How do dividends impact the cash value of a life insurance policy?

Dividends impact the cash value of a life insurance policy by having the potential to increase it if they are accumulated. In participating life insurance policies, which pay dividends to policyholders, these dividends can be used in several ways – one option is to accumulate them within the policy. When dividends are left to accumulate, they earn interest, which contributes to the overall cash value of the policy over time. This accumulation can lead to a substantial increase in the cash value, providing additional benefits for the policyholder, such as increased availability of funds through loans or withdrawals.

The nature of dividends in this context is that they are not guaranteed, unlike the cash value, which is a set feature of whole life insurance. However, when they are paid and elected to be accumulated, they enhance the financial growth of the policy. This is an important distinction because understanding how dividends function reinforces the concept of policy performance and benefits to the policyholder.