Participation, Dividends & Additions

CARD T131

Participating Policy

A policy eligible for policy dividends. Eligibility does not guarantee a dividend will be paid.

How it works

A participating policy is eligible to receive policy dividends if the insurer declares them. Dividends are not guaranteed. Mutual insurers commonly issue participating policies, but participation describes the policy’s dividend eligibility; mutual ownership describes who owns the insurer. Guaranteed benefits should be evaluated separately from dividend illustrations. [1] [4]

EXAMPLE

A policy illustrates an annual dividend of $400. Actual experience leads to a declared dividend of $300. The illustration was not a guarantee of $400.

Key distinction

Participating does not mean the policyowner personally chooses the insurer’s investments or receives guaranteed dividends.

Practice Participating Policy · 3 questions

CARD T132

Nonparticipating Policy

A policy that does not provide participation in policy dividends. Its contractual benefits remain governed by its terms.

How it works

A nonparticipating policy does not participate in policy dividends. Its contractual benefits and guarantees still apply. A policy can have interest crediting or other nonguaranteed features without being a participating dividend policy. Compare actual costs and coverage instead of assuming that dividend eligibility alone makes one policy superior. [1] [19]

EXAMPLE

An owner receives the stated guaranteed benefits under a nonparticipating policy, but does not expect an annual policy dividend.

Key distinction

Nonparticipating does not mean uninsured, nonrenewable, or without cash value.

Practice Nonparticipating Policy · 3 questions

CARD T133

Policy Dividend

A nonguaranteed amount an insurer may return to the owner of a participating policy when its financial results are more favorable than assumed in pricing. It is different from a dividend paid to company stockholders.

How it works

A policy dividend can reflect lower claims or expenses, or better investment results, than the insurer assumed when setting premiums. It is not promised every year. Depending on the policy, the owner may take cash, reduce a premium, leave it with the insurer to earn interest, or buy additional paid-up or one-year term insurance. For federal income tax, dividends generally return previously paid premium and reduce the policy’s remaining tax basis. Amounts above that basis can be taxable; interest earned on retained dividends is generally taxable. [2] [8] [12]

EXAMPLE

An owner has $10,000 of remaining tax basis and receives a $300 cash policy dividend. It generally reduces basis to $9,700 rather than creating taxable income. Interest earned if the dividend is left with the insurer is a separate taxable item.

Key distinction

A policy dividend is not automatically the same as a taxable corporate stock dividend. Dividend interest is not the dividend itself.

Practice Policy Dividend · 3 questions

CARD T134

Paid-Up Additions

Small amounts of additional fully paid life insurance. Participating policy dividends may be used to purchase them.

How it works

Paid-up additions are small amounts of fully paid permanent life insurance added to a base policy. Dividends commonly purchase them, and some policies allow additional purchases through a rider. They increase death benefit and cash value under their terms. Purchasing an addition does not necessarily eliminate premiums still due on the original policy. [2] [4]

EXAMPLE

A dividend purchases $1,000 of additional paid-up death benefit. A $100,000 base benefit becomes $101,000 before other adjustments, while the base premium may still be due.

Key distinction

Paid-up additions add coverage. Reduced paid-up nonforfeiture replaces the original benefit with a smaller fully paid benefit.

Practice Paid-Up Additions · 3 questions