What should I do with my life insurance dividend?

If you own a participating policy, you are entitled to "dividends" - a refund of portion of the gross premium that you have paid. This is possible because the premiums in a participating policy are a bit higher than those in a non-participating policy. And yet, premiums in a participating policy are not 100% guaranteed as they are paid at the insurer's discretion.

Whether you will receive your life insurance dividend, is a matter of circumstances. If the insurer has had a favorable financial year, they will refund some of the premium overpayment. But if their year was worse than expected, the insurer can decide not to pay any dividends at all.

Upon purchasing the permanent life policy, you have several choices as to how you want to take your dividend. Don't forget you can choose a combination of options, and that you can change them at any point in time.

Common Dividend Options

The best dividend option is the one that best suits your financial situation and goals.

• With the cash payment option, the policyholder receives checks amounting to the dividend annually or every two years. Usually, people with very tight budgets opt for this variant.
• Premium reduction - the dividend is used to reduce the subsequent premiums. This option is appropriate for people who have experienced a reduction in their earnings.
• The paid-up additions option (purchasing additional small increases in your life insurance coverage) is suitable for people who are about to retire or are uninsurable due to poor health.
• If you opt for the dividend accumulations option, you leave the dividends on deposit with the insurer to accumulate interest. The minimum interest rate guaranteed by the insurer is 3%. Due to the fact that interest income is taxable, however, this option may not be very tempting for people who have very high income taxes.
• The so-called Fifth Dividend Option, offered only by a small number of insurers, allows policyholders to use their dividends to purchase either a one-year term insurance equal to the cash value, together with paid-up additions, or a yearly renewable term insurance.

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