The debate about which is a better form of life insurance: Whole Vs Term - rages on the internet.
Although I rarely suggest that clients spend more money for the Whole Life Insurance as opposed to the simple and straight forward concept of purchasing an inexpensive term policy and investing the rest, that does not mean that Whole Life should always be avoided.
In this short peice Ill describe the four ways that Mutual Whole Life Insurance Dividends can Typically be used:
1. The most obvious method is to take the dividend as a check and cash do what you will with the check. Cash it, Spend it, Use to to buy a load of grocercies. Since life insurance dividends are often federally income tax free, there is not a lot of paperwork to fill out.
2. The most highly suggested method from Insurance Agents is to use the money to buy yet more whole life insurance (which themself can one day received dividends.) This increases the size of your policy and allows your ultimate death benefit to grow. This is done via a Paid Up Additions Rider or PUA for short.
3. Some insurance companies, not all, will allow the dividends to be used to purchase short term policies of a limited amount of years. This can be a terrific idea in certain circumstances.
4. Most logically you can use your participating insurance dividend check to pay down your yearly premium. If your yearly premium is $900 and your dividend is $100, it may be as simple as subtracting the two. This has the benefit of cutting your costs down and one day, possibly, allowing the permanent life policy to be self sufficient.
5. Generally considered to be your worst option for tax and other financial reasons, you may be able to accept the money but keep it in your account to receive more dividends. This accumulate at interest option is should generally be avoided.
Now, some article will list out paying down your life insurance policy loan down as yet another (6th) option. I am not listing it separatly - but consider it to be akin to points 4 and 2.
Please note that not all whole life insurance companies allow all of these options, nor are policy dividends guaranteed.
Does this mean that I recommend whole life insurance? Not exactly - but if you are already into a well funded policy - You should know your options. Always read your contract and speak with your insurer about your life insurance dividend options.