Insurance confusion - dividends and cash value?

I%26#039;m extremely confused about something. In whole life insurance plans, where, exactly, do the dividends come from? What do they do, and can you save them up? Do they pay out immediately?

Also, where does the cash value come from? Does it come from the premiums you pay? Besides being able to take it out (surrender), what does the cash value do?

Insurance confusion - dividends and cash value?debt consolidation

Let me preface this with I only buy term insurance. I like to keep my insurance and my savings separate. The only time I%26#039;ll get a dividend is when my car insurance company has a really good year and has to pay for far fewer accidents than they were expecting to pay off on.

No matter what kind of insurance you buy, you are giving money to the insurance company. They invest all the money they receive and they hope that after they%26#039;ve paid off all the claims that there is money left over. When there is money left over, these can be paid out as dividends. On a term insurance, this goes to the stock holders of the insurance company, not the policy holders. On a whole life insurance plan, you pay MORE money in than just the part that%26#039;s for insurance. This builds up the %26quot;cash value%26quot; of your policy (sort of like being a shareholder). Your share of the dividends is credited to you. Often it%26#039;s used to reduce your premium for the next year (which is like paying it out).

While an agent can dazzle you with figures, so can a broker for a mutual fund...and the mutual fund usually has higher numbers when the dust settles.

Insurance confusion - dividends and cash value?

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whole life consists of a savings/investment account wrapped around a decreasing value guaranteed renewable term life insurance policy [what we used to call mortgage insurance].

in some companies, especially mutual (policyholder owned) firms, investment earnings above the rate anticipated when the policy was written are split between the policy holder and the company%26#039;s surplus. These are called %26quot;dividends%26quot;.

Depending on the election you make [which can usually be changed], dividends can be paid to you [and they are taxable then] or used to purchase more fully paid insurance. Salesmen pushed the more insurance choice since they got an added small commission from that one.

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Whole life works by charging more in the early years of the policy than term insurance costs for those years. The added charges are invested by the company and the accumulated balance of those charges, less sales fees paid to agents and managers, is the %26quot;cash surrender%26quot; value. If you cancel the remainder of the policy at any time, you get the cash surrender value. [Note that the salesman still got paid nearly his full fee -- the usual cash surrender value anytime in the first three years of the policy is zero so the commissions can be paid.]

Some companies allow you to borrow against the cash surrender value -- unrepaid borrowings, if any, reduce the insurance payoff when you die.

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the amount your family receives from a whole life policy if you should be so unlucky as to die is the full face amount, plus the added life insurance %26quot;value%26quot; purchased by dividends over the years (if any). The face amount consists of two parts -- the current year%26#039;s term policy and the accumulated cash surrender value.

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Insurance companies are regulated by each state%26#039;s Insurance Commissioner. because of the statistical nature of their likely future payouts [for all policies combined, the payouts are pretty closely known amounts in each year unless very drastic things happen] the companies are usually heavily invested in bonds that will mature when their payouts will occur.

This is a major reason why many observers consider life insurance companies to be poor investors (receive poor returns over time). a further reason is that life companies have high operating costs as a percentage of funds invested [as compared to mutual funds, for example].

these critics of the industry thus assert that most people would be better off to buy guaranteed renewable term insurance and invest the difference in price themselves in index mutual funds. [for one thing, this greatly reduces the commission the salespeople get -- which the buyer pays for].

does this help??|||Dividends are basically interest, on your cash value. They don%26#039;t pay out to you, usually, they get added to your cash value.

Cash value comes from your overpayment of premium. Whole life costs about 10X what term costs. So, if your whole life premium is $100 a month, $10 goes to buy the term coverage for you, $10 goes into your cash value, and $80 is the insurance company profit.

Cash value is a selling point of whole life. The policy %26quot;earns%26quot; money for you. You can borrow the cash value (your own money, and pay interest to the insurance company), you can get it when you cash the policy in (minus a surrender value). But when you die, the insurance company keeps the cash value, and if you die with a loan unpaid, the insurance company takes the loan balance and interest from the face value of the policy.|||This is clearly a complicated question. The simplest answer I have is that your cash value represents your liquidity in your policy at any given time. Dividends represent an over charge of your premiums. You usually have many options to choose if you have a dividend, but they cannot be guaranteed in any way.

Without knowing your goals, I don%26#039;t want to be too long-winded, but you may be interested in this article.