Policy Options

When a policyowner surrenders a life insurance policy, the insurance company may withhold payment of the policy's cash values for up to:

6 months.

With a participating life insurance policy, a policyowner may do all of the following with dividends received

Policy dividends may be taken in cash, used to reduce the following year's premium, or used to purchase a 1-year term policy or additional life insurance protection. Dividends can also be allowed to accumulate at interest

Participating policies

Participating policies are issued by both stock and mutual companies. They are called participating because they are eligible for dividends, thus enabling policyowners to share in the earnings of the company. For this reason, the premium cost is generally higher for participating policies than for nonparticipating policies.

The paid-up additions option

Dividends may be used to purchase additional amounts of insurance which are added to the face value. Paid-up additions uses the annual policy dividend as if it were a single premium to purchase a paid-up whole life insurance policy. Adds to the policy's cash value growth and death benefit.

Accumulation at Interest Option

policy owner may leave dividends with the insurer to accumulate at interest in much the same fashion as a savings account. Dividends can be withdrawn at any time. If insured dies, dividends that have accumulated at interest are added to the face amount. Interest earnings on dividends are taxable income when paid, even though the dividends themselves are not.

The privilege of accessing the cash value of an insurance policy if it is surrendered is known as the:

nonforfeiture provision.

Most participating whole life insurance policies allow the following uses of standard life insurance dividends EXCEPT: A) to increase the policy's face amount. B) to purchase 1-year term insurance. C) to reduce future premium payments. D) to purchase additional units of paid-up life insurance.

A) to increase the policy's face amount. Most participating whole life insurance policies allow the policyowner to apply dividends to pay up a policy earlier than otherwise expected, to buy paid-up permanent life insurance, to buy 1-year term insurance, or to reduce future premium payments. The policyowner cannot use dividends to increase the policy's face amount.

Is the term rider amount considered on a reduced-paid up policy?

A reduced paid-up policy is based on the original whole life policy amount; the term rider amount is not considered.

Insurance policies that pay dividends are referred to as:

Participating policies

Reduced Paid-Up Insurance Option

Nonforfeiture option where cash value is used to make a single premium payment to purchase as much of the same type of insurance as possible. Face amount of the new policy would be less than the original policy, but no further premium payments would be necessary.

Policies that do not pay dividends are referred to as:

Nonparticipating policies

With a participating life insurance policy, a policyowner may do all of the following with dividends received EXCEPT:

use the dividends to pay overdue premiums from previous years.

Wendy has a $100,000 whole life participating policy. She recently married and is planning to have a family. She wants to increase her life insurance coverage but at minimal additional cost. Which of the following dividend options would be most suitable for her needs? A) Use dividends to buy one-year term insurance. B) Use dividends to buy paid-up additions. C) Allow dividends to accumulate at interest. D) Apply dividends against premium payments.

B) Use dividends to buy paid-up additions. By using dividends to buy paid-up additions, Wendy can increase her life insurance coverage without significantly adding to the cost. The dividends buy paid-up additions of life insurance, of the same kind as the original or base policy. The premium rate is based on her attained age at the time the paid-up addition is purchased. Although she can also use dividends to buy one-year term insurance, her need for increased coverage in the coming years will remain unsatisfied. Applying dividends against premium payments will lower the cost of her insurance, but it will not increase her coverage as desired. And while allowing dividends to accumulate at interest gives her a source of funds for withdrawal at any time, it too fails to meet her need for increased coverage.