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A Historic Whole Life Policy’s Fluctuating Dividends
Let’s discuss dividend interest rates and how that affects whole life cash value and death benefit performance on an ongoing basis.
We’re going to do so by looking at one particular insurance company’s dividend history because although most other quality carriers have nearly identical trends this particular mutual company has released actual historical data from a sample policy issued in 1980.
Why this is important is because when you see an illustration it assumes that the dividend interest rate stays exactly the same for the entire time. However, the ongoing dividend interest rate will most likely rise and fall throughout the life of the policy.
And since many of my clients believe that interest rates will rise in the future I thought it would be useful to show how this affected policies in the past – since we can’t illustrate this kind of trend using current policies.
So if we zero in on 1981 we see that the dividend interest rate of this particular carrier was 8.27 percent and it stayed that way for a few years before spiking dramatically and staying very high for a number of years before starting to subside and stabilize.
Eventually, around 2002 it dipped below where it was originally illustrated and it stayed that way all the way to present day 2017 where it’s now at 6.7%. And thankfully this carrier has provided actual historical performance data since 1980, so we can see the effect of those dividend interest rates on a hypothetical policy issued in 1980. And we can see year by year how they affected total dividends total cash value and total death benefit amounts.
Keep in mind this is a male, no spring chicken, age 50. He’s standard non-smoker meaning, not a preferred rating not preferred best. And these are using the 1958 census tables where people weren’t living nearly as long as they are today. So it entails that one of today’s policies should be a little bit more efficient at least from a mortality standpoint.
This is a 10 pay whole life policy, meaning there’s a lifetime worth of premium stuffed into the first 10 years of this policy and this is a lot closer to how we structure most of our banking policies, although with certain carriers we can have them contractually paid up in seven years (even as little as five years).
The premium on this policy is fourteen thousand four hundred and forty-five dollars is due once a year for 10 years and then it’s contractually paid up. If we look at the guaranteed cash value column, you see at the end of 10 years you’re not quite yet break even. But you do break even somewhere between Year 11 and Year 12.
Now, this assumes that no dividends are ever paid and most quality companies including this one have found a way to pay a dividend each and every year for the last hundred and something years. And so we’re going to focus on the total dividends column now and the total cash value.
What I’m gonna do is I’m going to overlap the dividend interest rate so we can see the delta as we go and if we look at the total dividends column in the total cash value column there’s an illustrated and there’s an actual column under it. For the first three years when the dividend rate is exactly the same as what was originally illustrated, there’s no change anywhere. What was illustrated is what actually appeared in that policy.
Now 1984, boom, we have a spike. Our dividend rate goes from 8.27 to 11.6. And lo and behold the total dividend that got paid on this policy instead of being two thousand and forty dollars was thirty-nine hundred and forty-eight dollars. The next year the dividend increases again to 12.2. So instead of twenty-two hundred dollar dividend, we’re looking at a fifty-one hundred dollar dividend.
If we jumped down, in 1991 we can see that the dividend rate has fallen now from 12.2 to 10.5. But if we look at the total dividend that was paid instead of a 43 hundred dollar dividend, we have nearly a thirteen thousand dollar dividend that was paid.
If we look at the total cash value column you can see that there’s almost a 40000 thousand dollar difference. Now the reason this is the case is that all those additional dividends you received above what was illustrated continue to compound inside the policy and with the mutual company where there are no stockholders, the policyholders actually own the company – your shares of stock so to speak are represented by how much cash value you have.
The more cash value you have, the bigger cut of the dividend pool you get. So even though the dividend decreased from 12.2 to 10.5, your actual dividend is exponentially bigger than what was originally illustrated.
Needless to say, your numbers will obviously be vastly different and past performance is no indication of future returns.
If we skip down to the year 2002, we can see that the dividend interest rate finally dips below what was originally illustrated, that 8.27 percent. The dividend was originally projected to be a seventy-nine hundred dollar dividend. However, it would have worked out to be over a twenty thousand dollar dividend and the total cash value would be 50 percent higher than what was originally projected inside this policy.
If we just keep scrolling down, you see that the dividend interest rate just continues to drop. Yet, the actual dividends being paid are far greater than what was originally illustrated in the policy.
This again has to do with that compounding effect. All those additional dividends, even though they were far smaller than what we’re seeing in the later stages of the policy, they just continue to grow and compound upon themselves and demand a bigger cut of the dividend pool for the policyholder.
If we jump down and focus on the end game, what you’re going to see is the original IRR or internal rate of return projected for this policy. Cash value was just over 4 percent, 4.1 percent, and what it actually worked out to be was over 6 percent.
Instead of over a half a million dollars of total cash value, there’s actually well over 900000 of total cash value inside this policy and the death benefit originally projected to be just over 600000 is well over one point one million.
If you believe that prevailing interest rates and dividend interest rates are at or near historic lows, then what you want to do is start heavily funding a policy now so that you can command a bigger cut of that dividend pool on an ongoing basis and continue to compound exponentially into the future.
Feel free to click the button below to schedule a phone appointment with a license policy design specialist. They just may be able to help you build something slightly more efficient than a 10-page policy for a 50-year-old with a standard rating using outdated mortality tables. There’s a very good chance that you’ll be pleasantly surprised by the projections using today’s low dividend rates not to mention what’s possible in the future.
John “Hutch” Hutchinson
ChFC®, CLU®, EA, AEP®, CExPs®