What is Accumulation Option

An accumulation option is a policy feature of permanent life insurance that reinvests dividends back into the policy, where it can earn interest. Some types of insurance pay dividends to their policyholders each year when the insurance company performs better than estimated. Accumulation options are one of several options policyholders have for what to do with the dividends they receive. An accumulation option is also known as an "accumulation at interest dividend option," "accumulation at interest option" or "dividends on accumulation."

BREAKING DOWN Accumulation Option

Accumulation options are available to participating permanent life insurance policyholders. The interest earned is taxable to the policy owner annually. The total dividend balance is payable in addition to the face amount of the whole life policy as a death benefit, as well as, being included with the whole life policy guaranteed cash value upon the surrender of the policy.

A policyhoulder may also use their dividends to pay a portion of their existing premiums or elect to receive dividends immediately as cash. Although, dividends are not guaranteed, some insurance companies have paid them annually to their whole life policyholders for more than 100 straight years. 

Dividends Beyond Accumulation Options vs. Paid-Up Additional Insurance

Policyholders may also use their dividends to purchase more insurance. This is called paid-up additional insurance.The paid-up addition also builds cash value and earns dividends. The cash value and dividends grow income tax-deferred. Paid-up additional insurance is usually the default option, unless otherwise specified. Paid-up additional insurance increases the total death benefit as well as the cash value the policy owner can either borrow as a loan or receive upon the cash surrender of the policy. This may be a good option for a policyholder that has a family, whose insurance needs will grow over time. Paid-up additional coverage does not require medical underwriting, so it's an easy way to increase coverage even if health declines.

Annual dividends can also be applied towards the premium on the policy anniversary to lower the out-of-pocket cost of the policy. The annual dividend may be larger than the annual premium once the policy has been in effect for a number of years, which would eliminate the out-of-pocket-premium requirements.

Selecting paid-up additional insurance produces both an increased death benefit and increasing cash value. Leaving dividends to accrue at interest allows you to access the cash build-up without affecting the life insurance coverage. A life insurance agent should show a prospective policyholder projected dividends and cash values for all the dividend options.