A Historic Whole Life Policy's Fluctuating Dividends - YouTube

Hi this is Hutch with BankingTruths.com

and today we're going to discuss dividend interest rates

and how that affects whole life cash value

and death benefit performance on

an ongoing basis.

And 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

historic 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.

Now 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.

Now 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.

And 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.

And 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.

And 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.

Now if we jumped down in 1991 we can see that the dividend

rate has fallen now from twelve point two to ten

and a half. 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.

And 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 is because 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 policy holders 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 twelve point two

to ten and a half 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.

So if we skip down to the year 2002 we can see that the dividend interest

rate finally dips below what was originally illustrated,

that eight point to seven 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.

And 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.

And 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.

Now 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.

So 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.

So 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 pay policy for a 50 year old

with a standard rating using outdated mortality tables.

And 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.