How dividends can be applied to paid‑up additions
Dividends from a participating whole‑life policy may be directed toward purchasing paid‑up additions (PUAs), which are small amounts of extra, fully paid‑up insurance that increase the death benefit and cash value. When a dividend is used for a PUA, the insurer issues a new, permanent coverage unit that costs the dividend amount plus any applicable tax‑free fees.
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Benefits of using dividends for PUAs
Adding PUAs boosts the policy's cash value faster than letting dividends accumulate as cash, and the added coverage is tax‑deferred. PUAs also compound: each new addition earns its own dividends, creating a growth loop that can significantly raise the policy's overall value over time.
Limits and considerations
Not all dividends can be forced into PUAs; the insurer may set a maximum percentage of the dividend that may be used each policy year. Excess dividends are typically paid out in cash, used to reduce premiums, or left to accumulate interest. Additionally, PUAs increase the policy's total death benefit, which may affect underwriting if the insured later applies for new coverage.
Steps to purchase PUAs with dividends
- Confirm your policy is a participating whole‑life plan that pays dividends.
- Review the policy's dividend option schedule to see the PUA allocation percentage.
- Submit a written election to your insurer, specifying the amount of dividend you want to apply.
- The insurer will calculate the number of PUAs purchasable with that dividend and issue them.
- Monitor the policy statements to verify the new PUAs and the adjusted cash value.
Comparing dividend options
| Option | Effect on Cash Value | Effect on Death Benefit | Tax Consideration |
|---|---|---|---|
| Cash Payment | Increases immediate cash available | No change | Subject to income tax if withdrawn |
| Premium Reduction | Reduces out‑of‑pocket cost | No change | Tax‑free |
| Paid‑Up Additions | Boosts cash value over time | Increases death benefit | Tax‑deferred growth |
When a quizlet might help
Study tools like Quizlet can be useful for agents or policyholders preparing for certification exams or client meetings. Flashcards that outline dividend options, calculation methods for PUAs, and policy‑specific rules help reinforce understanding and ensure accurate communication.