The Boom on Wall Street

…And How The Boom On Wall Street Affects Your Whole Life Insurance Dividend

The stock market has reached historic heights and the Shiller price-to-earnings for the S & P 500 is “currently 34 times compared to the median level of around 16 times.”[i]  Meanwhile, the “US market cyclically adjusted price-to-earnings ratio is the highest among the 26 countries that Barclays Bank of London monitors.”[ii]  Global consumer confidence in North America remains steady, has risen 3 points in the Asia-Pacific region, 5 points in Europe and held steady in Latin America, according to the Nielsen Global Consumer Confidence Index.[iii]  Finally, “72% of the rise in 401k balances is due to market gains over the last 12 months.”[iv]

Things seem to be humming right along for investors who hold equities, mutual funds and EFTs but what about whole life insurance dividends?  Have they performed as well for policy owners?  To understand the answer to that question we must appreciate how dividends are derived and distributed to participating whole life insurance owners.

Mutual life insurance companies have been doing business in the US since 1752.[v] And according to A.M. Best, mutual life insurance companies in the United States have the Best Capital Adequacy Ratio (BCAR) because they “maintain a solid level of capitalization as reflected by more than 75% of all the rated companies.”[vi]

Mutual insurance companies, when compared to stock held insurance companies, are like marathon runners compared to sprinters. Mutual companies are always considering the long-term outcome and are not as concerned with the short-term fluctuations that occur in the market.

In light of this fact, mutual companies tend to have conservative investment portfolios with little, if any, exposure to the volatility of the market.  In other words, large short-term profit margins have never been the priority of mutual insurers.  Mutual insurers are significantly more dedicated to the stability and sustainability of their portfolio, which is very similar to Jeff Bezos’ model for Amazon.com.  Slow and steady has proved to win the race for them and their policyholders.

Historically, mutual insurance companies have shown remarkable financial stability allowing them to maintain their focus on policyholders rather than shareholders.  And it is because of this remarkable objective that mutual insurers have “outperformed the rest of the industry when it comes to retention and customer satisfaction.”[vii]

Using secure, low-risk time proven portfolio management has allowed mutual life insurance companies to earn the trust and respect of their policyholders.  And this respect retains policyholders who realize that over time the dividends paid to them is comparable to the returns they could have earned in more risk-prone investments, but without all the anxiety and worries which come with having to deal with market volatility.

Of course, while other investors face the anxieties and worries that come with assuming greater risk, mutual whole life insurance policy owners also have the assurance of owning a death benefit that will protect their assets and cover their liabilities should their life be cut short. This is not something other investors are assured of without taking profits away from their investment(s) to purchase term or non-dividend paying life insurance.

Obviously, a stock held life insurance company is more interested in satisfying its shareholders than it is in making sure they placate their policyholders.  And for this reason, they typically don’t share any of their profits with policyholders.  Paying dividends to whole life insurance policy owners therefore, is almost exclusively a mutual life insurance company phenomenon.

The dividend, which is the profit above and beyond the cost of paying all claims, expenses and commissions, is shared with participating whole life insurance owners.  Furthermore, the IRS classifies this dividend payment as a ‘return of premium’ and therefore it is not taxable as long as the dividend is used to add more death benefit to the base life insurance policy from which the dividend originated.

Long-term analysis proves that this re-capitalization of dividends in a participating whole life insurance policy can boost the tax equivalent compound annual growth rate in the policy past the actual returns retained when trading the S & P 500.[viii] But, according to Vanguard, there is now a “70% chance the US stock market will correct this year.  This is 30% higher than what has been typical over the last 6 decades.”[ix]   And this brings us full circle as to what is happening today with the market rally and your participating whole life insurance dividends.

4. Will this market rally? And how long will it rally? These are both questions to which nobody knows the answer.
5. Yes, the earnings ratio for the S & P 500 is 34 times, but still “earnings per share are only 6% above their peak 10 years ago.”[x]
6. Accounting for inflation (1.57%,) [xi] real earnings are even lower than the above.
7. When, not if, the next market correction occurs, what will be left of the gains this bull market produced?

And that is why participating whole life insurance dividends are so valuable.  Dividends paid on participating whole life insurance, are not subject to retracing like earnings or dividends gained in the market.

If you are in the market, you have to either pull out to avoid losses or you have to have a strong constitution to sit and watch correction(s) erode your “profits”.

With participating whole life insurance, there is no erosion of profits when a market correction occurs because of the strong focus on long-term returns that the mutual life insurance portfolio managers have maintained for centuries. And because of this steady and sustainable management you don’t have to earn back 11% on a 10% correction, or 100% on a 50% correction, just to break even.  With participating whole life insurance, you can count on the dividends that you earned to be there for you in the future, guaranteed!  The compounding effect of this phenomenon is as comforting as it is sustaining.

Recently, while doing a policy review for a prospective client, I read the comments of the agent who sold them the policy I was reviewing.  This agent said, “That is why I don’t even consider dividends, because I can show you how to make 10-30% on your money.”

Naturally, dividends are not something that can be considered guaranteed earnings until they are received but to completely disallow the benefits that dividends provide a participating whole life insurance owner, borders on insanity.  Believing such nonsense would be like imagining, “There is no value in considering the rate of return on your savings, investment portfolio or a mortgage.” Of course, there is value, otherwise saving and investing would be a useless endeavor and there would be no profit in mortgages holders charging interest.

Though high returns are being earned in the market currently, such returns are not something that can be counted on to continue.  Besides, there is no guarantee that traders won’t lose much of their gains in the coming market correction.  Therefore, it behoves us to realize that dividends earned in participating whole life insurance will remain, and not only will they remain, but they will compound over a lifetime.  And as Einstein observed, compound interest is the eighth wonder of the world.  It is always nice to have it working for you and not against you.

If you have a life insurance policy that you would like to have reviewed, or are just interested in understanding more about how participating whole life insurance can be beneficial for your overall financial health, call our office at 702-660-7000.  Offering policy reviews is just one of the services we provide to those who want to keep more of the money they earn.

[i] https://www.newsmax.com/finance/robwilliams/robert-shiller-cape-albert-edwards-donald-trump/2018/01/25/id/839410/
[ii] Ibid
[iii] http://www.nielsen.com/us/en/insights/reports/2017/q2-2017-consumer-confidence-report.html
[iv] http://fortune.com/2017/08/03/americans-record-highs-401k-balances/
[v] https://www.insurancejournal.com/magazines/mag-closingquote/2015/11/02/386441.htm
[vi] Ibid
[vii] Ibid
[viii] Ohio National Financial Services, Boost Policy Values with Additional Paid-Up Insurance
[ix] https://www.cnbc.com/2017/11/27/chance-of-us-stock-market-correction-now-at-70-percent-vanguard.html
[x] https://www.newsmax.com/finance/robwilliams/robert-shiller-cape-albert-edwards-donald-trump/2018/01/25/id/839410/
[xi] https://www.bls.gov/data/inflation_calculator.htm