While you can take out loans against your whole life insurance policy, there are other ways you can dip into your policy without reducing the death benefit. Depending on the terms of the policy and the insurer, you may have the option to withdraw dividends annually or reinvest them in your policy, raising the death benefit.
Understanding the words and phrases you may find on your life insurance policy is your first step in using dividends.
Dividends are the funds earned by the insurance policy that are distributed to the policy holder. This is very similar to interest, though an insurance company does not guarantee any dividend or return on their investment.
Paid-up additions are purchased by your insurance policy with the dividends made during the year. To determine the number of paid-up additions (PUAs) in your policy, subtract the death benefit listed on last year’s statement from the death benefit on this year’s statement. The difference is the PUA amount purchased in the past year.
Most insurers automatically return dividends and PUAs to your policy benefit if you do not exercise the option to cash them out. However, once you’ve made the change to withdraw dividends from your whole life policy, expect to see a check show up every year until you request a change again.
To request dividends or PUAs be cashed out, you’ll need the most recent statement of your policy, your policy number, the customer service telephone number and the amount of PUAs that are available (see “Terminology”).
Call your insurance company and follow the telephone prompts. Once you get through to a customer service representative, tell him or her that you’d like to change the way your dividends are used and request they be sent to you in the form of a check. You can also request they be used to pay your premiums or to pay down any balances on a loan against your insurance policy.
Dividends and PUAs are most often issued once per year, usually on the anniversary of the policy. The customer service representative you speak with can probably tell you how long you should wait for the check to arrive as well as how to contact them should it not arrive. Make sure you log this information and keep an eye on your mailbox when the check is due to arrive.
If you would like future dividends to be absorbed by the policy in the future, call the insurance company after waiting one year. Typically, you cannot make more than one policy change in a single year.
Dividends and PUAs purchased with dividends are not subject to income taxes. If you instruct your insurance company to reinvest these into your policy you are not penalized.
If you choose to withdraw your dividends or PUAs purchased with dividends, those funds may be subject to taxation. If you are concerned about this added tax liability, you should contact an accountant or, at the very least, the IRS website. Sometimes, insurers are willing and able to send you instructions for reporting your exercised dividends on the proper line of the tax form you use.
Keep a copy of the statement that should arrive with your dividend check for tax preparation purposes. This documentation should be kept for no less than eight years, just in case you are audited.