Dividend Scale and Participating Whole Life Insurance
Participating whole-life insurance offers a compelling choice for those looking for lifetime coverage and the benefits of tax-deferred growth. To select the right policy, it’s essential to grasp how important elements, like the dividend scale, influence the dividends you receive. Understanding these components will help you find the policy that aligns with your financial goals.
If you’re just learning about the different types of life insurance, it’s helpful to begin with the basics of participating in whole life insurance. This overview will cover key concepts like premiums, the dividend scale, and how the growth potential is determined.
How Do Dividends Function in Participating Whole Life Insurance?
The growth from a participating whole life insurance policy comes as dividends, which are calculated using a method called the dividend scale. Before we discuss dividends, let’s review the basics of the policy.
Participating whole life insurance gathers money from policyholders (which could be you) into a shared account. This money is managed by a team of professionals at the insurance company who aim to grow the investment so that dividends can be distributed. You can use the dividends you earn in various ways, such as:
- To pay premiums
- To buy additional life insurance
- Keeping them in a deposit account to earn interest (keep in mind that you may be taxed on any cash withdrawals from your policy)
- Receiving them directly each year (note that any cash you withdraw from your policy may be subject to taxes)
Dividends are distributed each year on the anniversary of your policy, and they are allocated fairly among all policyholders based on a method known as the “dividend scale.”
What makes up a participating account?
Several factors determine whether a participating account will have extra funds. These may include:
- Investment performance: The success of the invested funds
- Costs: The expenses involved in managing the account
- Mortality rate: The number of claims filed during that year
- Additional factors include the number of policyholders who canceled their policies, surrendered their coverage, borrowed against their policies, and paid any applicable taxes.
If the participating account does better or worse than anticipated, any extra earnings or profits will stay in the account and be shared fairly among policyholders by adjusting the dividend scale. On the other hand, if the account faces unexpected losses, those losses will also be reflected in the policies. To balance out the gains and losses, insurance companies use a method known as the “smoothing technique,” which helps lessen fluctuations over time.
What is a dividend scale?
A dividend scale is the system your insurance company uses to figure out how much you receive in dividends each year. The company reviews this scale annually, considering factors like the mortality rate of policyholders, the costs of managing the account, and how well the investments are performing.
Dividend payouts vary for each individual. The amount you receive is calculated specifically for you, taking into account factors like your age, the size and type of your policy, the premiums you’ve paid so far, and how you choose to pay your premiums. Dividends are distributed fairly based on these considerations. It’s important to understand that dividends are not guaranteed with your policy, and the amount you receive can change each year. However, once the dividends are paid, they become the property of the policyholder and cannot be reclaimed by the insurance company.
What does the dividend scale interest rate mean?
The dividend scale interest rate (DSIR) is an important factor in determining how much money is paid out to policyholders in dividends. It is used to calculate the investment part of the dividend scale but does not represent the growth rate of your policy. The DSIR can be higher or lower than the actual investment returns from the participating account.
Other factors, such as the earnings from the participating account and anticipated future returns, are also taken into account beyond just investment returns.
How frequently does the DSIR change?
Every year, insurance companies decide whether to keep or adjust the dividend scale and the dividend scale interest rate. The DSIR can increase or decrease depending on market conditions like inflation and changing interest rates. Other aspects of the dividend scale may also change based on the company’s experiences and factors like inflation. The insurance company usually informs policyholders in their anniversary statement about where to find information regarding policyholder disclosures.
What is the smoothing technique used in the dividend scale?
Even though the dividend scale may change, participating whole life insurance policies can provide steady returns from year to year (though it’s important to remember that dividends are not guaranteed). This is because a smoothing technique is used to reduce the short-term effects of market ups and downs. Essentially, changes in investment gains or losses are averaged over several years, which helps manage investment risks and lessens the impact of market fluctuations for policyholders.
Should I select a life insurance company based on its DSIR?
Since the DSIR is just one part of the equation, picking a policy mainly based on this factor won’t give you a full understanding of how your life insurance policy will meet your needs. While the DSIR matters, it’s only one of many factors that influence your dividends.
Before choosing a policy, consult with your insurance advisor to ensure you’re making the best decision for you and your family. Don’t forget to ask your advisor about the insurance company’s:
- Approach to investment and strategy for consistent, long-term growth
- Experience and a wide range of skills in handling the participating account
- Long-term dedication to the participating account as the DSIR evolves over time
Want to find out more about participating in whole life insurance and whether it’s the right fit for you? Reach out to PB Bankers today!
Kyla Lovell is a financial expert that teaches the Infinite Banking concept utilizing whole life insurance. This concept creates financial wealth by creating your own personal bank. Get your free Infinite Banking report for more information on the concept.
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