The Business Resource Center
How Do Dividends Affect Your Whole Life
Policy’s Cost Basis?
As a mutual company, The Guardian Life Insurance
Company of America (“Guardian”) operates for the
benefit of its policyholders. Owners of whole life
insurance policies share in the company’s results, in
part, through the payment of annual dividends.
Dividends are not guaranteed and are declared
annually by the Board of Directors, but Guardian has
paid a dividend every year since 1868. Dividends
represent a portion of Guardian’s surplus, and owners
of whole life policies share equitably in those
dividends.
Dividends and Their Impact on Policy Basis
Dividends are considered a partial return of basis.
Dividends may, therefore, reduce basis but the net
result depends on the particular dividend option
selected. (Note that the discussion here is for
policies that are not classified as Modified
Endowment Contracts (MECs)). Guardian offers a
variety of dividend options to policy owners.
Dividends can impact a policy’s cost basis when
policyholders calculate policy gains and losses upon
surrender or sale of the policy, and sometimes even
on an exchange of a policy for another. Let’s take a
look at a few of Guardian’s more popular dividend
options and the respective impact these options
have on a Whole Life policy’s cost basis.
The Guardian Life Insurance
Company of America
guardianlife.com
New York, NY
PUB7808(10/18)
2018-70337 (Exp. 11/2020)
1
Paid-up Additions (PUA) are purchases of additional insurance (death benefit) that have a cash value. These
purchases are made with dividends and/or a rider that allows the policyholder to pay an additional premium
over and above the base premium. This creates the growth of death benefit and cash values in a participating
whole life policy. Adding large amounts of paid-up additions may create a Modified Endowment Contract (MEC).
A MEC is a type of life insurance contract that is subject to last-in-first-out (LIFO) ordinary income tax
treatment, similar to distributions from an annuity. The distribution may also be subject to a 10% federal tax
penalty on the gain portion of the policy if the owner is under age 59 ½. The death benefit is generally income
tax free.
2
The Accelerated Death Benefit for Long Term Care Services Rider is marketed as Guardian’s Long Term Care
Rider. The Accelerated Death Benefit for Long Term Care Services Rider is not available in all states. Rider
provisions and features may vary by state. Guardian’s Long Term Care Rider is issued on Policy Form: 14-L95,
14-L99, 14-L121, 12-L20, 12-L65, and 11-WL10. The LTC Rider is an optional Rider available at an additional
premium.
3
Guardian treats the dividend under the term portion as a Qualified Additional Benefit under IRC §7702. Thus,
the entire dividend under Option Q is treated as under Option D.
4
The premium offset year is not guaranteed and relies on the payment of non-guaranteed dividends and the
amount of paid-up additions in the policy in order to pay for the policy’s required premium.
5
If any portion of the dividend is used to pay loan interest or repay a policy loan, then that portion of the
dividend will reduce policy basis.
Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors. The total dividend
calculation includes mortality experience and expense management as well as investment results.
Guardian® is a registered trademark of The Guardian Life Insurance Company of America.
Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your
tax, legal, or accounting professional regarding your individual situation.
Guardian Financial Representatives may call the Business Resource Center for Advanced Markets, at
1.800.871.7780, Option 3, for additional information.
Additional Comments
The most common dividend option selected by
policyholders is Option D (Dividends to Purchase
Paid-Up Additions). As we saw from above, this
dividend option generally has no net impact on
policy basis. Guardian offers a wide variety of
dividend options. We have chosen to illustrate the
impact on basis of just a few of our more common
dividend options. For more information on dividend
options and policy features, please review your
Guardian life insurance policy and discuss this with
your Guardian Financial Representative.
Please consult with your Guardian Financial
Representative if you have any questions
concerning this document.
