Definition
A Policy Dividend is a refund issued to the holders of participating life insurance policies. This refund represents a portion of the premiums paid and is determined annually. The calculation is based on the difference between the premiums charged and the company’s actual costs and surplus generated throughout the fiscal year.
How is a Policy Dividend Calculated?
The amount of the policy dividend is determined by subtracting the actual expenses and death claims paid from the total premium charged to all the policyholders. Surpluses can arise from better than expected company performance, including investment returns and cost management.
Options for Using Dividends
Policyholders may use their dividends in various ways:
- Cash Out: Receiving the dividend payment directly in cash.
- Reinvest in Insurance:
- Paid-up Additions: Use the dividend to purchase additional amounts of insurance coverage that are fully paid and require no further premium payments.
- Term Extension: Using the dividend to buy temporary term insurance coverage typically for a year.
- Deposit: Leaving the dividend on deposit with the insurer, often earning interest according to the terms set by the insurance company.
Insurance policyholders are advised to understand thoroughly the terms and conditions, as well as potential advantages or considerations of each dividend option to best fit personal financial needs.
Regulatory Aspects
In the United States, the handling and distribution of policy dividends is regulated under state insurance laws which ensure that insurance providers operate under fair and safe practices and maintain the mandates of the insurance contracts. For guided information, individuals should reference specific state insurance department guidelines.
Conclusion
Policy Dividends offer flexible options for managing financial returns on life insurance investments. Holders of participating policies should review their policy terms carefully and consult with their insurance provider for the detailed and personalized application of dividends.
