Life Insurance - Dividend and Non-Forfeiture Options

DIVIDEND OPTIONS
If you own a participating life insurance policy, you are entitled to receive dividends. Not all policies are participating. Of course, it is important to understand, the payment of dividends is not guaranteed; dividends are a reflection of conditions affecting the company and the cost of insurance.

  • Policy dividends are not taxable income, unlike corporate dividends; they are a return of the policy owners premium.
  • Policy owners are generally permitted by insurers to receive their dividends through one of five options.
    a. Take dividends in cash - Dividends become payable on contract anniversary dates and are usually sent automatically in the form of a dividend check after company
    approval.
    b. Apply dividends against premium payments - Applying dividends to premium payments generally lowers the owner's out-of-pocket expense.
    c. Allow dividends to accumulate at interest - Can be withdrawn at anytime; however, any interest paid on them is taxable income in the year the interest is credited to the policy.
    d. Use dividends to buy paid-up additions - Dividends can be used to purchase additional life insurance, of the same kind, but premium rate is based on the age of insured at the time paid-up insurance is purchased.
    e. Use dividends to purchase one-year term insurance - This is done through the issue of a separate rider.

NON-FORTEITURE OPTIONS
Non-forfeiture options are ways in which cash values can be paid out to or used in the case the policy is lapsed or surrendered.

There are essentially three non-forfeiture options available: cash surrender, reduced paid-up insurance and extended term insurance.
a. Cash surrender option - Policy owners may request an immediate cash disbursement when their policies are surrendered.
b. Reduced paid-up option - The cash value is used as the premium for a single-premium whole life policy, at a lesser face amount than the original policy.
c. Extended term option - The cash value is used to purchase a term insurance policy in an amount equal to the original policy's face value, however, when the term insurance expires there is no more protection.

Practice Question:
Scott purchased a whole life policy for $250,000 ten years ago. He would still like some insurance but no longer desires to continue to pay premiums. If he does this, which of the following is a non-forfeiture option he could use?

A. Paid-up reduced amount
B. One-year term
C. Installments for a fixed period
D. 1035 rollover option

Answer: A
"Reduced paid-up" or "Paid-up reduced" is the only answer that is one of the non-forfeiture options. The other two non-forfeiture options are cash surrender and extended term. Settlement Options and Illustrations
Related Articles
  1. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  2. Products and Investments

    How to Create a New Financial Product in 10 Steps

    The 10 steps outlined here are essential to the creation of a new financial product.
  3. Professionals

    A Day In The Life Of A Public Accountant

    Here's an inside look at the workdays of two experienced CPAs, to give you an idea of what it might be like to pursue a career as a public accountant.
  4. Professionals

    A Day in the Life of a Public Accountant

    There’s no typical day in the life of a public accountant, but one accountant’s experience may shed some light on what the career entails.
  5. Saving and Spending

    A Key Tip for Making Your Nest Egg Last Longer

    Retirees who don't want to deplete their nest eggs during a bear market should make sure to do the following.
  6. Mutual Funds & ETFs

    Fidelity Target Risk Funds Overview

    Get a brief overview of Fidelity's seven target risk funds, with a description of each fund's asset allocation and expense ratio.
  7. Investing News

    Is it the Right Time to Raise Interest Rates?

    Warning signs have started to emerge that point to a potentially dismal 2016 for the U.S. economy.
  8. Markets

    Four Big Risks of Algorithmic High-Frequency Trading

    Algorithmic HFT has a number of risks, and it also can amplify systemic risk because of its propensity to intensify market volatility.
  9. Mutual Funds & ETFs

    The Top 3 Invesco Funds for Retirement Diversification in 2016

    Explore analyses of the top three Invesco mutual funds for retirement diversification in 2016, and learn about the characteristics of these target-date funds.
  10. Investing Basics

    Hedging Risk for Beginners: How and When to Do It

    Hedging risk is always a good idea. Here is how sophisticated investors go about it.
RELATED TERMS
  1. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  2. Equity Risk Premium

    The excess return that investing in the stock market provides ...
  3. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  4. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  5. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  6. Gross Exposure

    The absolute level of a fund's investments.
RELATED FAQS
  1. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Full Answer >>
  2. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  3. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  4. Why are mutual funds subject to market risk?

    Like all securities, mutual funds are subject to market, or systematic, risk. This is because there is no way to predict ... Read Full Answer >>
  5. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  6. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
Hot Definitions
  1. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  2. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  3. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  4. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
  5. Godfather Offer

    An irrefutable takeover offer made to a target company by an acquiring company. Typically, the acquisition price's premium ...
Trading Center