Like many other permanent life insurance policies, Dividend Paying Whole Life Insurance (WL) is a great way to provide a guaranteed death benefit for loved ones. Most people are familiar with what a whole life policy is compared to a term life insurance policy—WL policies are set up to provide coverage for an entire lifetime as long as the premiums are paid-up. Premiums are also set at a level rate that doesn’t increase when you purchase the policy. However, the inner workings of a dividend paying whole life may be a little less clear.
- How does Dividend Paying Whole Life Insurance Work?
- How to Take the Money Out of the Cash Value Account in a Dividend Paying Whole Life Policy
- A Case Study of Dividend Paying Whole Life Insurance
How Does Dividend Paying Whole Life Insurance Work?
These policies have two financial components to them; the guaranteed death benefit and a cash value that accumulates with each premium payment. Typically, whole life policies do not accumulate large amounts of cash value. It’s really just there to help cover a few missed premium payments or provide partial withdrawals or loans in emergencies. If you are looking to a policy to grow cash value, you should look into either indexed universal or variable universal life policy. See more at case studies of universal life insurance.
The dividend paying WL policy provides an added bonus of potential annual cash payments based on how well the insurance company has done that year. Mutual insurance companies offer dividend payments because policy holders are considered part-owners in the company. Whether you get a dividend payment and how large it will be each year depends on a few factors:
- Number of Policies Sold
- Number of Insurance Claims
- Performance of Company Investments
Policyholders can also elect to use their dividend payments in a number of ways, including:
- An Annual Cash Check Made out to the Policy Holder
- Used Toward the Premium Payments
- Used to Increase the Cash-Value
- As Savings That Earn Additional Interest
- Purchase of Additional Insurance
- Repayment of Existing Loans
- Purchase of Term Life Insurance
>>MORE: Is Whole Life Insurance a Good Investment?
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How to Take the Money Out of the Cash Value Account in a Dividend Paying Whole Life Policy
As mentioned previously, policyholders can access their cash value at any time. Every time you access the cash-value of the policy it will reduce its value and the size of the potential death benefit. Policyholders have two options for accessing this money: Loans vs. Withdrawals
Partial Withdrawals: Depending on the insurance provider, you can make a partial withdrawal of cash from the cash value of the WL insurance policy. Withdrawals are not paid back into the policy so your cash-value is permanently reduced. However, the fee for accessing partial withdrawals is lower, usually about $25.
Loans: Another option is taking out a loan against the cash value of the policy. This allows you to keep the cash value in the policy growing and earning interest. You can also repay the loan and it won’t negatively impact the death benefit. However, loans come with fees and interest charges. The loan’s interest may vary but will usually be the current standard, about 5%.
>>MORE: Why is Whole Life Insurance Not Worth It?
A Case Study of Dividend Paying Whole Life Insurance
To give you a good idea of what a dividend-paying whole life insurance policy can do in the long-term, we’ve pulled an illustration from PennMutual. This Guaranteed Whole Life Insurance policy is for a man, 30 years old, healthy, and living in California. He wants to get a whole life policy with a guaranteed death benefit of $500,000. He wants to pay a premium for 30 years from 30 to 60 years old.
Premium Payments
With PennMutual, this man has the option of choosing from a few different payment schedules. He can pick an annual premium or a monthly premium that is more convenient. See for yourself:
| Death Benefit Amount | Premium Schedule | Premium Payment |
| $500,000 | Annual | $5,840 |
| $500,000 | Semi-Annual | $2,968.24 |
| $500,000 | Quarterly | $1,524.24 |
| $500,000 | Monthly | $508.08 |
If he chooses the annual premium, he only pays about $5,840 per year, but if he opts for the monthly payment it ends up being $6,096.96 per year.
The monthly premium is $508.08 times 12 months which is $6,096.96.
Assuming he chooses the annual payment schedule, he will pay out a total of $175,200 in 30 years.
Cash-Value Accumulation
This man’s policy is also dividend paying whole life insurance with a cash value accumulation. His illustration is set up with a maturity date of 121 years old. Assuming he doesn’t access the cash value and earns no dividends, he will have a million dollar life insurance policy with $500,000 in cash value plus the $500,000 death benefit.
By the time he reaches 61 years old, he will have earned $202,715 in cash value that he could potentially draw from for supplemental retirement income via withdrawals and loans.
However, there is potential for a larger amount of non-guaranteed earnings through potential dividends. Here’s a quick value chart showing where his cash value could be with different dividend earning rates.
| Policy Lifetime | Cash Value with Guaranteed Assumptions | Cash Value with 50% Dividend Earnings at Current Scale | Cash Value with Dividends Paid at Current Scale |
| 5 Years | $13,115 | $14,384 | $15,670 |
| 10 Years | $40,690 | $46,656 | $52,993 |
| 20 Years | $109,330 | $134,337 | $163,837 |
| 40 Years | $275,990 | $406,089 | $594,763 |
| 55 Years | $395,910 | $692,179 | $1,202,217 |
All of the policy outcomes in this scale also assume the additional $500,000 death benefit. If the policy holder continues to earn good dividends at the current scale for the first 40 years of his policy, he’d already reach million dollar policy status by 70 years old.
If he waits a little longer before accessing his cash-value at the age of 85 years old, it would be over one million alone in addition to the death benefit.
>>MORE: How to Calculate the Dividend in a Whole Life Insurance Policy?
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>>MORE: Compare Whole Life Insurance With Guaranteed Universal Life Insurance
Final Thoughts:
- Dividend Paying Whole Life Insurance can potentially provide a large cash value for loans and withdrawals.
- It takes a few decades for the cash value to reach retirement income levels in value.
- The premiums are high for a whole life insurance, but policy holders could save a couple hundred yearly with annual payments.
- It’s possible to reach a million dollar policy value with consistent payments and an early start when getting dividend paying whole life insurance.
