One of the benefits of certain whole life insurance policies is that, though not guaranteed, they can grant policyholders dividends. Dividends are typically associated with stock ownership, but certain participating insurance policies do offer this as a benefit to policyholders when the company performs better than expected. There’s more than one way to utilize these dividends and some may be better than others depending on your situation. Dividends from whole life insurance are for the most part not taxable because they are considered as returns of paid premiums. They are usually disbursed on the anniversary of your policy. Before you decide what to do with your dividends, let’s look at some of your options.
Take them as cash: This option lets you receive the dividend amount in cash. . This option gives you some spending money in-hand, so it may be a good choice for anyone looking to repay credit card debt, boost emergency savings, or simply contribute to a vacation fund.
Reduce premiums: You can use your dividends to help pay for your policy, effectively reducing the premiums you owe. This can be a great option, particularly if your income or job situation is in flux: You can get more room in your budget, but your policy is unaffected. In some cases, your policy may grow to the point where dividends can cover your premium for the full year.
Consider Paid-Up Additional Insurance: Getting paid-up additional insurance is a way to increase coverage. It can increase death benefits or living benefits. Paid up additional insurance increases the cash value of your policy and, as a result, can increase future potential dividends, too.
Reduce or pay off a policy loan: If you’ve already borrowed against a policy, then you can use your dividends to repay what you owe. An outstanding policy loan reduces the death benefit of a whole life insurance policy, so it can make sense to repay it quickly.
As you can see, there are quite a few options when it comes to making use of whole life insurance dividends, but the right one will differ from person to person. And it doesn’t have to stay the same year-to-year: You can change how you use your dividends depending on your situation.