Permanent participating cash value life insurance policies earn dividends.
It may be important to you to understand a little about how a life insurance company arrives at the amount they pay to their policy owners who own cash value policies.
When a life insurance company's performance is better than anticipated, assumed or projected, when dealing with a participating policy, a dividend is paid.
The payment indicates the company's operating expenses, risk selection and management experience is more efficient than expected.
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This payment is made on a given policy the year after it is earned...usually on the policy anniversary. It is equal to the difference between the policy value and the cash value at that time.
Paid up additions are also considered when calculating policy value and a dividend.
The policy value is equal to the guaranteed cash value, plus the gross annual premium, less mortality and expense charge, plus whatever interest is credited to the policy, minus the guaranteed cash value.
It is important that you know that payment of dividends are not guaranteed and are based on the particular insurance company's experience.
The Dividend can be paid in cash, be used to purchase paid up additions...that is additional insurance of the same type...or they can be used to reduce premiums.
If the dividend is used to purchase paid up additions it becomes part of the guaranteed cash value of the policy the following year.
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