Legal Definitions - deferred-dividend insurance policy

A deferred-dividend insurance policy is a type of insurance, typically life insurance, where any dividends earned by the policy do not get paid out immediately or annually to the policyholder. Instead, these dividends are held and allowed to accumulate over a specified period, often several years. After this deferral period ends, the accumulated dividends are then distributed to the policyholder, usually as a lump sum, or they can be used to increase the policy's cash value or death benefit.

This structure means that policyholders forgo immediate, smaller dividend payments in favor of potentially larger, consolidated payments in the future, benefiting from the growth of the deferred amounts over time.

• Example 1: Long-Term Retirement Planning

  A 30-year-old individual purchases a whole life insurance policy with a deferred-dividend feature. They choose a 20-year deferral period, intending for the dividends to accumulate until they are 50. Instead of receiving small annual dividend payments, the policy's dividends are reinvested and grow within the policy. When the deferral period ends, the accumulated dividends are paid out as a substantial lump sum, which the individual then uses to supplement their retirement savings or make a significant investment.

  This illustrates a deferred-dividend policy because the policyholder intentionally delays receiving dividend payments for two decades, allowing them to grow and be disbursed as a larger sum at a future, pre-determined date.

• Example 2: Funding Future Education Costs

  Parents buy a life insurance policy for their newborn child, selecting a deferred-dividend option with a payout scheduled for when the child turns 18. Their goal is to create a fund for college tuition. The dividends generated by the policy are not paid out each year but are instead held and compounded within the policy. Upon the child's 18th birthday, the accumulated dividends are released, providing a significant sum to help cover university expenses.

  This demonstrates a deferred-dividend policy as the dividends are not immediately accessible but are allowed to accumulate over a long period (18 years) to serve a specific future financial goal.

• Example 3: Business Succession Planning

  A small business owner takes out a key-person life insurance policy on a crucial executive. To ensure maximum financial benefit for the company in the long run, they opt for a deferred-dividend structure with a 10-year deferral. The dividends generated by this policy are not distributed annually to the business but are allowed to accumulate. After 10 years, the accumulated dividends provide a substantial cash value that the business can then use to fund a future expansion, buy out a retiring partner, or serve as a contingency fund.

  This example highlights a deferred-dividend policy because the business chooses to defer the receipt of dividends for a decade, allowing them to grow and provide a larger financial resource for future strategic business needs.