How Dividends in Whole Life Policies Are Calculated
Dividends in participating whole life insurance policies are not guaranteed, but rather reflect the insurance company’s financial performance. They are typically determined by a complex formula that considers three main factors:
- Investment Performance: A significant portion of the dividend comes from the insurer’s investment returns on its general account assets, which include the premiums paid by policyholders. If the company’s investments perform better than projected, there will be more surplus to distribute.
- Mortality Experience: This refers to how many policyholders die during a given period compared to what the insurer expected. If fewer policyholders die than anticipated, the company has a surplus from lower-than-projected death benefit payouts, which can contribute to dividends.
- Expense Management: The efficiency with which the insurance company manages its operating expenses also plays a role. If expenses are lower than projected, more funds are available for distribution as dividends.
The actual calculation involves the board of directors of the insurance company declaring a dividend scale, which outlines how the surplus will be distributed to policyholders. While the specific formula is proprietary to each insurer, it generally involves comparing actual experience (investments, mortality, expenses) to the assumptions used when pricing the policy. Any favorable deviation from these assumptions creates a surplus, a portion of which is then returned to participating policyholders as dividends.
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