As a general rule, if you’re looking to buy life insurance you’re much better off going with term life insurance, rather than whole life. However, should you choose to go with whole life insurance – whatever the reason – one way you can offset a much higher premium cost is by going with a dividend paying life insurance policy.
Though the dividends won’t do a whole lot to offset the much higher premiums that come with the whole life policy, at least not during the first few years that the policy is in force, they can provide certain benefits and options once you are a few years into the policy.
What is dividend paying whole life insurance?
Term life insurance policies do not pay dividends, as it is the simplest form of pure life insurance you can possibly obtain. Dividends are paid in connection with whole life insurance, mainly in the case of mutual life insurance policies where you’re essentially an owner of insurance company.
Sometimes known as participating life insurance, dividend paying whole life insurance enables you to participate in the insurance company’s earnings, in much the same way that you would if you are a stockholder in any company.
Typically, you will not receive dividends during the first year of the policy, and only a small amount in the second and third years. As the policy continues in force, and as the cash value in the policy increases, so do the dividend payouts. Over time, the dividends can become quite substantial.
Dividends on a whole life insurance policy are never actually guaranteed, however you can increase the likelihood of receiving them on a consistent basis by purchasing a policy in a company that has a long history of paying dividends. Like some dividend paying stocks, there are life insurance companies that have been paying dividends for decades, and some that even have a history of increasing them on regular basis.
Living benefits vs. death benefit only
The primary purpose of obtaining any kind of life insurance is so that there’ll be a death benefit available to your beneficiaries at the time of your death. This will allow your loved ones to pay for final expenses, to clean up medical bills and other expenses related to your death, and to provide money either to payoff debts or to provide for living expenses for at least a short time.
That kind of benefit is actually a death benefit, which is to say that it has no benefit whatsoever to you during the course of your lifetime. However with a dividend paying life insurance policy, you will be setting up insurance that will have a living benefit to you.
Some of those benefits include:
- Using the dividends to reduce your annual premium payments
- Using the dividends to purchase an increased death benefit
- Building up the cash value of the policy so that you will be able to take loans against it at advantageous interest rates
- As an additional source of investment capital for retirement
These are just some of the benefits of a dividend paying whole life insurance policy. Though the policy will cost much more than a term life insurance policy with a similar death benefit, they can be an excellent type of life insurance policy to have if you are not a saver by nature. You will be adding a savings feature to your life insurance policy.
For some people it’s easier to save money this way because they are doing it by paying a bill, rather than trying to put money into actual savings. The money can then grow quietly and out of sight, in much the same way that a tax-sheltered retirement plan does.
Dividend paying whole life insurance can make life insurance more pleasant
Let’s be honest – since it is all about making a provision for your death, most of us don’t really like to even think about life insurance, let alone talk about it. But when you have a dividend paying component to an insurance policy, it has the dimension of direct benefits during your lifetime.
You’re not just making a provision for your death, you’re creating a financial asset that will grow with time. That growth factor is very important. Not only will it allow you to save money in an unconventional way, but it will also provide you with a built-in mechanism to increase your insurance coverage as your needs increase, and as inflation makes more necessary.
For example, let’s say that you take a $100,000 life insurance policy, having a spouse and two children when you are 30 years old. Will it still be enough when you’re 40, or 50? Probably not. As your children get older, the need for funding for college education will present itself. The purchase of a home securing a mortgage will create the need to payoff the debt. And inflation will raise the overall cost of living throughout your life.
The dividend paying whole life insurance will enable you to increase your death benefit without having to go through medical qualification or taking an entirely new policy. In this way, a dividend paying whole life insurance policy stands head and shoulders above a term policy. The term policy will require an upward premium adjustment because you will be older at the time that it will renew. If you need additional insurance coverage, you may have to apply for an entirely new policy, and go through medical qualifying that may result in higher premiums still.
Dividend paying whole life insurance isn’t always the best kind of life insurance to have. But there are certain circumstances where it may work to your advantage. Check term life insurance first, if that doesn’t work for you, investigate dividend paying whole life insurance. It may be the next best insurance alternative.
