Definition
Dividend Addition in life insurance is the amount added to the face value of a life insurance policy, acquired using the dividends generated from the policy. When a life insurance policy, particularly a participating policy, earns dividends due to surplus earnings of the insurance company, policyholders can use these dividends to purchase additional insurance coverage, effectively increasing the policy’s death benefit.
Examples
- Whole Life Policy: A whole life insurance policyholder receives an annual dividend. Instead of taking the dividend as cash, they choose to purchase additional paid-up insurance, increasing the death benefit.
- Participating Policy: In this policy, policyholders receive dividends. These dividends then purchase units of paid-up additional insurance, adding to the original policy’s face value.
Frequently Asked Questions (FAQs)
What is the purpose of a dividend addition?
Dividend additions serve to increase the face value of the policy, thus enhancing the death benefit payable in the event of the policyholder’s death.
Do all life insurance policies offer dividends?
No, not all life insurance policies offer dividends. Policies that do are typically participating policies, such as whole life insurance issued by mutual insurance companies.
Can policyholders use dividends in different ways?
Yes, policyholders can choose to receive dividends in various forms: as cash, to reduce premium payments, to purchase additional insurance coverage (dividend addition), or to accumulate at interest within the policy.
How are dividends in life insurance determined?
Dividends are determined based on the insurer’s annual performance, including factors like mortality experience, investment returns, and operating expenses.
Are dividends guaranteed?
No, dividends are not guaranteed. They depend on the insurer’s financial performance and can vary from year to year.
- Face Value: The original nominal value of the life insurance policy, which is the amount payable upon the insured’s death.
- Policy Dividends: Profit share paid to policyholders of participating life insurance policies from the insurer’s surplus.
- Paid-up Addition: Extra insurance bought using dividends which requires no additional premium payments.
Online References
- Investopedia - Dividend Addition in Life Insurance
- Insurance Information Institute
- Life Happens - Understanding Your Policy Dividends
Suggested Books for Further Studies
- “Life Insurance - The Wealth Preservation Tool” by Bisen Singh: Discusses in-depth life insurance and how to maximize benefits, including dividend utilization.
- “The Tools & Techniques of Life Insurance Planning” by Stephan R. Leimberg: Comprehensive guide on life insurance, detailing dividend additions and other key aspects.
- “Life Insurance Mathematics” by Hans U. Gerber: For more technical insights and mathematical underpinnings of life insurance policies and dividends.
Fundamentals of Dividend Addition: Life Insurance Basics Quiz
### What is a dividend addition in life insurance?
- [ ] A decrease in policy premium.
- [x] An increase in the face value of the policy using dividends.
- [ ] An amount deducted from face value.
- [ ] Interest accrued on policy dividends.
> **Explanation:** A dividend addition increases the face value of the life insurance policy using the dividends earned on that policy.
### Can all life insurance policies purchase dividend additions?
- [ ] Yes, every policy can.
- [ ] No, only term policies can.
- [x] No, only participating policies can.
- [ ] Yes, but only if premiums are fully paid.
> **Explanation:** Only participating policies, such as whole life policies issued by certain insurers, can use dividends to purchase dividend additions.
### How often are the dividends evaluated for a participating life insurance policy?
- [ ] Daily
- [ ] Monthly
- [ ] Quarterly
- [x] Annually
> **Explanation:** Dividends for participating life insurance policies are typically evaluated on an annual basis.
### What factor does NOT influence the amount of policy dividends?
- [ ] Investment returns
- [ ] Mortality experience
- [ ] Operating expenses
- [x] The policyholder’s health
> **Explanation:** Policy dividends are influenced by investment returns, mortality experience, and operating expenses, not directly by the policyholder’s health.
### What can a policyholder do with their dividends?
- [x] Take them as cash.
- [x] Use them to buy additional insurance.
- [x] Reduce premium payments.
- [x] Accumulate them at interest.
> **Explanation:** Policyholders have several options for their dividends, including taking them as cash, buying additional insurance, reducing premium payments, or accumulating them at interest.
### Are life insurance dividends guaranteed?
- [ ] Always
- [x] No, they are not guaranteed.
- [ ] Only in whole life plans.
- [ ] Only for policies over 10 years.
> **Explanation:** Life insurance dividends are not guaranteed and depend on the insurer’s financial performance.
### How does a dividend addition benefit the policyholder?
- [x] Increases death benefit.
- [ ] Decreases premium cost.
- [ ] Generates immediate cash revenue.
- [ ] Allow for policy loan.
> **Explanation:** A dividend addition benefits the policyholder by increasing the death benefit, providing more coverage without additional premium payments.
### Can dividends decrease the face value of the policy?
- [ ] Yes, if requested by the policyholder.
- [ ] Yes, automatically if dividends are low.
- [ ] No, face value remains unaffected.
- [x] No, dividends either accumulate or add value.
> **Explanation:** Dividends cannot decrease the face value; they are typically used to add value or accumulate within the policy.
### What additional benefit might a paid-up addition provide?
- [ ] Additional cash surrender value.
- [ ] Reduced policy premiums.
- [x] Increased death benefit.
- [ ] Equity building similar to property.
> **Explanation:** Using dividends to purchase paid-up additions increases the death benefit and might also contribute to the cash value of the policy.
### How is a dividend addition reflected in the policy?
- [ ] As a deduction from the premium.
- [x] As an increase in the policy's face value.
- [ ] As an increase in the policy's interest rate.
- [ ] As a decrease in the cash value.
> **Explanation:** Dividend additions result in an increase in the policy's face value, reflecting the increased death benefit.
Thank you for your interest in understanding the intricate concepts of life insurance. Endeavor to get the most out of your policy benefits by keeping this knowledge handy!
