What Is Dividend Paying Whole Life Insurance And How Does It Work?

 

Life insurance is a vital financial tool that can provide peace of mind and protection for your loved ones in case of your untimely death. But not all life insurance policies are created equal. Some offer more benefits and features than others, depending on your needs and goals.

One type of life insurance that has some unique advantages is dividend paying whole life insurance. This is a form of permanent life insurance that pays an annual bonus to policyholders if the company overperforms financially. In this article, we will explain what dividend paying whole life insurance is, how it works, how it compares to other types of life insurance, and how to choose a policy that suits you.

How Dividends Are Calculated and Paid

Dividend paying whole life insurance is also known as participating whole life insurance, because policyholders participate in the profits of the insurance company. Unlike term life insurance, which only provides coverage for a specific period of time, whole life insurance provides coverage for your entire life, as long as you pay the premiums. It also builds cash value over time, which you can access through loans or withdrawals.

But what makes dividend paying whole life insurance different from non-participating whole life insurance is that it also pays dividends to policyholders. Dividends are a portion of the surplus that the insurance company generates from its operations, such as collecting premiums, investing them, paying claims, and managing expenses.

Dividends are not guaranteed and may vary from year to year depending on the company’s performance. The company’s board of directors decides how much of the surplus to distribute as dividends and how much to retain for future growth or contingencies. The amount of dividends you receive also depends on the size and type of your policy, as well as how long you have owned it.

There are different ways that you can receive or use your dividends, depending on your preference and goals. Some of the common options are:

• Cash or check: You can choose to receive your dividends as a cash payment, either by check or direct deposit. This option gives you the most flexibility and liquidity, but it also reduces the amount of coverage and cash value you have.
• Premium reduction: You can choose to apply your dividends to reduce your future premium payments. This option lowers your out-of-pocket costs and helps you maintain your coverage and cash value.
• Paid-up additions: You can choose to use your dividends to buy additional coverage that is fully paid up and does not require any further premiums. This option increases your death benefit and cash value over time, as well as your future dividends.
• Accumulation at interest: You can choose to leave your dividends with the company to earn interest. This option allows your dividends to grow tax-deferred and compound over time. You can withdraw or borrow against them at any time.

How Dividend Paying Whole Life Insurance Compares to Other Types of Life Insurance

Dividend paying whole life insurance has some advantages and disadvantages compared to other types of life insurance. Here are some of the main differences:

• Non-participating whole life insurance: This is a type of whole life insurance that does not pay dividends to policyholders. It has lower premiums than participating whole life insurance, but it also has lower returns and less flexibility. You cannot change or adjust your policy features or benefits once you buy it.
• Term life insurance: This is a type of life insurance that only provides coverage for a specific period of time, such as 10, 20, or 30 years. It has much lower premiums than whole life insurance, but it also has no cash value or dividends. If you outlive your term, you lose your coverage and have to buy a new policy at a higher rate or go without protection.
• Universal life insurance: This is a type of permanent life insurance that offers more flexibility and potential growth than whole life insurance. It allows you to adjust your premium payments, death benefit, and cash value within certain limits. It also has a variable interest rate that determines how much your cash value grows. However, it also has more risk and complexity than whole life insurance. You have to monitor your policy performance and make sure you have enough cash value to cover the cost of insurance and fees.

How to Choose a Dividend Paying Whole Life Insurance Policy

If you are interested in buying a dividend paying whole life insurance policy, here are some tips on how to choose one that meets your needs and goals:

• Assess your coverage needs and financial situation: Before you shop for any type of life insurance, you should determine how much coverage you need, how long you need it for, and how much you can afford to pay. You should consider factors such as your income, expenses, debts, assets, dependents, and future plans. You can use online calculators or consult a professional advisor to help you with this step.
• Compare quotes from different companies and policies: Once you have an idea of how much coverage you need and how much you can pay, you should compare quotes from different companies and policies. You should look at the premium rates, the dividend rates, the policy features, and the riders. You should also check the company’s financial strength, reputation, and customer service. You can use online tools or work with an independent agent to help you with this step.
• Check the company’s credit rating and dividend history: One of the most important factors to consider when buying a dividend paying whole life insurance policy is the company’s credit rating and dividend history. The credit rating indicates how likely the company is to pay its claims and obligations. The dividend history shows how consistent and generous the company has been in paying dividends to policyholders. You should look for a company that has a high credit rating (A or better) and a long and stable dividend history. You can find this information on the company’s website or on independent rating agencies’ websites.
• Review the policy features and riders: Another important factor to consider when buying a dividend paying whole life insurance policy is the policy features and riders. The policy features include the death benefit, the premium, the cash value, and the dividend options. The riders are additional benefits that you can add to your policy for an extra cost, such as disability waiver, accidental death, or long-term care. You should review the policy features and riders carefully and make sure they match your needs and goals. You should also understand the terms and conditions of the policy, such as the surrender charges, the loan interest rates, and the tax implications.
• Consult a professional advisor if needed: Buying a dividend paying whole life insurance policy can be a complex and long-term decision that requires careful planning and analysis. If you are not sure how to choose a policy or how it fits into your overall financial plan, you may want to consult a professional advisor who can guide you through the process and answer your questions. You should look for an advisor who is licensed, experienced, unbiased, and trustworthy.

Conclusion

Dividend paying whole life insurance is a type of permanent life insurance that pays an annual bonus to policyholders if the company overperforms financially. It offers several benefits, such as guaranteed death benefit, predictable premiums, cash value accumulation, and tax advantages. It also has some drawbacks, such as higher costs, lower returns, and limited flexibility compared to other types of life insurance or investments.

If you are looking for a life insurance policy that provides lifelong protection, stable premiums, and potential dividends, dividend paying whole life insurance may be a good option for you. However, you should also consider your coverage needs, financial situation, and personal preferences before buying a policy. You should compare quotes from different companies and policies, check the company’s credit rating and dividend history, review the policy features and riders, and consult a professional advisor if needed.

If you want to learn more about dividend paying whole life insurance or get a quote from a reputable company, contact us today. We are here to help you find the best policy for your needs and goals.