Life Insurance - Dividend and Non-Forfeiture 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
    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    c. Allow dividends to accumulate at interest - Can be withdrawn at anytime; however, any interest paid on them is taxable income in the year the interest is credited to the policy.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-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
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