Your Dividends: The Fine Print

Your dividend is a big part of your policy. They may not be part of the guaranteed interest calculated into the growth of your policy. However, they do add a lot of value and growth to your cash value. So it’s beneficial for you to understand their significance.

Each year, many insurance companies declare their dividend interest rate. These rates can vary from company to company, as can the methodology behind them. So it’s tough to know what makes an insurance company or policy a good fit for you.

How do dividends work?

The “contribution principle” is the accepted standard of practice for mutual insurance companies. It is designed to allocate dividends to each policy in the proportion that the policy contributed to company profits. The total amount of dividends to be paid, declared by the board of directors, is allocated to each policy according to this principle.

Dividends have three components are and calculated based on the following formula: 

1. Interest component: The excess of the dividend interest rate over the guaranteed interest rate. This is multiplied by the “policy value,” plus
2. Mortality component: The excess of the guaranteed mortality charge over the actual mortality charge. Plus/minus
3. Expense/loading component: This component reflects company expenses and taxes, and assesses a contribution to surplus (profit charge).

This formula may be straightforward, but the application can vary by insurers and policies. Disclosing only the interest component doesn’t tell the whole story. Differences among interest rates can result from product design and pricing, actual experience, and individual company practices. Some policies offer a choice of different guaranteed rates. Others offer variation in the policy value. The policy value may be based on reserves or cash surrender value, and it could be the beginning of year or mid year value. Some insurers also may allocate and recover expenses differently. They may or may not make deductions from the dividend interest rate for expenses. 

Comparing dividend rates can lead to potentially misleading situations. A higher rate may or may not produce a greater dividend payout than an insurer with a lower rate. While the interest rate is important, it’s only one factor. The interest rate is heavily marketed in most cases, usually with strong disclosure, but almost surely without full understanding.

What does this mean for you?

While it’s not as simple as comparing dividend interest rates, selecting a good whole life carrier isn’t all that complicated. Here are a few important things to look for:

• Guarantees & financial strength

One of the greatest features of whole life products is the underlying guarantees. Select a stable carrier with strong financial ratings that can follow through on its promises.

• Historical performance

Many companies provide some form of dividend history information. This information often illustrates the company’s actual historical performance over time, including some form of policy internal rate of return and a comparison to the illustrated values at the original point of sale. Past performance is not indicative of future results, and actual results may vary. However, a strong track record of performance relative to historically illustrated values may provide increased purchase confidence.

• Illustrated values

Illustrations are the most commonly used life insurance sales tool. They are use to demonstrate how an individual product works over time. They are also inevitably used to compare products. Exercise caution when comparing product values, and keep in mind these considerations:

• • Current scale

Most carriers illustrate nonguaranteed values using their current dividend scale. However, not all carriers adjust their dividend scales every year, and the length of time since the last scale change should be considered. Carriers that haven’t adjusted their current scale for a number of years could be more likely to change their scale in the near future. The converse may also be true.

• • Consistency of scale changes

U.S. life insurers essentially operate in common environments. Company performance will differ to a degree, and some carriers will perform better than others over time. But it’s important to question and seek to understand moves that seem inconsistent with the general industry trend.

• • Illustration projection

Given that illustrations often project 30 years or more, understand what supports the dividend scale in the near term and how this might evolve over time.

• • Reduced scales

Understand that dividends are not guaranteed. And given the important nature of the life insurance purchase, understanding how products perform at reduced dividend levels can be important. This is because they may be different than illustrated. 

The most important factor is to choose a company that’s committed to providing strong policyholder value over the long term. They should have the financial strength to endure whatever future may come. 

Now, all this may sound like too much. And for you, the policyholder, it is. Luckily for you, The Money Multiplier team does that work for you. We vet and monitor insurance companies based on these criteria and more. We are constantly looking out for your best interests as a policyholder. And this is true not just with dividend rates, but with every aspect that makes an insurance company compatible with what we do and teach every day. So rest assured that we understand all this insurance jargon. We’ve already got the best of the best companies lined up for you when you’re ready to start your Infinite Banking journey.

When you’re ready to get started on creating your financial legacy or if you have more questions, most questions can be answered by watching this video. Start there and then schedule a consult with my team when you’re ready to begin.