Dividends are a tough topic—from defining a dividend, to options for receiving dividends. Dividends also work differently with whole life insurance than they do with stocks.
So where do you start when working with a client?
It is crucial to know the difference between gross dividends and net dividends. When mutual companies make a profit, they are required by law to distribute those profits amongst all owners. Policy owners of participating whole life insurance are considered partial owners of the life insurance company, and are therefore able to partake in the distribution of dividends. Although no dividends (profits) are guaranteed, they must be paid out when they occur. he good news? Dividends have a stellar track record in the life insurance industry.
Advisors and clients alike can be tempted to compare the gross dividends of mutual companies, in order to make an informed decision. Looking only at the gross dividends, however, is actually irrelevant in the grand scheme of things.
In order to run a well-managed insurance company, companies must first subtract their operating costs from any dividend rates. There are three components to these costs: death benefit costs, commission fees, and general operating costs. Once these costs have been considered, you’re left with the net dividend rate. This is the figure that matters to you and your client.
Companies will have different overhead costs, so the gross dividend of one company may look more favorable than the other…but in actuality doesn't perform as well after costs. The net dividends represent the dividend rate that is actually payable to policy owners.
So, how does Truth Concepts help?
In the Truth Concepts calculators, we show the net figures for you. The net dividends are most obvious when it comes to the Funding Calculator, coupled with the Life Insurance Values tool. Here’s how you can analyze the gross dividend against the net dividend:
Below is our Life Insurance Values tool. Use this to upload your desired illustration. This enables you to transfer the values to the Funding Calculator. Notice, though, the IRR (internal rate of return) displayed in the righthand columns. These rates can be misleading, because people don't quite understand IRR.
Below, is the Funding Calculator. Although it also displays an IRR, it does so on the whole policy (not a yearly cumulative value). In Life Insurance Values, the IRR shows what the account earns on a cumulative basis. Those beginning figures don't look so great (-49.91% is downright terrifying), but the policy begins to far outperform itself in the later years.
The IRR displayed in Funding Illustration is based on the total accumulation of the policy. This shows what the policy, in essence, earned each year.
If you're still hesitant, copy and paste that number into the “Annual Investment Rate” box under “Alternate Account.” Scroll down to the “View” box and select “Alternate Account.” This interpolates how an alternate account, say a savings account, with the same deposits will perform.
You'll see that the EOY balance, if the savings account earns that same rate every year, is the same as the total Cash Value. Even though the life insurance seems to underperform in the beginning, the performance of the account is equal to this alternate account.
So the IRR given, which outlines the overall net performance of the life insurance, accurately portrays the growth of the Cash Value. This directly compares to the net dividend rate. What it really means, is that by the time the policy owner's portion of the dividend hits their pocket, it has been reduced by the overhead cost.
Our hope is that this post will help inform future dividend discussions with your client. Gross Projections are important to the life insurance companies, but when it comes to your client, Net is more meaningful. Using the Funding Calculator, show your client the growth power of their net dividends.
For more info on the Funding Illustration and how to make the biggest impact, see our tutorial page. If a deep dive into the calculators sounds interesting, Truth Training is a LIVE 3-day event where you will learn how to show clients why much of the typical financial advice they hear is FLAWED…and what to do instead. For more info on the next session, visit our Truth Training page.