Entire life insurance policies are often heavily dependent on the issuing company's ability and willingness to distribute. While the entire life policy has significantly strong guaranteed functions, the dividend dramatically changes the net value that an insurance owner can take out of the contract.
These dividends play a crucial role in increasing cash values as well as the death benefit. And in some cases, these dividends play a crucial role in the overall profitability of the insurance contract. ever-growing fashion year after year. This column of projected figures has subtle but very significant implications for the assumptions, and unfortunately these assumptions need to be questioned. <! ̵
Here is an example:
Notice how year the dividend value continues to rise. <! – ->
What do All Life's dividend forecasts assume?
The ever-increasing dividend figure states that the insurance company assumes a constant improvement in the profitability of your insurance contract. When every year clicks, the life insurer makes more money on your insurance than it did last year. As a thank you, the insurer shares these ever-increasing profits with you in the form of a dividend.
But is this assumption realistic? No.
The truth is that insurers do not always do better this year than they did every year before. Circumstances change, and this can have a direct impact on the insurance company's results and the dividends that the insurance owner receives during a given year.
Throughout history, fluctuations in dividends due to fluctuations in profitability played a slightly more important role than a minor irritation. Sure, it was not perfect to get a smaller dividend in one year compared to the last, but it was not life-changing.
Current economic trends create some headwinds that have a real potential to make falling dividends much more than a minor annoyance to a large number of entire life insurance holders. To understand the situation, we must first understand the balance that insurers assume between rising mortality costs and rising investment income on insurance assets.
Countervailing mortality costs with investment income
As you age, your insurance costs rise. I know there are some agents who believe that whole life insurance has some form of immunity to this reality, but I can assure you that it is a real cost of life. Insurers are well aware of this cost and they have a strategy to deal with it. The really really really short version of this strategy is simple: produce more investment income on the assets accumulated on behalf of this policy than the direct cost increases to insure the life of the insured.
Sounds simple enough and for decades each. However, current economic conditions (ie low interest rates) make this strategy much less achievable and even begin to question its likelihood.
So what does this mean for entire life insurance owners? This means that dividends can fall in old age and possibly fall sharply. <! – ->
Now instead of an ever-increasing dividend, we can see a scenario where the dividend decreases and reaches very low levels if the insured lives in the late 80s / early 90s or later .
Here is an example from a really valid whole life insurance:
 Notice how the dividend reaches its peak at the age of 88 and then begins to decrease. At age 97, they are almost a third of what they were at the top. <! – ->
For those who achieved a completed status, triggered the reduced paid function, or who plan to continue paying premiums well into old age, this is not much of a problem. A source of frustration over unfortunate underperformance compared to original expectations, but perhaps not a death for the insurance policy.
But for those who plan to use premium compensations. , the dividend option for lowering / paying premiums or using the mix to achieve cheaper permanent life insurance, this situation is a serious potential problem.
Why? Let's examine why.
Making a full insurance policy pay their own premiums
Most insurance agents understand that a full life insurance policy has the ability to pay their own premiums. This means that the insurance owner does not pay the premium when it falls due. Instead, the insurance owner directs cash either or is generated by the insurance to pay the premium at maturity. <! – ->
The two ways to perform this task with an entire life policy are through either
- a premium compensation or the
- dividend alternative for lowering / paying premiums.
A premium compensation is simply the withdrawal of cash value from an entire life insurance which then uses cash that is released from the insurance to pay the premium. For example, say you have an entire life policy with $ 500,000 in cash value. Your annual premium is $ 25,000. You can choose to use a portion of that $ 500,000 cash value to pay the premium.
Functionally, this means a partial transfer of cash value created either by the paid supplementary driver or dividend that purchased paid supplements up to $ 25,000. Instead of getting a $ 25,000 check from the insurance company, the insurer will apply the money directly to the $ 25,000 premium account. You as an insurance owner pay nothing to the policy this year.
Many people choose to use this feature to discontinue premium payments. Some do it temporarily, while others have a more permanent plan to cancel premium payments.
As an alternative to a premium compensation, some people use the dividend earned under an entire life policy to pay the premium. If the annual dividend is large enough to cover the entire premium, you as the insurance owner do not pay any premiums and instead allow the dividend to cover it for you.
Again, many people use this feature to interrupt premium payments. The majority of people who choose this dividend option usually have a permanent plan to stop paying premiums. Now that the entire life policy earns dividends that are large enough to pay the premiums, the insurance owner can retain the insurance death benefit without making premium payments out of pocket.
In both the case of premium compensation and dividend alternatives to pay the premium, the insurance owner has in some sense achieved payment status without having to meet the original guaranteed requirements for achieving payment status. There is only one crucial difference, neither the premium compensation nor the dividend option for paying premiums is a guaranteed feature.
This means that once the policyholder starts using this feature, he / she has no guarantee that the policy will be able to maintain its ability to pay future premiums. If the entire life insurance policy does not cover overdue premiums, the insurance owner must again make premium payments. This can cause a serious problem for older people who have no plans to use other valuable resources to cover life-long premium payments.
When the whole life mixture causes problems
Mixing the whole life is a process of taking life insurance and adding it to a whole life insurance. The term politics is not separate from the whole life policy, but instead a part of the whole life policy. We use mixture all the time to build cash-rich politicians for life.
And I want to be very clear about something here, what I'm talking about in this blog post does not apply to mixing in the context we talk about it 99% of the time. There is another application for mixing of the whole lifetime and this is where this problem takes flight.
Alternatively, agents use blend as a way to make whole life insurance policies look cheaper. In fact, since the 1990s, whole life insurance was mixed with futures insurance to sell people cheaper, "permanent full insurance" has been a favorite sales technique for agents across the country.
If you can not afford traditional full insurance, we can arrange for you something much cheaper, seems a little crazy for someone to buy traditionally all their life now, right? There must be a catch. The catch is what this dividend debacle is about.
The whole life mixture sold for cheaper death benefit is super dependent on dividend assumptions. Eventually, the concept of insurance disappears and paid supplements purchased through the dividend replace this term insurance. So when someone buys such insurance, the agent must make assumptions about the dividend and how long the insurance owner should reasonably go before paid supplements replace this term life insurance. 19659015] If the dividend paid to the insurance owner decreases, this will extend the time that the term life insurance remains linked to the entire life insurance. It takes longer to collect the paid supplements that are necessary to replace the concept of life insurance. This fact has a very subtle but potentially damaging implication that many agents fail to understand. Replacing the concept of life insurance can take many more years than is assumed to be realized. This happens because the insured's elderly person reduces the amount of death purchased by paid supplements. I will use a very simple (read: not super realistic in any case but more than enough to understand the consequences of this point) to help everyone understand.
Suppose you own a full life insurance policy with the paid rider supplement. Right now, for every $ 1 spent to buy a paid supplement, you will create $ 3 in death benefits. Next year, however, each $ 1 will create only $ 2.75 in death benefits. You plan to add $ 1,000 to the paid additional drivers this and next year, which would create a net $ 5,750 in death benefit. But an emergency arose and you could only put $ 700 into the paid additional driver this year.
Thankfully, things turned around a bit and you could add $ 900 to the paid additional drivers in year two. That means you eventually created $ 4575 in death benefit, that is $ 1175 less dollars in death benefit created. This is a reduction of 20.4% in the death benefit. The reduction in dollars you contributed is 20%. This is the beginning of a worrying deviation.
It happens that every year $ 1 buys less death benefit than the year before. Now imagine if this trend continues from year to year for 20, 30, 40, etc. years. The problem has the potential to get worse exponentially.
If the problems with these types of whole life insurance policies are already dizzying, I need to introduce another layer of complexity and problematic implication.
Most mixed whole life policies direct the dividend first to pay the forward insurance cost and others to paid supplements – with what is left after paying the futures premium to buy paid supplements. If the dividend goes down, the less paid supplement buys, this leads to less paid supplement death benefits that reduce the death benefit for life insurance, which means that next year the lifetime cost will be higher than originally assumed.
With a higher lifetime cost, there will be fewer dollars left to buy paid supplements, which means that more of the term life insurance death benefit remains. This fact also exacerbates the problem exponentially.
There are several factors that can go in the opposite direction to the policyholder's benefit and that is exactly what we have seen play for a number of people who bought whole life insurance in this way.
Mixture of whole life insurances makes it work much more like universal life insurance. This does not make it bad. The flexibility that universal life insurance provides from a political design perspective is very superior to ordinary ordinary life insurance.
But with this freedom to control different parts of life insurance contracts comes the responsibility to handle some of its "moving parts" correctly. Some agents are concerned about this when it comes to universal life insurance, but embrace it unequivocally throughout life insurance. The truth is that there is very little difference as long as you approach both types correctly.
What can you do if you own one of these policies?
I do not address this to scare people from the whole life insurance. . The product is purchased under sound assumptions and can help you achieve your financial goals in a way you never imagined.
I raise this to sound the alarm for the thousands of people who have probably bought a whole life insurance policy and either plan to use a non-guaranteed premium payment feature and / or those whose agent used the mixture to make their whole life seem cheaper against competition or more budget-friendly.
If you own the entire life insurance, it's time to take a look at it. Call your agent or find a new one and take the time to understand what you have. This problem is unlikely to go away on its own, and as the options for remedying each year increase, the situation becomes less and less favorable.