Dividends and Dividend Options

Among life insurance policies, only participating policies pay dividends. Although they are called "dividends," the payments are not like dividends paid on stock. Instead, they are merely the nontaxable return of some excess premium by the insurance company based on lower-than-expected mortality expenses (fewer claims than expected) and administrative expenses, and/or higher than expected investment yields. A participating policy will normally describe the five alternatives that can be selected with respect to any dividends that might become available:

• cash payment to the policyholder
• application to reduce premiums
• accumulation by the insurance company for the policyholder's benefit
• application to purchase paid-up insurance
• application to purchase one-year term coverage