Policy dividends: How to make the best use of them

Dividends occur in participating life insurance policies. How you make use of them is vital to getting the best value from your life insurance.

These are the most common dividend options:

Increase your coverage: Use your annual dividends to add extra amounts of cover- age to your policy, at no cost to you. The most popular use of dividends, this option is called paid-up additions or bonus additions. This option also increases future cash values. Alternatively, dividends could be used to purchase one-year term insurance.

Enhanced protection: You can combine the two options mentioned above by
using dividends to purchase a combination of paid-up insurance and one-year term insurance to provide additional protection equal to a pre-determined amount. As dividends increase over time, they are used to replace the term insurance with paid-up insurance so the additional protection becomes permanent. This can be a cost-effective way of purchasing whole life insurance.

Reduce the cost of your insurance: Use your dividends to reduce your premiums on the policy every year.

Take as cash: You can, of course, take policy dividends in cash.

Leave to accumulate: Leave dividends on deposit with the insurance company to earn interest or to be invested in an equity growth (segregated) fund. Returns on the latter are not guaranteed. Dividends left in the policy to accumulate can be withdrawn at any time and, on your death, accumulated dividends, unlike cash values, are added to the face amount payable to your beneficiary or estate. Interest earned on dividends left on deposit is subject to income tax.

Premium offset: This concept, also called premium offset, is a combination of the premium reduction and the paid-up additions options. Typically, after premiums
have been paid for a number of years, say, 10-15 years, future dividends are used to pay part of the premiums and the balance of the premiums is paid by surrendering some of the paid-up additions. Remember that policy dividends are not guaranteed and that projections about when your premium offset date will take effect may have to be adjusted if dividends are lower (or higher) than anticipated. This option could result in tax reporting to you as the policyholder, if cumulative dividends exceed cumulative premiums paid. Be sure to get a full explanation from your agent.

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