Policy Dividend

Compare with regular dividends on investments

A policy dividend may be available on a whole life policy.

A policy dividend is a distribution arising from overpayment of premiums

  • the premium charged is intentionally excessive —> the portion the insurer does not use is returned to policyowners
  • not a share in the insurer's profits
    • arises from the insurer overestimating mortality rates, underestimating investment earnings, overestimating policy expenses
  • nonguaranteed
  • varies year by year

Dividends are like condominium fees or taxes … you can get reassessed. If death claims are higher than expected, your dividends can be reduced.

Sources of Dividends

There are three sources for policy dividends

  • mortality (actual deaths lower than expected deaths)
  • investment earnings (actual returns higher than expected returns)
    • e.g., from stocks, bonds and real estate
  • expenses (actual expenses lower than expected expenses)

Uses of Dividends

There are three main uses of dividends

  1. saving
    • get a refund by cheque
    • leave the dividend on deposit with the insurer to earn interest
    • buy segregated funds (how?)
  2. buy more insurance (without evidence of insurability)
    1. paidup additions
      • added to the base policy
      • has own cash surrender value
      • can surrender individually without affecting the base policy
    2. 1 yr nonrenewable term
      • usually for the amount of the cash value
        • any excess paid in cash
      • can also buy with the whole dividend
  3. reduce premiums
    • apply the dividends towards the ongoing premium payments

PS Network

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