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How do Whole Life Insurance Dividends Work?
How do Whole Life Insurance Dividends Work?
phot by Lobster Stew
Whole life insurance, as the name implies, is insurance which provides coverage for the policyholder’s entire lifetime. Whole life policies can be divided into two categories: participating and non-participating. Both policies provide level premiums, lifetime protection and a guaranteed cash value—but participating whole life plans pay an annual dividend. The annual dividend is NOT guaranteed, and in most instances is linked to long-term interest rates as well as the insurance company’s performance. If you have an existing participating whole life policy which was purchased in a high interest environment, it is a good idea to request an updated policy illustration—the projected values may have changed dramatically.
Most participating whole life policies have multiple dividend options. The following is a brief look at some of the different dividend options:
Dividends on deposit – the annual dividend is kept on account within the policy
Paid-up additions – the annual dividend is used to purchase additional paid-up insurance
Premium reductions – the annual dividend is used to reduce the annual premium
Term option – the annual dividend is used to buy paid-up term insurance
By contrast, non-participating whole life policies have no dividends, and the value of these plans are guaranteed. Because non-participating whole life policies are fully guaranteed, they can be instantly compared by our on-line insurance calculator. Non-participating whole life policies can be payable for the life of the policy, or they can be paid up after a specific period of time (such as for 25 years, 20 years, 15 years or 10 years, or when the insured reaches age 65). The shorter the policy payment period, the higher the premium. The guaranteed cash surrender value of whole life policies vary by the amount of coverage, length of time paid, and the company issuing the coverage.
Below is an example comparing a participating and non-participating whole life policy, using a
30-year-old male non-smoker with $250,000 of whole life coverage paid up in 20 years:
- Non-participating Empire Life Policy
Annual premium – $1,492.50
20-year contribution – $29,850
Death benefit at year 20 – $250,000
Death benefit at age 65 -$250,000
Cash value at year 20 – $31,750
Cash value at age 65 – $64,500
- Participating Empire Life Policy (paid-up additions assumes the current dividend rate)
Annual premium – $6,672.50
20-year contribution – $133,450
Death benefit at year 20 – $680,776
Death benefit at age 65 – $1,273,845
Cash value at year 20 – $147,164
Cash value at age 65 – $513,881
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[…] Did you know that if you choose participating whole life insurance plan, the annual dividend is not guaranteed? Why should you request an updated policy illustration? What are the dividend options available? These are just some of the questions I tried to answer in the latest addition to our Life Insurance Tips section. You probably know that whole life insurance provides coverage for the policyholder’s entire life. If you want to learn more about this particular policy, read our article on The Ins and Outs of Whole Life Insurance. […]
This article was a big help. Are the premiums on all Whole Life policies guaranteed?
Thanks,
AL
Al. Thanks for the comment. Gnerally speaking particpating and non partipating Whole Life policies have premiums which are fixed for the insured’s entire lifetime. Some insurance companies offer adjustable non particpating whole life premiums which are interest rate sensitive.
For the whole life insurance products featured, the annual premiums and thus death benefits are different. Is that a reflection of the type of product? Why would that be so?
If the person in this example died after 10 years of initiating the life insurance policy, would the death benefit still be e.g. $250,000?
HI Cheryl,
Thanks for the note. On the non participating Whole Life policy the death benefit is level on the Participating Whole Life it increases each year depending on the insurance companies dividend scale.
Regards …
HI,
“Paid-up additions – the annual dividend is used to purchase additional paid-up insurance”
at what mortality table does the dividend purchase additional insurance..
if i am 40 preferred health when i first buy insurance..
how would my dividends buy insurance when i am 46,47,48 etc..would the insurance company want to have my health profile every year..or is it a one size fits all…
2) if dividens buy paid up insurance..does it mean single premium insurances are available..
Hi Rob,
Thanks for the note. Whole Life paid up additions if set at the time of application are not subject to medical requirements each year - however if you change the dividend option mid way through the policy the insurance company would require medical evidence.
Paid up additions and single premium policies are two completely different topics.
Why not try Equitable Life of Canada, they are a Mutual Life Company (Canadian)their Participating Account Yield is second to none. Premiums, cash values and death benefit are guaranteed. It is the only “true” Participating Whole Life Plan in the Canadian Marketplace as it is one of the last remaining Mutual Life Insurance Companies - policyholders are the shareholders, benefits from performance of all lines of business not just the participating account.
Increasing face amounts (death benefit) with paid up additions or one year term is not subject to additional medical requirements, if you elect a guaranteed insurability option, you are locking in the option to purchase additional insurance in the future without evidence. That is why insuring children makes so much sense they are healthy and time value of money, start them young!
Hi KImberly,
Thanks for your note - I agree Equitable Life has a very good Participating Whole Life plan. One addition to your comment Assumption Life is also a mutual company and just introduced a participating Whole Life plan.