Study guide
4.3 Dividend Options and Settlement Options
California Life & Health Insurance State
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1 Standalone Coverage Map
Standalone Coverage Map: National Content vs. California Rules
2 Introduction: California Life & Health Insurance Exam Overview
California Life & Health Exam Overview
3 National Portion: Insurance & Risk Fundamentals
Risk, Peril, Hazard, and the Law of Large Numbers Insurable Interest, Indemnity, and Insurance Principles Insurance Contract Law and Elements Producers, Agents, Brokers, and Authority Types of Insurers and Distribution Systems
4 National Portion: Life Insurance Basics
2.1 Purpose and Need for Life Insurance 2.2 Term Life Insurance 2.3 Whole Life Insurance 2.4 Adjustable, Limited-Pay, and Endowment
5 National Portion: Interest-Sensitive & Variable Life
3.1 Universal Life Insurance 3.2 Variable and Variable Universal Life 3.3 Indexed Universal Life 3.4 Specialized Policies (Joint, Survivorship, Juvenile)
6 National Portion: Life Policy Provisions & Options
4.1 Standard Policy Provisions and Beneficiaries 4.2 Nonforfeiture Options and Cash Value 4.3 Dividend Options and Settlement Options 4.4 Policy Loans, Withdrawals, and Assignments
7 National Portion: Life Riders & Underwriting
5.1 Living Benefit and Disability Riders 5.2 Death Benefit and Insured Riders 5.3 Life Insurance Underwriting and Risk Classification 5.4 Field Underwriting, Applications, and Replacement
8 National Portion: Annuities - Structure & Types
6.1 Annuity Principles and Parties 6.2 Fixed and Immediate Annuities 6.3 Deferred and Indexed Annuities 6.4 Variable Annuities
9 National Portion: Annuities - Payout, Uses & Suitability
7.1 Annuity Payout Options and Annuitization 7.2 Uses of Annuities and Suitability 7.3 Annuity Regulation and Disclosure
10 National Portion: Life & Annuity Taxation, Group, and Retirement
8.1 Taxation of Life Insurance and MEC Rules 8.2 Taxation of Annuities 8.3 Group Life Insurance 8.4 Qualified Plans, IRAs, and Retirement (TEFRA/SEP/401k)
11 National Portion: Health Insurance Basics
9.1 Health Insurance Concepts and Defining the Insured 9.2 Medical Expense Insurance (Basic and Major Medical) 9.3 Managed Care: HMO, PPO, POS, and HSA/HDHP 9.4 Cost Containment and Provider Arrangements
12 National Portion: Disability Income Insurance
10.1 Disability Income Policies and Definitions of Disability 10.2 Benefit Periods, Elimination Periods, and Riders 10.3 Business Disability (Key Person, Buy-Sell, BOE) 10.4 Disability Underwriting and Taxation
13 National Portion: Health Policy Provisions & Clauses
11.1 Required and Optional Uniform Provisions 11.2 Renewability and Continuation Provisions 11.3 Exclusions, Riders, and Pre-Existing Conditions 11.4 Claims, Coordination of Benefits, and Subrogation
14 National Portion: Group Health & Employer Plans
12.1 Group Health Fundamentals and Eligibility 12.2 Group Underwriting and Contribution/Participation 12.3 COBRA, HIPAA, and Continuation 12.4 Section 125 / Cafeteria Plans and Self-Funding
15 National Portion: Senior & Government Health Programs
13.1 Medicare Parts A, B, C, and D 13.2 Medicare Supplement (Medigap) Policies 13.3 Medicaid and Long-Term Care Partnership 13.4 Social Security Disability and Benefits
16 National Portion: Long-Term Care & Supplemental Health
14.1 Long-Term Care Insurance 14.2 Dental, Vision, and Limited Benefit Plans 14.3 Specified Disease, Critical Illness, and Hospital Indemnity 14.4 Accidental Death & Dismemberment and Supplemental
17 National Portion: Affordable Care Act & Individual Market
15.1 ACA Essential Health Benefits and Metal Levels 15.2 Guaranteed Issue, Rating Rules, and Marketplaces 15.3 Premium Tax Credits and Cost-Sharing Reductions
18 National Portion: Underwriting, Producers & Claims
16.1 Health Underwriting and Risk Selection 16.2 Application, Producer Responsibilities, and Fair Credit Reporting 16.3 Claims Handling and Fraud Prevention
19 National Portion: Insurance Regulation & Licensing
17.1 State Regulation, Licensing, and McCarran-Ferguson 17.2 Marketing, Advertising, and Replacement Regulation 17.3 Company Operations, Solvency, and Guaranty Associations
20 National Portion: Ethics & Unfair Trade Practices
18.1 Unfair Trade Practices and Unfair Claims Settlement 18.2 Producer Ethics, Fiduciary Duty, and Suitability 18.3 Privacy (HIPAA/GLBA), Fraud, and Consumer Protection
21 Chapter 1: California Insurance Regulation & Licensing
1.1 California Department of Insurance (CDI) 1.2 California Producer Licensing Requirements 1.3 License Maintenance and Continuing Education
22 Chapter 2: California Life Insurance Laws
2.1 California Life Insurance Policy Requirements 2.2 California Annuity Regulations 2.3 California Replacement Rules
23 Chapter 3: California Health Insurance Laws
3.1 California Health Insurance Policy Requirements 3.2 California Medicare Supplement (Medigap) Regulations 3.3 California Disability and Long-Term Care Insurance
24 Chapter 4: California Insurance Ethics & Prohibited Practices
4.1 Unfair Trade Practices 4.2 Producer Conduct and Fiduciary Duties 4.3 California Life and Health Insurance Guarantee Association
25 Chapter 5: California Annuity Regulations & Senior Protections
5.1 California Annuity Best Interest Standard 5.2 California Senior Consumer Protections 5.3 California Variable Annuity and Indexed Annuity Regulations
26 Chapter 6: California Group Insurance & Special Topics
6.1 California Group Life and Health Insurance Requirements 6.2 California COBRA and Cal-COBRA Continuation 6.3 California State Insurance Programs
4.3 Dividend Options and Settlement Options
Key Takeaways Explain This Topic AI
Dividends are paid only on participating policies and are a non-taxable return of overpaid premium.
Standard dividend options include cash, reduce premium, accumulate at interest, paid-up additions, and one-year term.
Under accumulate-at-interest, the dividend is not taxed but the interest credited is taxable.
Settlement options control how proceeds are paid: interest only, fixed-period, fixed-amount, and life income.
Fixed-period locks the number of years; fixed-amount locks the payment size and varies the duration.
Last updated: June 2026
4.3 Dividend Options and Settlement Options
Dividends are paid only on participating (par) policies, which are typically issued by mutual insurers (owned by policyholders). Stock insurers usually issue non-participating policies that pay no dividends. A dividend is the return of an insurer's divisible surplus when actual mortality, expense, and investment experience are better than the conservative assumptions built into the premium.
Because a dividend is legally treated as a return of overpaid premium , it is not taxable income . Dividends are also not guaranteed , the insurer's board declares them annually based on results, and an illustration of future dividends is only a projection. The exam expects you to know the standard dividend options and how each affects the policy's value and the owner's taxes.
Dividend Options
Cash - the insurer mails a check. Simple, not taxable.
Reduce premium - the dividend is applied against the next premium due.
Accumulate at interest - the insurer holds dividends and pays interest; the interest is taxable even though the dividend is not.
Paid-up additions (PUA) - dividends buy small single-premium amounts of permanent insurance at the insured's attained age, increasing both face amount and cash value. Frequently the most efficient use of dividends.
One-year term (the fifth dividend option) - the dividend buys one year of term insurance, often used to cover an outstanding policy loan.
Dividend option Effect Taxable?
- Cash Check to owner No
- Reduce premium Lowers next premium No
- Accumulate at interest Held; earns interest Interest only
- Paid-up additions Adds face + cash value No
- One-year term Buys term coverage No
The paid-up additions option is powerful because each PUA is itself a tiny single-premium whole life policy that immediately has its own cash value and pays future dividends, compounding the policy's growth. The one-year term option (sometimes the "fifth dividend option") is often used to buy term coverage equal to the cash value so that a policy loan is fully covered if the insured dies. Selecting the right option is a suitability decision: a client needing current income picks cash ; a client maximizing long-term value picks PUA .
Settlement Options
Settlement options govern how the death benefit (or surrendered cash value) is paid to the beneficiary. The default is a lump sum , which is income-tax-free to the beneficiary. Any interest earned under a deferred settlement option is taxable. The owner may pre-select an option (binding the beneficiary), or leave the choice to the beneficiary. The recognized options are:
Interest only - the insurer holds the proceeds and pays interest; the principal stays intact for a later lump-sum or option payout.
Fixed-period - proceeds plus interest are paid over a chosen number of years; the payment size is whatever divides the fund across that fixed time.
Fixed-amount - a chosen dollar amount is paid each period until the proceeds and interest are exhausted; the number of payments varies.
Life income - proceeds are annuitized over the beneficiary's lifetime. Variants: straight life (highest payment, stops at death with nothing to heirs), life with period certain , life with refund , and joint and survivor .
Worked example
A $300,000 death benefit under a fixed-period option of 10 years pays roughly $300,000 plus interest divided across 120 monthly payments, about $2,650 per month at a 3% credited rate. Under a fixed-amount option of $3,000 per month, the same proceeds simply last fewer months (about 105 months) until exhausted.
Distinguish them clearly: fixed- period locks the time and lets the payment float; fixed- amount locks the payment and lets the duration float. The life income options instead guarantee payments for life but the per-payment amount depends on the beneficiary's age and the variant chosen, straight life pays the most because it carries no guarantee to survivors.
Dividend Options in Detail
Dividends on a participating policy are a return of overcharged premium and are therefore not taxable as income (they reduce basis instead). Policyowners may elect any of five standard uses:
Cash - a check is mailed.
Reduce premium - the dividend is applied against the next premium due.
Accumulate at interest - left with the insurer to earn interest; the interest (not the dividend) is taxable.
Paid-up additions - buys small, fully paid-up chunks of additional whole life at the insured's attained age, each with its own cash value; this is the most efficient compounding choice.
One-year term (fifth dividend option) - buys one year of term equal to the cash value.
Settlement Options for the Death Benefit
Settlement options govern how the death proceeds are paid: lump sum ; interest only (insurer holds the principal, pays interest); fixed period (equal payments that exhaust principal and interest over a set number of years); fixed amount (a chosen dollar payment until funds run out); and life income (payments for the beneficiary's life, optionally with period certain or refund). In every annuitized settlement option, the portion of each payment representing earnings is taxable while the return of principal is tax-free.