If you have a whole life policy, is it still serving you well? Could you be facing additional premium payments going forward? Now may be a good time to re-evaluate your whole life policy for three reasons.
Lower interest rates are not good for policy dividends - Lower interest rates may be good for some companies, but generally speaking they are not good for insurance carriers. Low interest rates can negatively affect whole life dividends and policy loans. Annual dividends are a return of policyowners’ premiums. They are not guaranteed, but they are important in the performance of a whole life policy over time. Dividends are reinvested in the cash value of the policy and help the savings account grow. After 15-18 years, in most cases the dividend is usually large enough to pay for the future premium. The policy owner does not need to make any more payments and has a potentially “paid-up” policy for life.
Lower interest rates can mean lower dividends for policyowners. This is because insurers invest policy premiums largely in conservative fixed income assets. If the fixed income investments are yielding less due to low interest rates, than the insurers earn less on their money and have less to credit in dividends. If dividends remain low, whole life policy owners may have to pay into their insurance contracts for longer they initially anticipated. The dividend may not be large enough to have the policy “paid-up.”
Lower interest rates can mean lower dividends for policyowners. This is because insurers invest policy premiums largely in conservative fixed income assets. If the fixed income investments are yielding less due to low interest rates, than the insurers earn less on their money and have less to credit in dividends. If dividends remain low, whole life policy owners may have to pay into their insurance contracts for longer they initially anticipated. The dividend may not be large enough to have the policy “paid-up.”
Lower interest rates are not good for policy loans - Whole life insurance policyowners can borrow from their cash value while they are alive. The insurance company charges interest on the loan. This used to be less of an issue because loan rates were low and dividends were high. However, since insurance companies are earning less on their bond portfolios, they are looking for alternative sources of income. Some insurers are raising the loan rates they charge policyowners. Recently one large insurance company boosted their loan borrowing rate from 3.5% to 5%. For policyowners with an outstanding loan on their contract, this is an additional cost that will detract from the performance of the cash value. Again, this may translate into paying for longer than initially anticipated.
Your goals may have changed - Take an example of a 60-year-old policyholder who no longer needed the whole life insurance death benefit protection. His kids were older, and the mortgage was paid off. Instead, retirement income and long-term care insurance were higher priorities. We asked the insurance company for a quote on his existing whole life policy. To no surprise, they projected he needed to contribute more premium. The dividend was not high enough to put the policy in paid-up status. The time was right to evaluate other options.
What to do instead - A good start is requesting an in-force illustration from the existing carrier. An in-force illustration projects the cash value and death benefit values. It also shows how much longer you may need to fund the policy. I usually stress test the in-force illustration by running a dividend rate lower than the current dividend. If the policy needs several more premium payments to reach the “paid-up” status, then you want to evaluate whether it still makes sense to fund. It may be time to look at other options.
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