What do Sky Miles and Life Insurance Dividends Have in Common?
If you have ever received an annual dividend announcement from a life insurance company, you are bound to have been presented with a huge number for the millions of dollars of dividends paid in the last year. The message is so positive and re-assuring. In some of these reports, this news takes up as much as the first three quarters of the press release.
Just when you get a little over halfway through, another email pops up from the airline and you skip over there, since they have new sky miles program announcements. Just like the life carrier, the airline tells you that they have exciting news about their program updates. But after you have actually read what is happening, you notice that the program has once again devalued your miles. They have take-aways, higher mileage requirements, fewer seats available to purchase with your miles, new restrictions. So, somewhat disgusted with the annual erosion of your airline program, you decide to go back to finish reading the much more positive life insurance dividend announcement.
It happens again. You pick up at the point in the dividend announcement where you left off, when they said they had delivered $20 trillion of dividends around the world. They then mention that the dividend rate for next year will be slightly lower. This is not something the carriers want to do, but they are stuck in a universe of steadily falling interest rates and many see those rates remaining at terribly low levels for the foreseeable future. So, we are all glad that people around the world got paid $20 trillion, but we aren’t so sure this is good news for us. It isn’t. As you will see in our dividends chart, this story has been going on for quite some time
Yes, many of us see some good news in this. There’s not too far to fall out of the basement window. Longer term rates would have to go back up, since there’s not much lower to fall, wouldn’t they? That would make sales illustrations for new policies far less vulnerable to future reductions in dividends, and thus much more reliable than the ones people relied upon in the past.
The bigger story is what this means for all of your clients who own whole life policies that were purchased over the past 20 years or so. Policies purchased when dividend rates were 8%, for example, are highly likely to be heading into trouble as rates have dropped to 5%. Those original projections assumed that the 8% rates would live on forever. Dividend reductions can hurt a policy in several ways. They can suppress the growth of the cash value, they can drive future premium increases, and they can reduce the life of the policy from age 100 to age 80, for example. It would be a pretty tragic situation if your policy lapsed the week before you died. Clients are likely unaware of this unless they are having their coverage evaluated on a regular basis. And fixing the problem is a lot easier in its early stages, especially when client insurability is most likely to be at its best.
You might wonder why this should be an issue if whole life is guaranteed. You are correct to assume that a policy issued with a guaranteed premium and guaranteed death benefit is likely going to deliver as promised. However, many policies are sold with projections of strong cash value increases, which can vanish. Then, with a lower cash value, it is much more expensive to switch to a more competitively priced product in the future.
And there’s one more thing. Many whole life policies have been built with “term riders”, delivering a portion of the death benefit in the form of term insurance. For example, a $1,000,000 whole life policy could be blended with $250,000 of whole life and $750,000 of term rider. This allows the policy to have a competitive premium, more like universal life. It also means that the client really only bought $250,000 of guaranteed whole life. Those dividends are likely to be used to cover a portion of the term cost, and when the dividends go down, well you have to come up with the difference at some point in the future.
Here’s the moral of the story: Conduct regular policy reviews of your clients’ whole life policies. Those policies aren’t as simple as they may seem, and your client may be heading for a cliff.
At AdvisorServe, we are here to help. We are happy to do all of the leg work to help you obtain information and projections. Armed with that information, you will be in an excellent position to do what you do best for your clients: Advise. This can be a small effort on your part that could make a big difference for your clients.
Take a look at our Historical Dividend Chart:
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