Accumulation Option - Explained
What is an Accumulation Option?
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Table of ContentsWhat is an Accumulation Option?How Does an Accumulation Option Work?Dividends Beyond Accumulation Options vs. Paid-Up Additional InsuranceAcademic Research on Accumulated Option
What is an Accumulation Option?
An Accumulation Option is a provision of life insurance policies that enables policyholders enjoy dividends on their policies through the reinvestment of dividends to earn interest. The accumulation option enhance accruing interest or dividends. This option allows policyholders leave dividends on deposits, these dividends are in turn reinvested by the insurer to earn interest. Unlike some insurance policies where dividends are paid to policyholders annually, an accumulated option provides a policyholder with options of how dividends can be better used. There are other names that an accumulation option is called, they are, dividends on accumulation and accumulation at interest dividend option.
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How Does an Accumulation Option Work?
When policyholders opt for accumulated option, they agree to leave their dividends on deposits with the insurers who then reinvest the dividends to make higher profits. Policyholders can also use their devidients as payment for a portion of existing premium instead of receiving it as cash. The accumulated option is an attribute of permanent life insurance policies. The interest earned in accumulated options is however taxed to the policyholder on a yearly basis. Payment of accrued dividends are made to policyholders even in cases of surrender of policy. Policyholders receive the dividends as an additional payment different from the face value of the policy.
Dividends Beyond Accumulation Options vs. Paid-Up Additional Insurance
Some policyholders can unconsciously choose paid-up additional insurance instead of an accumulated option, this means the dividends paid to them are used to purchase additional insurance. Paid-up additional insurance is often tagged a default choice, default choice because policyholders who do not make an active choice about accumulated options automatically end up with paid-up additional insurance. Paid-up additional insurance is a good way of increasing a policyholders cash value or even death benefits. In cases where policyholders surrender a policy, paid-up additional insurance increase the value of money they can take as a loan or receive as payment.