Accumulation Option – Definition

Cite this article as:"Accumulation Option – Definition," in The Business Professor, updated June 9, 2019, last accessed October 29, 2020,


Accumulation Option Definition

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.

A Little More on What is an Accumulation Option

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 policyholder’s 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.

References for Accumulation Option

Academic Research on Accumulated Option

The whole life insurance policy as an options package: an empirical investigation, Walden, M. L. (1985). Journal of Risk and Insurance, 44-58.

The life insurance policy as an options package, Smith, M. L. (1982). Journal of Risk and Insurance, 583-601.

•    Effects of relationship marketing on satisfaction, retention, and prices in the life insurance industry, Crosby, L. A., & Stephens, N. (1987). Journal of marketing research, 404-411.

•    Implicit options in life insurance: An overview, Gatzert, N. (2009). Zeitschrift für die gesamte Versicherungswissenschaft, 98(2), 141-164.

•    Regression-based algorithms for life insurance contracts with surrender guarantees, Bacinello, A. R., Biffis, E., & Millossovich, P. (2010). Quantitative Finance, 10(9), 1077-1090.

•    Use of life insurance to fund the farm purchase from heirs, Tauer, L. W. (1985). American Journal of Agricultural Economics, 67(1), 60-69.

Securitization of life insurance assets and liabilities, Cowley, A., & Cummins, J. D. (2005). Journal of Risk and Insurance, 72(2), 193-226.

•    Agency theory and life insurer ownership structure, Pottier, S. W., & Sommer, D. W. (1997). Journal of Risk and Insurance, 529-543.

Options for guaranteed index-linked life insurance, Hipp, C. (1996). In Proceedings AFIR 1996 (pp. 1463-1483).

•    Variable Life Insurance Product Design, Miller, W. N. (1971). Journal of Risk and Insurance, 527-542.

•    The interaction of guarantees, surplus distribution, and asset allocation in with-profit life insurance policies, Kling, A., Richter, A., & Ruß, J. (2007). Insurance: Mathematics and Economics, 40(1), 164-178.

•    Pricing of unit-linked life insurance policies, Aase, K. K., & Persson, S. A. (1994). Scandinavian Actuarial Journal, 1994(1), 26-52.

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