Insurance Dividends: A Look Back at the 2008 Market Crash
During the 2008 stock market crash, mutual insurance companies outperformed many other financial institutions. This was attributed to several factors:
Conservative Investment Strategies: Mutual insurance companies typically embrace more conservative investment strategies than financial institutions. They prioritize long-term stability and security over short-term gains, which enables them to weather the storms of the stock market crash.
Diversification: Mutual insurance companies typically maintain a diversified investment portfolio that includes bonds, real estate, and various assets alongside stocks. This strategy has effectively mitigated the impact of stock market crashes on their overall financial health.
Policyholder-Centric Focus: Mutual insurance companies are owned by their policyholders rather than external shareholders. This ownership structure means they do not face the same pressure to maximize short-term profits, allowing them to focus on providing consistent value and service to their policyholders, even amid market volatility
While mutual insurance companies were not wholly immune to the effects of the 2008 stock market crash, their conservative investment strategies, diversification, and focus on policyholders enabled them to navigate the crisis more effectively than many other financial institutions.
Dividend-Paying Insurance Companies: Dividend Interest Rate (DIR)
Are whole life insurance dividends guaranteed? No, but many mutual companies have paid yearly dividends for over 150 years, even during significant financial downturns.
1861 – 1865: The Civil War
1914 – 1919: World War I
1918 – 1919 Spanish Influenza Epidemic
1929 – 1939: Great Depression
1939 – 1945: World War II
1980 – 1989: Savings and Loan Crisis
2001 – 2002: Dot Com Crash
2007 – 2009: Subprime Mortgage Crisis and Great Recession
2019 – 2023: COVID-19 Pandemic
Why “Participating” Life Insurance Dividends
Dividend-paying mutual insurance companies are distinctively structured to provide insurance coverage to policyholders who also own these mutual entities. Typically, these companies generate profits from their insurance operations and distribute some of those profits as dividends to their policyholders. This benefit can be appealing, as it allows policyholders to earn additional income alongside their insurance coverage.
Moreover, being owned by policyholders often encourages these companies to prioritize delivering quality service and returning value to their customers rather than maximizing profits for external shareholders.
Whole life insurance that pays dividends is also known as “participating life insurance” or a “participating policy contract.” This means that policy owners “participate” in sharing the insurance company's profits. Unlike non-participating policies, dividend-paying whole life insurance allows policyholders to share in the insurer's surplus, enabling them to benefit from the company's performance. Dividends from participating life insurance policies are generally not subject to income tax, as they are considered a return of premium.
How Do Dividends from a Life Insurance Company Differ from Other Dividends?
The term “dividend” often causes confusion because it is most commonly associated with public companies distributing stock dividends. If you own shares in a public company that pays dividends, you may receive a quarterly payment from the company. Stock dividends can also take the form of additional shares instead of cash. Dividends represent corporate earnings and are determined by a company’s board of directors.
Life insurance dividends also represent earnings. However, mutual life insurance companies must, by law, share all profits with participating policyholders. They distribute profits exceeding those reserved for legacy benefits and operating expenses back to policyholders as dividends.
Dividends are paid and reinvested into the policy as paid-up additions. In that case, they become part of the guaranteed cash value, establishing a new, higher basis or floor that enhances future gains—guaranteed gains and dividend payouts. The cash value can never decrease and is guaranteed to grow by at least a minimum amount. Consequently, you cannot lose reinvested dividends if the stock market declines. Moreover, any dividends paid and reinvested ensure that your future cash value gains and dividend payouts are increased!
Consider this in relation to a stock dividend: When you reinvest your dividends and the stock price declines, you have effectively “lost” your dividend. Alternatively, you must wait for the stock price to rise again to recover it. Although you can receive stock dividends in cash, you wouldn’t lose them; you may have to pay taxes.
How to Weather the Storm: Diversification
Balancing the diversification of your current and future assets with participating life insurance coverage is a smart strategy that offers comprehensive protection, flexibility, and financial security. Combining various policies can effectively reduce equity market risks and ensure guaranteed growth to achieve your financial goals.