We know that the term 'dividend' is a refund part of the gross premium if the insurer has favorable experience with respect to mortality, interest and expenses On the basis of dividend option the policy can be classified into two parts They are participating policy and non-participating policy The policy which pays dividend is known as participative policy and the policy which does not pay dividend is known as non-participative policy In insurance dividend is derived from the difference between expected and actual mortality experience, excess interest earning on the assets required to maintain legal reserves and the difference between expected and actual operating expenses
The forms or ways of dividend can be classified into different parts:
1. Cash:
It includes cheque to receive dividend by policy owner After a certain period of time or usually on the anniversary of the policy, the policy owner receives a cheque equal to the declared dividend.
2. Reduction of premium:
In this form of dividend, the dividend can be used to reduce the next premium coming due and the policy owner must then remit the difference between the premium and actual dividend paid
3. Accumulation at interest:
In this way of dividend payment the dividend can be retained by the insurer and accumulated at interest This premium rate will be already fixed and higher rate may also be paid on the basis of market condition This accumulated dividend can be withdrawn at any time The interest income may be undesirable for policy owners due to its taxable nature
4. Paid up additions:
Under this provision, the dividend is used to purchase a small amount of paid up whole life insurance Due to this option there is no load of expenses because they are purchased at net rates and evidence of insurability is not required in it But sometimes in some policies, the paid up increments of insurance may be overpriced
5. Term insurances (Fifth dividend option):
In this type of insurance dividend policy the dividend can be used to purchase one year term insurance equal to the cash value of the basic policy and the remainder of the dividend is then used to buy paid up additions or is accumulated at interest In this option the dividend can be used to purchase yearly renewable term insurance.