How are whole life insurance dividends and interest rates faring in this low interest rate environment? Is today's long stretch of low interest rates a bad sign for whole life insurance in the future?
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Today, we're having a candid conversation about today's interest rate environment, the impact on bond rates and prices, and how that impacts whole life insurance dividends.
If you want to know how your whole life insurance will weather any environment… tune in now!
Table of contentsThe Role of Bonds on InsuranceHow Do Insurance Companies Invest?What About Policy Loans?Life Insurance Companies Invest ConservativelyHow Do Bonds Work?What a Portfolio of Bonds Means for Insurance CompaniesWhy You Shouldn’t Worry About Low Dividend RatesAdditional ArticlesBook A Strategy Call
The Role of Bonds on Insurance
Bonds play a significant role in the dividends you receive as a policyholder. This happens because life insurance companies invest heavily in conservative bonds. So rising interest rates should lead to higher declared dividend rates. Similarly, a falling Federal interest rate will likely result in a decreased dividend rate.
Are there long-term effects of a low interest rate environment? Well, not to spoil things completely, but life insurance has been around for a long time. It has survived many low-interest rate environments, paying dividends through wars, depressions, recessions, and much more.
We’re going to dive deeper into why this is, and how life insurance is still one of the safest choices for your money.
How Do Insurance Companies Invest?
When you pay premiums, the insurance company doesn’t just throw that money into a savings account and wait. They actually put the money to work. Some of this money goes into securities, however, it’s a minuscule amount. Many companies have anywhere from 0.58% to 2.49% of their portfolio in common stock.
The much more significant portion of life insurance company’s investments is in bonds—either corporate bonds or treasury bonds. Bond investments often range from 60.2% to 75.5%.
Then, there are preferred stocks, which work similarly to bonds because it produces interest. Additionally, preferred stock means that stockholders get paid before anyone in the common stock gets paid. This means preferred stockholders have low liability. The range for preferred stocks is about 0.25% to 1% of the company’s portfolio.
The next biggest investment in an insurance company’s portfolio is going to be mortgage-type investments. Companies allocate anything from 0% to 16.3% of their portfolio to mortgages. To reduce risk, they invest in high equity mortgages. Real estate investments, separate from mortgages, range from 0.33% to 1% of the investment portfolio.
What About Policy Loans?
The last kind of “investment” life insurance companies make is contract loans. And these are the loans that insurance companies offer to policyholders. Contrary to popular belief, when you take a loan, you’re not taking a loan from yourself. The life insurance company is giving you the money because your cash value is backing the loan. This also means that when you pay interest, you’re paying interest to the life insurance company, not yourself.
Life insurance loans make up anywhere from 2% to 7.24% of an insurance company’s portfolio.
Policy loans, even in a low-interest rate environment, are great for insurance companies, and by extension you, as the policy owner. It all comes down to the way mutual companies are structured and the dividends they pay. In a low interest rate environment, with many loans fixed at about 5%, this is actually some of the greatest returns companies get during such times. Plus, they can take comfort knowing all loans are backed by cash value.
This is beneficial to you, the policy owner because you want your insurance company to do well. You partake in the profits of the company,
