Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceMedium
A client owns a participating whole life insurance policy and has chosen the 'Accumulate at Interest' dividend option. What happens to the dividends under this option?
- AThey are held by the insurer and earn interest, becoming accessible to the policyowner.
- BThey are used to purchase additional paid-up insurance coverage.
- CThey are applied to reduce the next premium payment.
- DThey are paid out to the policyowner as a cash lump sum.
Show answer & explanationAnswer & explanation
Correct answer: A. They are held by the insurer and earn interest, becoming accessible to the policyowner.
Under the 'Accumulate at Interest' option, dividends are retained by the insurer and accrue interest, which can be withdrawn by the policyowner.
Why the other options are wrong
- B. This describes the 'Paid-Up Additions' option.
- C. This describes the 'Reduction of Premium' option.
- D. This describes the 'Cash Payout' option.
Accumulate at Interest Dividend Option
A dividend option where dividends are left with the insurer to earn interest, which is taxable only when withdrawn.
- Dividends are held by the insurer
- Dividends earn interest
- Interest is taxable when withdrawn
- Dividends themselves are generally not taxable
Memory trick: Dividends are gifts; how do you want to use your gift?