February 22nd, 2011 | Author: Mitch Reynolds

Whole Life Insurance Dividend Option

Enhanced Coverage Option for Your Whole Life Insurance

When buying whole life insurance you have a number of options for your dividends to choose from. Dividends! What are you talking about? This is a life insurance policy, not a stock.

Well, with traditional whole life insurance the insurance company pays dividends to it’s policy holders as it has profitable performance of the entire whole life insurance fund. Think of all the premiums paid by all other people owning the same whole life insurance product being pooled into a managed fund. The fund can have strong performance because of good investment returns, controlling operating expenses and lower than expected death claims. All these things can contribute to profitable performance of the fund, and the majority of those profits are paid back to policy holders in the form of a dividend. Once you receive the dividend, you have a number of choices to make. What should you do with your dividends?

This is the first article is a series discussing the options for your dividends. The other coming articles include:

Whole Life Insurance Enhanced Coverage Option

With this dividend option, you can purchase a larger face amount of whole life insurance with a lower premium. This is because the entire amount of insurance purchased is not all whole life insurance; at least not in the beginning.

The enhanced amount refers to a portion of the coverage that is a term life insurance attachment to the base amount of whole life coverage bought. So, if you re buying $500,000 of enhanced whole life insurance, maybe $200,000 would be true whole life coverage while the remaining $300,000 would be term life attachment. This plan can be set up so that the total amount of insurance, the $500,000, is fully guaranteed for life. No matter if the planned dividends from the insurance company do not materialize, the full amount of coverage and the monthly/annual premium will remain fixed and guaranteed.

Over time the dividends being paid out are used to buy you small blocks of permanent whole life insurance that are fully paid up for life (called paid up additions). If your dividend was $500 for this year, that might buy you $1,500 of paid up whole life insurance. As the years go buy, the amount of term attachment reduces and the total amount of whole life insurance increases. Once your paid up whole life insurance additions exceed the original amount of term attachment, the policy grows beyond the original total amount of coverage purchased.

Since the term attachment is much less expensive than the permanent whole life insurance, the premiums are significantly less that buying the full amount as true whole life insurance in the beginning. In the early years, only the whole life portion of the coverage is eligible to earn dividends, and the premium being paid for the term attachment does not earn dividends. As the paid up additions increase your total block of whole life insurance, your dividend scale also increases, so your annual dividend payouts go up too over time.

All these dividends being paid out and increasing over time also give you a cash value inside the policy. Every whole life insurance policy has a guaranteed cash value and a variable cash value. Together they equal the total cash value. The variable cash value is dependent on the amount of dividends being paid out over time. The dividend payouts, even though they are being used to a buy you paid up additions, have a cash value attached to them. This cash value can can be accessed buy you in two ways: borrow money from the policy in the future when the cash value has grown large enough; or cancel the policy and have all the cash value paid back to you.

Enhanced coverage option is a very common dividend option when designing whole life insurance for clients. It allows you to have a manageable premium so that you can actually afford to get into the whole life insurance policy. It provides the opportunity to participate in dividends and get ongoing paid up additions to eventually give you a growing policy. The total amount of life insurance purchased under the enhanced coverage option is always guaranteed, so you know you will never have less than the total amount you purchased. And, the premium is guaranteed! This means the life insurance company is very confident in the future dividends they plan to pay out.

Whole Life Insurance Advice from Life Guard Insurance

Even though dividends are not guaranteed, whole life insurance dividends give you one of the most stable returns in the Canadian financial industry today. For example, Canada Life’s dividend scale has averaged a 7.5% annual return to policy holder for the last 50 years.

If you have ever thought about getting permanent life insurance before, but thought it might be too expensive to start a policy based on your budget, take a look at the Enhanced Coverage Option. This might allow you to get into the policy for a very reasonable premium and get all the upside of being a whole life policy owner.

Feel free to contact Life Guard Insurance to find out more about the enhanced coverage option and whole life insurance might work for your financial plan.

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