Whole life insurance is a type of permanent or “cash value” life insurance that provides benefits for the “whole” of your life (versus term insurance that only lasts for a specific period of time).
Some companies offer dividend paying whole life insurance policies which means the policies pay dividends. These policies are also known as participating whole life insurance, because the policy owners participate in the profits generated by the company, by receiving dividends.
Whole life policies have a guaranteed, pre-set annual cash value increase. These guaranteed increases are based on a “worst-case” financial results scenario projected by the insurance company. In a participating policy, at the end of the year, the company does an accounting of the death claims paid, their earnings, and the expense of running the company and the premiums it collected. If they did better than their worst-case projection, they pay the policy owners a dividend.
Dividends are not guaranteed, however some companies have paid them every single year for over 70 years. The formula that each top life insurance agent in Bangalore uses to calculate the dividend it credits to any given policy is based on a complex formula, but this example of the growth of dividends in an actual policy may help…
Check out the progression of the annual dividends that have been credited to an actual policy – one which was started in 2005.
This is one of numerous whole life policies my family owns. The dividends we received were in addition to the guaranteed annual cash value increases we’ve received every year.
As you can see, in all but two out of 14 years, the annual dividend credited was larger than the year before. You probably remember the major market crash of 2007-2009 during which the S&P 500 lost 57%. But this policy, like all whole life policies, has just kept chugging along, blissfully oblivious to the Wall Street roller-coaster ride:
YearDividend Credited (Rounded to nearest dollar)
2006 $1,694
2007 $3,109
2008 $6,459
2009 $6,707
2010 $8,125
2011 $8,909
2012 $9,651
2013 $9,436
2014 $9,672
2015 $10,481
2016 $11,470
2017 $11,007
2018 $11,528
2019 $12,551
*Total: * $120,799
Each year we reinvested the dividends, which means we left them in the policy to purchase fully “paid up” life insurance, which is life insurance you’ll never pay another premium on. Reinvesting your policy dividends is a very powerful strategy because it increases both your cash value and your death benefit in the most efficient way possible by buying the lowest amount of death benefit possible.
I can hardly wait to see how big the dividends in this policy will be in 10 or 20 years! And I’m thrilled they aren’t related to the stock market so we don’t have to worry about the potential impact the next market crash might have.
And my family is using this policy to provide us with a guaranteed, predictable, tax-free income in retirement
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