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Understanding the Value of Dividends
December 14, 2015
If you own a life insurance contract or are considering purchasing one, you’ll want to understand what dividends are all about. Life insurance can be “participating” or “nonparticipating.” Participating life insurance contracts are eligible to receive dividend payments. Nonparticipating contracts do not pay dividends.
A dividend is money paid to the owners of eligible insurance products. When you receive dividends – also referred to as surplus refunds or a return of premium – you are receiving a share of a company’s divisible surplus. Not all of a company’s surplus gets distributed. Generally, the company’s board of directors or trustees determines how much of the surplus is to be distributed and how much of it is to be retained for ongoing business purposes.
While traditional whole life insurance contracts usually credit dividends, most term, universal life and variable universal life products typically do not.
How dividends are determined
Dividends may be declared annually. Although they are never guaranteed, dividends may become payable when actual results are better than assumed results.
Think of it this way for traditional whole life insurance:
- The contract owners paid premiums based on the results that the company assumed.
- If the actual results are better than the assumed results, the company returns a portion of this excess to the contract owners in the same proportion that they contributed to it.
Factors that affect dividends
A company’s ability to pay dividends is a result of using solid business fundamentals, such as rigorous expense management, strong investment practices and careful underwriting of new business.
Each year there are some key factors used to calculate the potential distribution of dividends. They include:
- Favorable claims experience (or mortality savings), which result when the amount paid out in actual death claims is less than what was expected when premiums were determined.
- Favorable investment results, which can occur when a company’s investment returns exceed the guaranteed interest rate required to meet its obligations to contract owners.
- Expense savings, which can occur when the cost of doing business is less than expected. The outcome contributes to surplus.
The dividend difference
Dividends can be an important part of the overall value of life insurance. A discussion
with your financial professional can help you decide if purchasing a participating
life insurance contract is right for you.
Read more about Thrivent Financial's $312 million dividend payout for 2016 >
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