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

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