Legal Definitions - dividend addition

A dividend addition in life insurance refers to an increase in the death benefit of a participating life insurance policy. This increase is purchased by using the policy's annual dividend payment as a single, one-time premium. Instead of receiving the dividend in cash, using it to reduce future premiums, or letting it accumulate with interest, the policyholder chooses to use it to buy a small amount of additional paid-up insurance coverage. This newly purchased coverage then becomes a permanent part of the policy's total face value, effectively growing the policy's death benefit over time without requiring any new out-of-pocket payments from the policyholder.

• Imagine Sarah purchased a whole life insurance policy with a $250,000 death benefit when her children were young. Each year, her insurance company pays out a dividend based on its financial performance. Instead of taking the dividend check, Sarah consistently opts to use these dividends to purchase dividend additions. If her dividend for a particular year is $500, the insurance company uses that $500 as a single premium to buy a small amount of additional paid-up insurance, perhaps increasing her death benefit by an extra $1,500. Over many years, these small additions accumulate, steadily increasing the total amount her beneficiaries will receive upon her passing, all without her having to pay any additional premiums out of her pocket.

• Consider David, who owns a participating universal life insurance policy. He initially bought it to provide for his children, but as they grew up and became financially independent, David decided he wanted to leave a larger legacy or cover potential future estate taxes. He consistently chooses the dividend addition option. Each year, the dividends generated by his policy are automatically used to buy more insurance coverage, incrementally boosting the policy's overall death benefit. This strategy allows him to increase the value of his estate for his heirs without needing to pay higher monthly or annual premiums himself.

• Maria, a retiree, has an older participating whole life insurance policy that she purchased decades ago. She's comfortable with her current financial situation and doesn't need the annual dividends for immediate expenses. To maximize the value of her policy for her grandchildren, she has always selected the dividend addition option. For instance, if her policy pays a $700 dividend, that amount is used to purchase a small, fully paid-up insurance increment that adds to her existing death benefit. Over the years, these consistent additions have significantly increased the total payout of her policy, providing a larger financial gift to her beneficiaries than the original face value alone, without any further premium payments from her retirement income.