• One Year Term Option
• In connection with the high early cash value policies mentioned in the previous paragraphs, a new dividend option, colloquially called the fifth dividend option, sprang up, with dividends being used to purchase an amount of insurance equal to the cash value.²⁸
  • The use of dividends to purchase term insurance is nothing new, but in the past it has failed to achieve any general popularity probably because of the rapid decline in insurance purchased with advancing age which results if the entire dividend is used to purchase the insurance.
  • Under the fifth dividend option the balance of the dividend after purchasing modest amounts of insurance in the early durations is (at least theoretically) accumulated to provide a fund from which the future larger costs can be drawn.
  • Adverse selection is eliminated by permitting the option at issue or after examination, generally only on standard risks, and providing that if the dividend in any year is not used to purchase the prescribed insurance the option will terminate.
• The fifth dividend option was designed, at least initially, to "insure the loan," that is, to provide enough additional insurance so that the original face amount would be received by the beneficiary even though the policy was fully loaned.
  • It is also argued that this option provides a hedge against inflation, though, for it to be at all satisfactory for such a use, the rate of inflation would have to be approximately equivalent to the ratio of the increase in cash values to the face of the policy (and in later years when the accumulations have been exhausted, there is a rapid decrease in the amount of insurance purchased).
• ²⁸ The future of this option on policies written in New York is extremely cloudy at the time this is written. The recently promulgated Regulation 39 requires, on the grounds of discrimination, that the option be made available "on all policies" and that the charge for the insurance "be consistent with the company's other term insurance rates." Undoubtedly some clarification of these terms will be forthcoming.

1959 - SOA - Some Observations on Ordinary Dividends, by Robert T. Jackson, Society of Actuaries - 48p