While it is true that you can take loans out against your policy for whole life insurance, there are alternative methods that you can tap into your policy without having to reduce your death benefit. Depending on what the terms are on your policy and your insurance company, you might have an option for withdrawing dividends on an annual basis or to reinvest them back into your policy which raises the death benefit.
The first step in learning how to use your dividends is understanding the terminology that is found in your life insurance policy.
Dividends are the funds that are earned by your insurance policy and distributed to you as the policy holder. They work in a similar way that interest does, except that an insurance company doesn’t guarantee any return on investment or dividend.
Paid-up additions (PUAs) are bought with dividends that are earned during a particular year by the insurance policy. In order to determine how many paid-up additions there are in your policy, you just subtract the listed death benefit from your statement from last year from the death benefit listed on your statement for this year. The difference between the two is PUA amount that has been purchased during the last year.
Most insurance companies return PUAs and dividends automatically to your policy unless you exercise your option for cashing them out. However, once you do make a change for withdrawing dividends out of your policy, then you can expect to get a check each year until you change your option.
To request that PUAs or dividends be cashed out you will need your most recent policy statement, your policy number, the amount of PUAs you have available, and your insurance company’s customer service phone number.
Contact your insurance company and tell the customer service representative that you want to change how your dividends are used and ask them to send them to you by check. Another thing you can do is ask that they be used for paying your premiums or paying down any loan balances you may have against the policy.
PUAs and dividends are usually issued once every year, and usually it is on the anniversary date of your policy. When you speak to the customer service representative they will probably be able to let you know how long it will take to receive the check and how to contact them just in case it doesn’t show up. Be sure to write this down and keep a close watch on your mail box when it comes time for your check to arrive.
If in the future you want to change back to having dividends be absorbed by your insurance policy, you can contact your insurance company again after you wait a year. Usually you will not be able to change this policy more than once a year.
PUAs that have been purchased with dividends as well as dividends are not taxable. If you ask your insurance company to have them reinvested back into your policy, you will not be penalized.
If you make the election to withdraw your PUAs that have bought with dividends or your dividends, this money might be taxable. You can get in touch with your accountant if you have questions about this potential tax liability. Sometimes insurance companies will send you the instructions you need to report your exercised dividends on the proper place on your tax form.
For tax purposes, keep a copy of statements that come with the dividend checks. You should keep this documentation for at least eight years to protect yourself in the event of an audit.
