How Dividends May Be Used

Having explained the sources of the surplus, and the methods of ascertaining and apportioning it, we may next pass to a consideration of the various forms in which the insured may receive his allotment. Briefly stated, it is customary for American companies to allow the insured, at his option, to take his dividends in any one of the following five ways:

1. The current dividend each year as determined by the company may be withdrawn in cash or applied to the payment of premiums.

2. Instead of taking dividends in cash, the insured may have the same applied to the purchase of non-forfeitable paid-up additions to the policy. Such paid-up additions may be either participating or non-participating, depending upon the terms of the contract. Usually proof of good health is not required as a condition precedent to the exercising of the option, and if required, such evidence of good health need be furnished only once, namely, at the time when this form of dividend distribution is first applied for. Unless the owner of the policy elects some other plan, the companies usually reserve the right in their contracts either to pay dividends in cash or to apply the same to the purchase of paid-up additions.

3. Dividends may be allowed to accumulate to the credit of the policy either at a definite rate of interest or at such a rate as may be determined by the company, and are withdrawable on any anniversary of the policy.

4. Dividends may be used to make the policy a paid-up contract. This means that whenever the reserve on the policy and existing dividend additions at the end of any policy year shall equal or exceed the net single premium for the attained age of the insured according to a given mortality table and a stipulated rate of interest for an amount of insurance equal to the face amount of the policy, the company, at the request of the insured, will indorse the policy as paid-up insurance for such an amount as the reserve will purchase at the premium named.

5. Dividends may be applied to convert the policy into an endowment, or in the case of endowment insurance to shorten the endowment term. Stated in another way, this plan provides that whenever the reserve on the policy and existing dividend additions at the end of any year shall equal the face amount of the policy, the company upon its surrender will pay the same as a matured endowment. The surplus is allowed to accumulate with the understanding that said accumulation is not paid in the event of death. In case of surrender or lapse, however, these accumulated dividends are not forfeited, since they are made to constitute a part of the policy's surrender value.

Various other ways of using the surplus on behalf of the insured may be mentioned, but their employment is only occasional. Under the deferred-dividend plan the insured may be given the option of having the surplus used for the purchase of a life annuity or temporary life annuity, thus resulting in a reduction of future premiums if the insured wishes to use the annuity in that way. At one time some companies also applied dividends for the purchase of an increased amount of insurance for a single year, but this plan is no longer used by companies.