Podcast
Questions and Answers
What are policy dividend options?
What are policy dividend options?
Only certain types of insurance policies produce dividends.
Only certain types of insurance policies produce dividends.
True
Which company commonly issues policy dividends?
Which company commonly issues policy dividends?
What is the main requirement for receiving dividends from a life insurance policy?
What is the main requirement for receiving dividends from a life insurance policy?
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Match the dividend options with their descriptions:
Match the dividend options with their descriptions:
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Dividends received in cash are generally taxable as income.
Dividends received in cash are generally taxable as income.
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What can a policyowner do with accumulated dividends?
What can a policyowner do with accumulated dividends?
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Under the premium reduction option, the insurance company uses the dividend to reduce the next __________ due.
Under the premium reduction option, the insurance company uses the dividend to reduce the next __________ due.
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What does the paid-up additions option entail?
What does the paid-up additions option entail?
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Study Notes
Policy Dividend Options
- Policy dividends are surplus funds returned to policyowners, representing a return on premiums exceeding insurer expenses and mortality experience.
- Only certain life insurance policies, typically participating policies from mutual companies, produce dividends.
- Policyowners choose how to apply dividends based on available options.
Dividend Basics
- Dividends are exclusive to participating life insurance policies, which share in the insurer's divisible surplus after liabilities and expenses are accounted for.
- These dividends function as a tax-free return of unearned premium, as long as they do not exceed total premiums paid.
- Dividends are not guaranteed, and insurers and their representatives cannot assure policyowners of their payment.
Dividend Options
- Policyowners can select from various options for applying declared dividends, including:
- Receiving the dividend in cash.
- Reducing the premium payment.
- Accumulating dividends with interest at the insurer.
- Purchasing additional paid-up life insurance.
- Buying one-year term insurance.
- Policyowners can change their dividend options at any time, subject to insurability requirements if the new option increases insurance risk.
Receive the Dividend in Cash
- Policyowners can choose to receive dividends in cash via a check on the policy's anniversary date.
- Cash dividends are generally not subject to income tax.
Reduce the Premium
- Dividends can be applied to lower the next premium payment due, making premium costs more manageable for policyowners.
- For example, a $1,000 premium with a $250 dividend would result in a premium notice for $750.
Accumulate at Interest
- Dividends can be held in an interest-bearing account, allowing policyowners to withdraw amounts at any time.
- While dividends are typically not taxable, any interest earned on accumulated dividends is taxable in the year credited.
Suspend Premiums
- Policyowners with accumulated dividends can use those funds to suspend premium payments.
- The duration of premium suspension is dependent on the total value of accumulated dividends and interest.
Buy Paid-Up Additions
- Dividends can be utilized to purchase additional paid-up insurance of the same type as the original policy.
- The premium rate for paid-up additions is based on the insured's attained age, which increases over time as dividends are used to buy more coverage.
- Paid-up additions have their own cash value and are eligible for dividends, contributing to the overall death benefit.
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Description
Explore the various options available for policy dividends in insurance. This quiz covers how dividends are returned to policyowners and the choices they make regarding those dividends. Enhance your understanding of how surplus funds in insurance work.
