The easiest way to cash your dividends is by calling the insurance company and talking to a customer service representative and telling them that you want to cash your dividends. In future if you want your dividends to be added to your policy benefits instead of being sent to you directly, you can again call up your insurance company and talk to the customer service representative and tell them to stop sending the dividend checks to you and instead add the dividend to your policy benefits. Dividends and paid up additions purchased with dividends are not subject to income taxes. If you instruct your insurance company to reinvest these into your policy you are not penalized but if you withdraw your dividends or paid up additions purchased with dividends, those funds may be subject to taxation.
