How is the entire life insurance dividend calculated?

Reversing the procedure for calculating dividends payable on a whole life insurance policy is almost impossible given the proprietary nature of life insurers. It said that we can use many information to make a minimum of information on the accuracy of dividends earned on a whole life policy in any policy year.

The fastest and easiest way to do this is life insurance delineation. Leaders found within the illustration normally project dividends payable over all policy years, we can use this to cover the dividends earned in a specific policy year.


The dividend may change, and if it does then the original illustration is no longer accurate. What do we do now?

We only request an in-force illustration that uses the newly announced dividend rate and uses this forward to reference the dividends earned. We will need to change the dividend in the insurance company every time.

The other way of doing this is far more complex and before we dive into the process of taking this approach, let’s spend some time understanding the components of dividends and accessing the information we have (at least some). Will allow dividend calculus to attempt reverse engineering. The word caution, this process is not for the faint of heart and the above mentioned process always There is an easy way to understand this question.

What is the dividend on a whole life policy?

Dividend paid over a whole life policy is the life insurer used to share the profitability of its business operations with policyholders. This is a clear question.

Why do life insurers want to share their benefits with policyholders?

Many do not and they generally do not.

However, some in the United States work as life insurers Mutual life insurance companies (Or pseudo-mutual life insurer, which is a subject for another day). These insurers place the ownership of the company in the hands of those who purchase insurance policies from the company. Life insurance companies of this type have a legal imperative for their owners (ie policyholders) to produce profits and do so through payment of dividends.

Technically speaking, dividends officially serve as a return of the premium paid by the policy owner. It is a unique tax classification that gives life insurers and life insurance policy owners a significant tax break / benefit.

Three components of a life insurance dividend

The entire life insurance dividend is derived from three sources:

  1. Underwriting profit
  2. Investment return
  3. Administrative cost

The benefit of underwriting comes from the profitability of being an insurance company. This usually happens when fewer people file claims (ie die) than the insurance company. Estimating mortality among a large group of people is surprisingly easy, so life insurers rarely lose Money on this variable.

Investment returns drive the cash value accumulation component of a life insurance contract. Insurers seek to generate at least sufficient investment income to cover the guaranteed provisions of the contract. The majority of life insurers successfully generate investment income in addition to guaranteed contract facilities. The income earned in excess of these contractual obligations is the profits that feed into the dividend payment. This variable usually plays the largest role in the overall dividend payout and it is often talked about the dividend interest rate.

Administrative costs are the day-to-day boring expenses that a life insurer faces that compares the common expenses of any business face. This includes things like office supplies, office space for rent, utility bills, wages etc. When life insurers work under budget for these expenses, it can go towards surplus dividend payment.

Whole life insurance dividend interest rate

Many insurance companies that issue whole life insurance declare a dividend interest rate when they declare a dividend payment for the year. While many believe that they understand what the dividend interest rate tells them, the truth is very few people actually understand what this data point suggests.

The dividend interest rate simply tells us what the insurer is using when it calculates the actual dividend payable on the entire life insurance policy. It is a variable … at least … three (see above for the other two).

In more complex cases about dividend interest rate, there is no standardized protocol for coming and publicly declaring dividend interest rate. So what may cause them to declare a 6.95% dividend interest rate for one company may be significantly different from the assumption that causes another company to declare a 7.05% dividend interest rate. For this reason, it is highly wrong to assume that you can compare who pays higher dividends by comparing the nominal rates declared by each insurance company. The matter is far more complex.

So the dividend interest rate tells us just the number that the insurer would plug into a much larger equation to calculate the policy owner’s dividend for the year. But the number is something else that is telling us.

The dividend interest rate gives us an idea of ​​how much the insurer values ​​each policyholder beyond the guaranteed facilities of the contract. Dividend interest rates include the policy’s guaranteed accumulation rate, which today sits somewhere between 3.5 and 4%. So a 6% dividend interest rate implies that the insurer’s dividend payable by the investment income generated from the income held by the insurer is 200 basis points above the guaranteed accumulation rate of the dividend – assuming that the whole life contract has a 4% guaranteed accumulation rate.

We can use this knowledge to do some reverse engineering of payable dividends.

Using the dividend interest rate to obtain a copy of the dividend payable

We will use the variable to check on the dividend paid by the life insurer by assuming a 6% dividend interest rate and a 4% guaranteed accumulation rate. This is paid on the reserve of 2% policy, which is a complex subject but usually the same as the accrual value of the contract.


If we take the current cash value of the policy and multiply it by 2%, we will arrive at a number that is equal to the dividend payable on the policy. There will almost certainly be some variance, and this is driven by three major factors:

First, the adjustments made by the other key variables mentioned above (such as underwriting profit and administrative costs) are not part of this calculation. The larger these variables affect dividends payable, the less accurate this calculation will be.

Second, the reserve is not the same as the cash surrender value, so it may cause dividends payable to differ from the results obtained from this calculation.

Third, to some extent linked to the first factor and typically only play in the very early and very late years of a policy, various spending assumptions can play a significant role in adjusting dividends. For example, most life insurers use an expense assumption on whole life policies known within the industry as a modified reservoir system. It effectively treats whole life policies, just as they are life policies for the first year or two of whole life. This dramatically reduces the reserve requirements an insurer must get with a whole life policy, and is the primary explanation behind why many regular whole life policies pay the policy owner no dividends for the first couple of policy years .

Thus this method of analyzing dividends will never be very accurate, as it will not work perfectly and will certainly now allow us to reconcile the insurance company’s mathematics. This will allow us to explore some things about the whole life policy.

If the product of this calculation is a number greater than the dividend payable, then we know that the insurer had higher expenses under the other two variables that caused negative adjustments to the dividend, or some other cost allowance that the insurer was allowed to take. This gives a loss on the policy in this policy year.

If the product of this calculation is a number less than the dividend payable, then we know that other variables at play (underwriting profits and / or administrative expenses) potentially increased overall dividends and / or larger than the cash value of the reserve policy. is .

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