If you have children, debts, or want to leave something behind for the family, you might be thinking about getting life insurance. But, there are many kinds of life insurance policies that pay out after death, one of which is dividend paying whole life insurance.
It may be a better option to get this type of life insurance if you want something that grows more the longer you carry it or that pays you back just for carrying life insurance.
- What is Dividend Paying Whole Life Insurance?
- Pros and Cons of Dividend Paying Whole Life Insurance
- Features of Dividend Paying Whole Life Insurance
- Who Should Consider Dividend Paying Whole Life Insurance?
- How Much does Dividend Paying Whole Life Insurance Cost?
What is Dividend Paying Whole Life Insurance?
Dividend paying whole life insurance is whole life insurance issued by mutual companies like Northwestern Mutual, Mass Mutual or Penn Mutual. Mutual companies are owned by their policy holders. If mutual companies are doing well and making profit, instead of paying dividend to shareholders as in public companies, mutual companies are paying dividend to its owners who are policy holders.
Many people opt for dividend paying whole life insurance as a way of offsetting their premiums, and even earning a little extra back on payments after an extended period of time. Essentially, this insurance offers policyholders an annual interest payment based on the insurance company’s profits. This “dividend” is usually a small percentage of the value of your policy. For instance, a typical dividend of 0.3% of a $50,000 death benefit on a whole life insurance policy equals $150 per year.
In addition, policy holders can do lots of different things with that dividend payment. Depending on your insurer, you usually have the option to:
- Take a cash payment on your dividend
- Add it to the cash value of your policy
- Use it to pay part of your annual premiums
- Set up savings with the insurance company to earn additional interest
>>MORE: Understanding How Dividend Paying Whole Life Insurance Works
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Pros and Cons of Dividend Paying Whole Life Insurance
While dividend paying whole life insurance is appealing to many people, it is a more complex type of insurance. So be sure you are aware of the pros and cons of obtaining it before signing any contracts. Let’s take a look at some of the major positives and negatives of this kind of policy.
Pros:
- Annual dividend earnings on your policy value
- Ability to reinvest dividends for investment gain
- Insurance coverage for life as whole life is a permanent life insurance type
- Guaranteed cash value, despite may be not as much as you may expect
- Ability to take out loans against the cash value account in the policy
- Set premiums that never increase
- Tax-deferred investment growth and tax-free when withdrawing by loans
- Most life insurance proceeds, including death benefits, dividend, and withdrawal or loans are not taxable
Cons:
- Premium costs can be increased
- Low returns as an investment. If you are looking to maximize cash value account for retirement income or other purposes, whole life insurance is not the right one to buy. Instead, you should consider indexed universal life or variable universal life. These universal life insurance are optimized for cash value account growth.
- More complex compared to term life. Also, see the Differences Between Whole Life and Term Life Insurance
- Dividends may not be guaranteed
- Last but not least, very expensive. For similar guaranteed coverage and cash value account, other universal life insurance policies are a lot cheaper.
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Features of Dividend Paying Whole Life Insurance
Dividend paying whole life insurance is very similar to traditional whole life insurance. The cash-value of both policies is guaranteed to increase over time. This is also permanent insurance that covers you for life as long as you’ve paid your premiums. Plus, you’ll be able to take out loans against both insurance policies.
The main difference is that the insurer offers either a guaranteed dividend per year or a potential dividend based on how well the company has done that year. A policy with a guaranteed dividend may have higher premiums on average. Conversely, a policy with non-guaranteed dividends may have lower premiums, but you run the risk of not getting a payment if the insurance company has a bad year.
Your dividend payments are also based on a number of factors, including:
- Value of the policy
- Company profits
- Interest rates
- Returns on investments
- Number of new policies sold
Who Should Consider Dividend Paying Whole Life Insurance?
Everyone can opt for a dividend paying whole life insurance policy if they want a guaranteed payment for their loved ones. However, there are some situations where this whole life insurance policy may be a better choice than other types of insurance:
- If you have children who are living with a disability, whole life insurance policies can provide the peace of mind that comes with a guaranteed payment.
- High income earners who have already maxed out their retirement contributions may want to consider whole life insurance as a place to keep their money for the tax benefits. However, in this case, you can also consider other permanent life insurance as well such as indexed universal life insurance.
- Older adults and seniors who expect to live a long time may prefer whole life over a term life insurance policy that could potentially end after a certain age.
- If you need guaranteed cash value account, despite a much lower growth rate compared to indexed or variable universal life insurance.
- If you need a certain amount of liquidity, a whole life insurance policy allows policyholders to take out loans against the death benefit.
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How Much Does Dividend Paying Whole Life Insurance Cost?
Since it does pay out annually, dividend paying whole life insurance is more expensive than standard whole life insurance or universal life insurance and much more costly than term life insurance. Whole life insurance can be as much as six to eight times the cost of comparable term life coverage.
The amount of your premium can vary according to a number of factors, such as:
- Your age at the time you obtain the policy
- Your gender
- Where you live
- Your health at the time coverage is obtained
- Amount of coverage
- Whether you use the dividend towards the premium
A woman aged 30 purchasing a term life insurance policy of $250,000 can expect to pay about $133 per year for 20 years. However, the same coverage for the same person in a whole life insurance policy would cost about $1,904 per year. It’s easy to see how much more costly the annual premiums would be on dividend paying whole life insurance from these numbers.
Dividend paying whole life insurance is a big investment, but it does provide the security of guaranteed payment after death and a regular dividend payment. Those who are looking for tax-deferred and tax-free investments may want to consider the benefits of this type of policy. It’s also a good way to provide protection for adult children with disabilities or family members who may have financial trouble after your passing.