Dividend-Paying Whole Life Insurance: Pros and Cons

July 9, 2018

Are you investing in whole life insurance? Unlike term insurance, whole life promises you insurance over your entire lifetime, as long as you pay the premiums. In other words, your beneficiaries receive benefits any time you die – you don’t have to die within a specific term. As an added bonus, you may receive dividends.

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With whole life, a portion of your insurance premiums are invested rather than just paying a term life insurance policy that will end. As your money accumulates, your policy has a cash value. Even if you no longer pay premiums, your account has a cash value, much like other investments.

Dividend-paying whole life insurance adds another element to the insurance policy. In addition to the death benefit and cash value, you may receive dividends. This is separate from the cash value of your investment. Insurance companies pay dividends based on the income and expenses of the insurance company each year. If they make a profit beyond a predetermined value, they pass the profits along to dividend policyholders.

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As with any policy, there are pros and cons to this insurance policy.

The Pros of Whole Life InsuranceWith Dividends

  • You get a guaranteed return – While some might argue the return is minimal, it’s a step up from what you’d get from term life insurance. Your policy has a cash value that you can access at any time.
  • You can borrow the money – If you don’t want to take a withdrawal, but rather a loan, you can borrow your own money
  • Your premiums don’t change – The premium you pay today remains the same even as you age
  • You can cancel the policy – You are free to cancel your whole life policy at any time and receive the full cash value of your investments at that time
  • You don’t have to reapply for insurance – Term insurance ends, which means you have to go through the approval process again, which could mean higher premiums since you’ll be older and may have other health issues
  • You may receive dividends – If the insurance company does well, you stand to receive dividends on a yearly basis

The Cons of Whole Life InsuranceWith Dividends

  • The premiums are higher – You will typically pay higher premiums on whole life because it’s a guarantee of insurance for your whole life rather than a specific term, which puts the insurance company at higher risk
  • The rate of return can be low – You can usually make better returns on investments that you make yourself in the market
  • There’s no guarantee of dividend payments – Dividend payments are up to the insurance company’s discretion and are based on their performance/costs for the year

Dividend-paying whole life insurance can provide you with the stability you desire without the emotions involved in investing in the stock market. While you shouldn’t invest all of your money in a whole life policy, diversifying your assets and including an investment in whole life can give you the stability and guarantee you need to ensure that your loved ones and yourself are taken care of as you age. You can think of the dividends as a ‘bonus,’ and enjoy the profit from your investment if/when it occurs.

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