Dividends are a crucial part of why whole life insurance is such an ideal asset for conducting an Infinite Banking Concept (IBC) strategy. But because dividends are not guaranteed is the life insurance contract, it raises the question: can we rely on life insurance dividends in a bad economy? Join us as we explore the inner workings of life insurance dividends, how it relates to the current economy, and why we don't think you have to be afraid.
https://www.youtube.com/watch?v=6ONu2ZroHeQ
Tune in as Bruce explores the factors at play, and find out how to navigate uncertainty while maximizing returns.
How Are Life Insurance Dividends Calculated?Understanding the Dividend RateThe Dividend is Chasing the Death BenefitAre Life Insurance Dividends a Return of Premium?The Relationship Between the Treasury and Life Insurance DividendsCan You Still Get Life Insurance Dividends in a Bad Economy?Book A Strategy Call
How Are Life Insurance Dividends Calculated?
While all mutual companies calculate their dividends in different ways, and the calculations are proprietary, the components of those calculations are all the same. Essentially, life insurance companies have income and expenses.
Expenses for a life insurance company include payroll, death claims (the most significant expense), and other overhead costs.
The income is all based on products sold. The companies then invest that income. Mutual companies have a reputation for investing very conservatively, as well as having significant liquid reserves. A significant portion of the investments are made up of bonds and real estate. Insurance companies also make a profit on policy loans to their policyholders.
When there is a profit, those profits are then distributed to policyholders. The insurance companies typically declare the rate for the coming year in December, based on all this information: expenses, profits, etc.
Understanding the Dividend Rate
Here’s where things can get confusing. Just because a company declares a 5% dividend rate does not mean that each and every policyholder is getting a 5% increase in their cash value. The dividend rate is a gross number and is actually applied differently across policies.
Factors that may contribute to your actual dividend include:
Any fees from your policy
Policy costs and expenses
Existing policy loans
Age of your policy
In some cases, policies may even earn more than the declared dividend. There are many factors that contribute to this because the “goal” of every policy is endowment, which causes the dividend to “chase” the death benefit.
The Dividend is Chasing the Death Benefit
[9:10] “The dividend is actually chasing the death benefit, and the cash value is always chasing the death benefit. What do we mean by chasing? Whenever you take out a policy, let’s say you put $50,000 in the first year… it’s going toward the base policy. And the base policy is the foundation or the rock of the policy. It’s the true insurance portion of the policy. Some of it goes to a term rider, and the term rider is there so we do not MEC the policy. And the last part is the paid-up additions rider. And those three cause a relatively high death benefit versus the $50,000.”
The policy is set to endow at age 121. This is the point when the cash value is equal to the death benefit, and you will receive the full death benefit if you’re still living. Over the course of your lifetime, you’re watching your cash value chase this endowment. Meanwhile, the death benefit is also increasing because of PUAs.
What this means is that your cash value and the death benefit of your policy are going to grow differently. Your policy has to have the growth momentum to actually reach this endowment. A 5-year-old has 116 years to accumulate enough money to reach endowment, while a 50-year-old only has 71 years. They might even get more than the declared dividend in order for the policy to keep up.
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