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Whole life insurance: Dividends and current market conditions

October 28, 2020 Article 3 min read
Authors:
Steven J. Gibson Wealth Management Ronda Davis
Whole life insurance policies have several advantages. However, dividends aren’t guaranteed, and current market conditions add complexity. Here’s what you should know.
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Whole life policies are one of several types of permanent life insurance options that offer both value accumulation and lifetime coverage. They’ve been around for decades, in part because they offer a high degree of certainty, namely a guaranteed premium, a guaranteed death benefit, and guaranteed cash value accumulation. However, what’s not guaranteed are the dividends — those that can be used to reduce or offset future premiums, add to the cash value for additional coverage, or pay out to the policy owner. Especially in today’s turbulent market, whole life customers need to understand the impact of current market conditions on their policies.

Whole life insurance dividends explained

The life insurance carriers that promote whole life tend to be mutual insurance carriers, meaning they’re owned by their policyholders and not by external stockholders. The dividend, generated from the financial performance of the insurance carrier, is made up of three components: investment income, underwriting profit (mortality), and operating expenses. Dividend rates are often published in November for policy anniversaries the following calendar year.

Many consumers — too many — believe higher dividend rates indicate a better product or a more successful carrier. This is misguided for a few reasons. Some carriers report gross dividend rates before operating expenses, and others report net dividend rates. In addition, no universally accepted practice exists for how carriers apply those dividend rates to a policy. When a carrier has a 5% dividend rate, it doesn’t mean the cash value of a policy gets credited at 5%.

Often, the dividend is calculated against the policy reserve account, which is set up for all life insurance policies to make sure the company is holding enough money aside to pay death claims. This reserve account is set using calculations that vary by carrier and even by product. Each carrier also has a method for how its dividend is applied and how that calculation impacts your policy. And, carriers can change these things at any time.

When a carrier has a 5% dividend rate, it doesn’t mean the cash value of a policy gets credited at 5%.

Since the largest component of a carrier’s dividends is the investment income generated by the mutual insurance company, looking at investment allocation and comparing a carrier’s dividend over time can help predict future dividend movement.

Based on data compiled for year-end 2019 by VitalSales Suite, a product of EbixExchang, the assets of the five largest mutual insurance carriers total:

  • 62.5% in bonds
  • 13.5% in mortgages
  • 7% in policy loans to current policy owners
  • 1% in real estate
  • 5.5% in stock
  • 1.5% in cash
  • 9% in other investment vehicles

Note that more than 75% of the invested assets are in bonds and mortgages, both directly interest rate-driven investments. In addition, all new premiums and maturing bonds will be invested at the current yields. Many popular carriers’ dividend rates have a 95% correlation with the Moody’s Aaa corporate bond yield.

Current market conditions may impact whole life dividends

In April 2020, Moody’s seasoned Aaa corporate bond yields dropped below 2.5% for the first time since July 1946. This has already caused major pricing changes in the life insurance industry. Whole life policies haven’t reacted to the interest rate disruption yet, but the effect was immediate for other forms of life insurance.

What does that mean for your whole life policy and its dividend? Strong data suggests that dividends will drop, but whether they drop for every carrier, and by how much, remain to be seen.

It’s important to review your policy as soon as the new dividends are announced. Changes could impact the date you’re projected to stop paying premiums, the amount you expect to withdraw from the policy as income, and in some cases your policy premium itself.

When markets are volatile, it’s particularly important for whole life policyholders to understand how their dividend is and will be impacted and to regularly assess whether, as part of your overall financial and estate plans, the policy is still performing as intended.

As always, if you have any questions, give us a call.

Securities are offered through Valmark Securities Inc. member FINRA and SIPC, an unaffiliated securities brokerdealer.

The material contained in the herein is for informational purpose only and is not intended to provide specific advice or recommendations for any individual, nor does it take into account the particular investment objectives, financial situation or needs of individual investors. Consult your financial professional before making any investment decision. The information provided has been derived from sources believed to be reliable, but is not guaranteed as to accuracy. Valmark Securities supervises all life settlements like a security transaction and its’ registered representatives act as brokers on the transaction and may receive a fee from the purchaser. Once a policy is transferred, the policy owner has no control over subsequent transfers and may be required to disclosure additional information later. If a continued need for coverage exists, the policy owner should consider the availability, adequacy and cost of the comparable coverage. A life settlement transaction may require an extended period to complete and result in higher costs and fees due to their complexity. Policy owners considering the need for cash should consider other less costly alternatives. A life settlement may affect the insured’s ability to obtain insurance in the future and the seller’s eligibility for certain public assistance programs. When an individual decides to sell their policy, they must provide complete access to their medical history, and other personal information.

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