What Are the Dividend Options Available to a Policyowner?

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What Are the Dividend Options Available to a Policyowner?

If you own alife insurancepolicy that pays dividends, you may have several options for how to receive those dividends. Here is an overview of the most commondividend optionsavailable to policyowners and some factors to consider when choosing among them.

Cash

One option is to receive the dividends in cash, which means that the insurance company sends you a check or credits your account with the amount of the dividend. This option provides you with immediate access to the dividend and allows you to use it for any purpose, such as paying bills, saving, or investing. However, it also reduces the amount of the policy's death benefit and cash value, since the dividend is no longer reinvested.

Premium Reduction

Another option is to use the dividends to reduce the premium payments on the policy, which means that the insurance company deducts the amount of the dividend from the next premium due. This option can help you lower your out-of-pocket expenses and keep the policy in force, especially if you have limited cash flow or face unexpected financial challenges. However, it also decreases the amount of the dividend and the potential growth of the policy's cash value.

Paid-Up Additions

A third option is to use the dividends to purchase paid-up additions, which are additional coverage units that increase the death benefit and cash value of the policy. This option allows you to enhance the policy's long-term value and flexibility, as well as to participate in the compounding effect of the dividends. However, it also reduces the amount of the dividend available for other purposes and may require additional underwriting or administrative fees.

Accumulation

A fourth option is to leave the dividends with the insurance company to accumulate interest or dividends, which means that the dividend becomes part of the policy's cash value and earns interest or dividends based on the company's performance. This option can help you maximize the policy's potential growth and create a source of tax-deferred income or loans in the future. However, it also requires you to trust the insurance company's financial strength and investment strategy and may limit your access to the dividend.

Factors to Consider

When choosing among these dividend options, you should consider several factors that may affect your financial goals, risk tolerance, and tax situation. Some of these factors include:

- Your current and future cash flow needs and priorities

- The policy's premium, death benefit, and cash value

- The policy's surrender charges, loans, and tax consequences

- The insurance company's ratings, history, and financial stability

- Your overall investment portfolio, diversification, and asset allocation

You may also want to consult afinancial advisoror tax professional who can help you evaluate the pros and cons of each option and tailor a strategy that suits your specific needs and circumstances. Moreover, you should review your policy regularly and adjust your dividend option as your life changes, such as when you retire, have a child, buy a home, or face a health issue.

Investment Implications

If you are interested in investing in life insurance policies that pay dividends, you should be aware of some potential risks and rewards. On the one hand, these policies can provide you with a steady stream of income, tax advantages, and asset protection, especially if you hold them for a long time and diversify your portfolio. On the other hand, these policies may also involve high fees, low liquidity, and complex regulations, as well as the risk of policy lapses, poor performance, or fraud.

Therefore, you should do your due diligence and research the insurance company, the policy terms, and the market trends before making any investment decision. You may also want to consider working with a licensed and experienced life settlement broker or advisor who can help you navigate the process and negotiate the best deal for you. Finally, you should always remember that investing involves risk and reward, and that past performance does not guarantee future results.