If you have a whole life insurance policy that is paying you dividends, there are a number of different ways you can use the dividends. It would be wise to consult a tax advisor about the tax consequences for any option you may choose.
One option for using dividends in a whole life insurance policy is called paid-up additions or PUAs. Paid-up additions of insurance are premiums paid for automatically by your dividends.
To determine your paid-up additions of insurance, you will need to look at your whole life policy's last annual statement and compare the death benefit policies of the last two years. Subtract the smaller amount from the greater amount to determine how many paid-up additions your dividends purchased during the past twelve months.
Be sure to record in your financial records the higher amount of death benefits your beneficiary will receive at your death. You need to also incorporate the higher death benefit in your financial planning portfolio.
Leaving your dividends with the insurance company to pay your PUA's does not increase your income tax. You will not need to report them on your annual income tax return.
Cashing in Dividends
You can opt to receive a dividend check as often as your insurance policy allows.
You will first need to find your contract number either in the policy or in your annual statement. The phone number for customer service should also be there. You will need to call that number.
Tell the customer service representative that you want to make a change to how your dividends are used. Tell him or her that you want the next dividend in a check to be mailed to you.
Make sure you note the date, phone number, and the first and last name of the customer service representative to whom you spoke. Once the option for how your dividends are disbursed is changed, it will remain that way until you change it again. A change in your insurance policy can be made once per year, and the change takes place on the anniversary date of the policy.
This option affects your taxes. It must be reported on your income tax return. It will also affect your death benefit amount and your cash values.
We've discussed two ways to use dividends in a whole life insurance policy. Study your policy or talk to a customer service representative about other options available to you.