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Understanding Accumulation OptionsAccumulation options are available to participating permanent life insurance policyholders. Dividends paid as part of accumulation options are considered a tax free return of capital as long as it remains in the cash value ("inside build-up") of the policy. If portions of the dividends are withdrawn, the amount that is above the "return of capital" would be subject to taxes. However, if taken out as a loan the entire amount would remain tax free. If you're specifically referring to the accumulation at interest account then this state would be accurate. No portion of the cash value is paid at the death of the insured, only the death benefit. Often times the death benefit may grow as the cash value grows in whole life policies. This effect is due to dividends automatically buying mini insurance policies which will cause the face value to increase. Upon surrender, only the cash value would be available for withdrawal. Taxes would be due if the total cash value is greater than total premiums paid into the whole policy. A policyholder 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. Some insurance carriers do allow policy owners to pay money directly into the cash value. Types of Accumulation OptionsHere are the five accumulation options in a whole life policy.
Dividends Beyond Accumulation Options vs. Paid-Up Additional InsurancePolicyholders 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. Example of an Accumulation OptionTom has a $100,000 life insurance policy with annual premium payments totaling $3,000. He earns $1,000 as annual interest from the dividend amount deposited into the accumulate at interest account maintained by his insurance company. He chooses to reinvest that amount back as premiums. Over time, as the dividend amount increases and interest rates move higher, Tom's premiums are covered by his accumulation options. A few years later, however, interest rates move south and Tom's interest rate account is not sufficient to meet his premium payments. What is reduction of premium dividend option?This option enables you to reduce the dollar amount of your out-of-pocket premiums whenever dividends are payable on your policy. For example, if your annual premium is $500 and your policy earns $150 in dividends one year, you would be billed for only $350.
What is a dividend on a life insurance policy?Some life insurance policies pay dividends. These are extra funds returned to policyholders each year.
Which dividend option will increase the death benefit?An accumulation option reinvests dividends back into the policy to earn interest on an annual basis. Death benefits may also increase due to increases in cash value.
What is the dividend option in which the policy owner uses dividends to purchase a term policy for one year?Use Dividends to Purchase One-Year Term Insurance - This so-called "fifth dividend option" allows the policyowner to use the dividends to purchase one-year term insurance at net rates, usually limited to no more than the current cash value on the contract.
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