In my last blog, Turning the Battleship Around…Has it Started?, I wrote about Whole Life dividend trends and stated perhaps the dividend slide might be “leveling off and slowly trending upward.” I based that thinking on the fact that of the “Big 4” Whole Life carriers—Northwestern Mutual, Mass Mutual, Guardian Life, and New York Life, three had “either maintained or increased their dividend rate,” which I believed was a “positive trend.”
One of the great challenges facing those of us who manage life insurance has been the long-term trend in interest rates. This is particularly true with Whole Life insurance. As the chart below shows, the drift in dividends has sloped downward for the last 28 years. And, today’s environment is especially challenging as we wallow in historically low interest rates for fixed investments. The cash value backing Whole Life insurance is typically invested in bonds (approx. 70%) and mortgages (approx. 10–15%), with the balance split between stocks, real estate, and other investments. In a recent blog (Life Insurers Adapting Investments to the Sustained Low Interest Rate Environment), I wrote about the fact that some carriers were exploring “other investments” that included “toll roads and stadiums as well as renewable energy initiatives, such as wind parks and solar farms” to reach for higher returns. But even for those carriers, these investments are only around the edges and the bulk of their investments are still in traditional fixed instruments. I concluded that blog entry with the following encouraging comment: “A few weeks ago, we received a notice from a carrier telling us that the dividend rate on a Whole Life policy held in one of our client’s portfolios was going up this year.”
Life insurance carriers have traditionally been a conservative lot when it comes to investing, with the vast majority of their investable assets in highly-rated bonds and a lower proportion in gold standard mortgages.
In my last Blog entry (If The Cost Of Insurance Goes This High, You Are Guaranteed To Have Some Angry Clients), I spoke about the issues with Universal Life (UL) policies in this low interest rate environment.
Whole life policies have fixed premiums that must be paid. There are a few exceptions. One is when the whole life policy is “paid-up,” meaning the policy is contractually guaranteed to run without any additional premium. This is actually called a reduced paid-up policy and must be requested from the carrier in writing. The death benefit that is “paid-up” will be something less than the current death benefit of the policy, hence “reduced.” Another exception is when the dividend of the policy is sufficient to pay the policy premium and the dividend election selected is reduce premium. Remember that dividends are not guaranteed and even if dividends are sufficient to pay premiums they may drop and out of pocket premium contributions may return. A somewhat related exception is the use of the cash value from paid-up additions to pay ongoing premium. The last exception is the use of an automatic premium loan or APL. Whole life policies have this interesting feature that allows cash values within the policy to be loaned to pay ongoing premium, sort of like moving money from your right pocket to your left.