Whole life insurance is considered the “most expensive” life insurance you can purchase – at least initially.
The policy provides significant guarantees. If the premium is paid in full each year, the policy is guaranteed to endow (cash value equal to death benefit) at maturity.
The higher initial premium (based on policy guarantees) is offset by dividends paid when the very conservative assumptions for mortality and operating expenses, as well as investment returns, are surpassed. One of the drivers behind dividends is the dividend interest rate (DIR), the investment component. The DIR is declared annually by the carrier and is based on the rate of return generated from their investments.
The investment portfolio of whole life cash value is invested in high quality fixed instruments. Over the last two decades, those rates have dropped. In the last decade, they have dropped dramatically. This has affected the DIR for carriers – most have seen corresponding drops.
The DIR will generally track the benchmark of a portfolio of long term bonds like Moody’s Aaa Long-Term Corporate Bond Yield Average. As shown in the chart that follows, the whole life dividends for 14 top whole life carriers over the last 20 years generally follow the Moody’s Aaa Bond Average, with the DIRs tracking slightly above.
It should be noted the Moody’s Index currently stands at its lowest point ever.
In the future, most pundits do not see a significant rise in fixed rates soon.
For those whole life policy owners, now is the time to review your policy. Although, as mentioned, the policy has significant guarantees, policy performance has been negatively affected. If a policy has not been reviewed in the last few years, one should occur as soon as possible.
Reach out to the selling agent, or if not in contact with the original agent, reach out to someone who can provide you with a non-biased review of the policy and its condition.
Policy issues do not solve themselves. They tend to increase over time.