letsgobobby wrote:I have seen several of our knowledgable insurance folks state that after holding a whole life policy for a certain number of years, the wisest move is to use dividends to buy additional paid up insurance. Why is that? I understand not letting a policy lapse after 20+ years and we have kept my wife's policy for that reason. But why more insurance, as opposed to letting the dividend reduce the premium?
First, life insurance policies with mutual companies that become stock companies continue to pay dividends, generally at the same rate as if the demutualization never occurred. I own several policies with former mutual companies and I am happy with the dividend performance since demutualization.
Second, the best dividend option depends on each individual's situation. Paid up additions makes sense if you want to increase the death benefit and total cash value annually, without having to qualify for the new insurance. PUA's are often recommended for the above reason, plus the annual increases are income tax free from both a death and a cash accumulation standpoint. Years ago, when interest rates were very high, many agents recommended dividends to accumulate at interest as a better way to grow policy values. The interest on past accums was taxable annually though the dividend itself was usually not taxable. With lower interest rates, the rate of growth has been better with PUAs for quite a few years now.
Using dividends to pay policy premiums also makes sense, depending on your situation. If you don't want or need more life insurance then dividends to reduce may be a good option. Also, if you need more life insurance, you might want to explore the option of allowing dividends to reduce or pay for existing permanent insurance to free up money to buy new term insurance. Alot also depends on age. On several policies I allow the dividends to complety pay all premiums just based of personal preference,
Other dividend options may include buying one year term insurance equal to the guaranteed cash value or to cover loans with the balance going to PUA's or whatever.
I guess the bottom line is that you need to choose the dividend option that best suits your needs.