Choosing a dividend option: a worksheet to run with your own policy

Every year, a participating whole life policy hands you the same small decision: what should happen to this year's dividend? Most owners answer it once, at purchase, and never look at it again. That can be fine, but the right answer at 35 with a new baby is rarely the right answer at 62 with a loan on the policy. This worksheet lets you run the comparison on your own numbers in about half an hour.

You need three documents: your latest annual statement, your policy contract (for the list of dividend options and the default) and, if you can get it, a current in-force illustration. The worked example uses invented, round figures, so you can see the arithmetic before you fill in your own. For a plain-language tour of the options themselves, start with life insurance dividend options: cash, paid-up additions and more.

Part A: Gather your figures

Copy these from your statement. If an item is not on the statement, call the insurer's policy service line and ask for it.

Two entries deserve a note. A7 matters for taxes. A participating dividend taken in cash is generally treated as a return of premium, so it is not taxed until the total you have received exceeds your cost basis. Your basis is roughly A6 minus A7, and a tax professional can confirm how it applies to you. Item A11 is the only one that is hard to find; the insurer can answer it in one call, and the answer rises with your age.

The worked example

Sam, 50, owns a participating policy. His numbers, all invented:

Sam's basis is about $31,000 ($36,000 minus $5,000). Keep these figures in mind as we work through Part B.

Part B: Run each option

For each option, answer the same four questions: what do I pay out of pocket this year, what do I gain in coverage, what do I gain in cash value or access, and what changes for taxes or the loan? Fill in the blanks for your own policy below Sam's line.

Option 1: Take the dividend in cash

• Cash in hand: equals A2. Sam: $1,200.
• Out-of-pocket premium: A1. Sam: $3,600.
• Net cash flow for the year: A2 minus A1. Sam: $1,200 minus $3,600 equals negative $2,400.
• Change in death benefit and cash value: none.
• Basis effect: A7 grows by A2. Sam's cash dividends to date become $6,200, and his basis falls to about $29,800 ($36,000 minus $6,200).

Your figures: cash in hand $______; net flow $______; new basis $______.

Option 2: Use the dividend to reduce the premium

• Out-of-pocket premium: A1 minus A2. Sam: $3,600 minus $1,200 equals $2,400.
• Net cash flow: same as Option 1, negative $2,400.
• Change in death benefit and cash value: none.
• Risk: the offset only works if the dividend arrives. If the scale falls, the bill rises. Sam would see it, for instance, as a dividend of $1,000 and a premium of $2,600.

Your figures: out-of-pocket premium $______.

Notice that Options 1 and 2 leave Sam in the same cash position. The difference is behavior and exposure. A dividend taken in cash arrives as money you can spend, while an offset lowers a bill and quietly builds a habit of relying on the dividend. The mistakes that follow from that are the subject of paying whole life premiums with dividends: mistakes that bring bills back.

Option 3: Buy paid-up additions

• Out-of-pocket premium: A1. Sam: $3,600.
• New paid-up coverage: A2 divided by 1,000, times A11. Sam: 1.2 times $2,100 equals $2,520.
• Cash value of the new addition: ask the insurer. Say Sam's first-year value is about $1,000, a little under the $1,200 spent. This is invented; first-year cash values on additions vary by contract.
• New total death benefit: A9 plus the new coverage. Sam: $140,000 plus $2,520 equals $142,520.
• Future effect: the addition earns its own dividends, so next year's dividend is a bit larger if the scale holds.

Your figures: new coverage $______; new death benefit $______; new cash value $______.

Read paid-up additions riders explained for how additions are priced and why an addition's cash value is usually a little below what you paid at first.

Option 4: Leave the dividend on deposit

• Out-of-pocket premium: A1. Sam: $3,600.
• Interest earned in the first year: A2 times A10. Sam: $1,200 times 0.03 equals $36.
• Tax: the interest is taxable as income in the year it is credited, even if left on deposit.
• Access: the balance can be withdrawn.
• Protection: the deposit is an obligation of the insurer, not a bank account, and is not FDIC-insured. State guaranty association limits are the backstop.

Your figures: interest $______.

Option 5: Repay the policy loan

• Loan balance after repayment: A4 minus A2. Sam: $8,000 minus $1,200 equals $6,800.
• Interest next year: new balance times A5. Sam: $6,800 times 0.05 equals $340, compared with $400 on $8,000 ($8,000 times 0.05). That saves $60 a year.
• Out-of-pocket premium: A1. Sam: $3,600.
• Why it can matter: a loan that grows faster than the cash value can cause a taxable lapse. Paying the balance down cuts the risk.

Your figures: new loan balance $______; yearly interest saved $______.

Not every insurer offers this option, and some require a written request for it. Check your contract. For loan mechanics, see life insurance policy loans: how they work and what they risk, and for a repayment worksheet see policy loan worksheet: interest, repayments and what the policy can carry.

Part C: Put the results side by side

Copy the results into one table. Sam's is filled in as a guide.

Fill in a blank copy for your own policy. The point is not that one column wins. It is that each column buys something different with the same $1,200.

Part D: Match the option to your goal

Use the table with your situation, not as a ranking.

1. If your top goal is more cash flow now, the choice is between cash and a premium offset. Prefer the offset only if you will not mind a higher bill when the scale moves, and keep a cushion for it.
2. If your top goal is a larger death benefit or a bigger pool to borrow from, paid-up additions do that at a modest cost. Sam gets $2,520 more coverage for $1,200, which is $2.10 per dollar. That is cheap compared with new term coverage at his age only if he wants permanent coverage, so compare with your real need in How much life insurance do I need?.
3. If you carry a loan, repaying it reduces the interest you pay and the risk that the loan overtakes the cash value. A 5 percent loan repaid by $1,200 saves $60 in the first year, and the saving compounds as long as the balance is lower.
4. If you want flexibility, a deposit keeps the money reachable, but the interest is taxed every year and the rate is declared by the insurer.

Many owners split their time across options, not their dividend. For instance, Sam could repay the loan for four years, then switch to additions when the loan is gone. Most contracts let you change the option by written request, and the change applies to the next dividend. The default if you do nothing is in your contract.

A second reader: Dana, early in the life of her policy

The same worksheet gives a different answer for someone else. Dana, 36, has owned her policy for four years. Her figures are invented: annual premium $2,400, dividend $300, option now paid-up additions, no loan, interest on deposit 3 percent, and $2,900 of paid-up coverage per $1,000 of dividend at her age.

• Cash: she receives $300. Her basis falls by $300.
• Premium offset: her bill falls to $2,100 ($2,400 minus $300), a 12.5 percent cut ($300 divided by $2,400).
• Additions: 0.3 times $2,900 equals $870 of new paid-up coverage, built on a dividend that is still small.
• Deposit: $300 times 0.03 equals $9 of taxable interest.
• Loan repayment: not applicable.

Dana's goals are long-term. She has no loan, her budget is not stretched, and she wants the policy to grow into something she could borrow against in her fifties. Additions suit her, and the worksheet confirms what she chose at purchase. If a baby arrived and her budget tightened, switching to the offset would give her $300 a year of relief, at the cost of ending new additions. That switch is reversible by written request, so she does not have to treat it as permanent.

Compare Dana with Sam. Sam is older, carries a loan and receives a dividend four times the size of hers. Dana's additions buy $2.90 of coverage per dollar of dividend ($870 divided by $300), while Sam's buy $2.10 ($2,520 divided by $1,200), because paid-up coverage costs more at his age. The ratio is a reminder that additions are most efficient early and become less so as you get older.

Part E: Test the plan against a lower dividend

Every figure in Part B depends on A2, and A2 is not guaranteed. Repeat the arithmetic with a dividend 20 percent lower.

• Sam's dividend would be $960 ($1,200 times 0.80).
• A premium offset leaves a bill of $2,640 ($3,600 minus $960), which is $240 more than before.
• Additions buy 0.96 times $2,100, or about $2,016 of coverage, which is $504 less than the $2,520.
• Loan repayment cuts the balance to $7,040 ($8,000 minus $960). Interest on that is $352 ($7,040 times 0.05), which is $48 less than the $400 on the original balance.

The same method works on any option. If the plan still works at 80 percent, you have margin. If it only works at 100 percent, it deserves a second look. The step-by-step response to an actual cut is in what to do when your whole life dividend scale is lowered.

Where the worksheet gets stuck

A few snags come up often enough to plan for.

• The statement does not show the loan interest rate. It is in the contract, and some policies have a variable rate that changes. Ask whether yours is fixed or variable and when it was last reset.
• The insurer cannot tell you A11 immediately. The paid-up coverage purchased per $1,000 depends on your attained age and the insurer's current rates. A representative can usually give it for the next dividend date.
• Some options are not on your list. Not every contract offers one-year term or loan repayment as a dividend option. The contract's dividend section is the authority. If an option is missing, the worksheet column simply stays blank.
• Your default is not what you think. If you never chose an option, the default applies. Common defaults are paid-up additions or deposit, depending on the company. Check A3 against the contract rather than memory.
• You no longer have the contract. Request a duplicate copy from the insurer's policy service department. The contract, not the statement, lists the dividend options, the loan interest rate and the default.

If a figure is unclear after one call, write down the date, the name of the person you spoke with and what they said. That record helps if the numbers later turn out to be different from what you were told.

Part F: Write it down and set a date

Record your choice and the reasons in one sentence each, with the date. Then set a reminder to repeat Parts A through D when any of these happens:

• The statement shows a lowered dividend scale.
• You take out or repay a loan.
• Your goal changes, for instance a child is grown or you retire.
• You turn 60 or reach a milestone where cash flow matters more.

Otherwise, repeat the worksheet every two or three years. An in-force illustration, described in how to request and read an in-force illustration, gives you the figures to use. For specifics about taxes on dividends and basis, ask a tax professional; how cash value is taxed: withdrawals, loans and surrenders explains the general rules.

Key takeaways

• Each dividend option buys something different with the same dollars: cash or a smaller bill now, more coverage and cash value, interest on deposit, or a smaller loan.
• In the worked example, $1,200 bought $2,520 of paid-up coverage, or $2.10 per dollar, versus $60 a year of interest saved by repaying part of a 5 percent loan.
• Cash and premium offset give the same net cash flow; the offset adds exposure to a lowered scale, which is why a 20 percent dividend cut raised Sam's bill by $240.
• Dividends taken in cash reduce your cost basis, which matters for a later surrender; confirm the details with a tax professional.
• Re-run the worksheet every two or three years and whenever the scale, a loan or your goals change.