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What Are Dividends?

Dividend: 1.n. 2.a. A share of profits received by a stockholder or by a policyholder in a mutual insurance company.
The American Heritage Dictionary

That definition is fine as far as it goes, but it leaves some important questions unanswered: What are an insurance company's profits? What is a mutual insurance company, and why should you consider buying insurance from one?

First, a mutual insurance company (such as New York Life) has no stockholders, because it has no stock that can be bought and sold. It is operated for the benefit of those policyowners who own a participating insurance policy. These policyowners are contractually allowed to share or "participate" in the company's periodic distributions. In other words, they receive dividends when they are declared by the board of directors. Not coincidentally, participating policyowners in a mutual company have the right to vote for their company's board of directors.

What Are Dividends?
A mutual company reports its profits in terms of gains from operations. If, after paying expenses, claims, and other liabilities, including benefits, a mutual company accumulates more funds than it deems advisable to cover the policy reserves that are used to provide for future life insurance benefits, it has a surplus.

Following each year's operations, the company determines how much of its total surplus should be distributed to policyowners. This amount is known as "divisible surplus" and it is distributed equitably among classes of policies in the form of dividends. Dividends are payable on a participating policy's anniversary date, and are generally considered a return of premium and, therefore, do not generally create taxable income until dividends withdrawn exceed the premiums paid.

The premium rates of a mutual company are often based on conservative assumptions. This is necessary because of the long-term guarantees that are provided by insurance policies. Dividend distributions are possible because of the margins provided in the premiums as well as from the difference between actual and expected mortality experience, operating costs, and investment results.

In short, the portion of the premium determined not to have been necessary to provide coverage and benefits, to meet expenses, and to maintain the company's financial position, is returned to policyowners in the form of dividends. The attraction to the customer of a mutual company is this combination of long-term guaranteed benefits and the prospect of dividends.

There is no way to know in advance what level of dividends, if any, will actually be paid on a participating policy. Neither the payment nor amount of dividends can be guaranteed, since these depend on the company's investment, expense, and mortality experience. None of these can be predicted with unerring accuracy. Thus, a company may do well with its investments, but generate a smaller-than-expected surplus due to unanticipated mortality costs — as resulted for many companies, for example, from the influenza epidemic of 1917-1918. Or investment results can suffer due to lower available interest rates or economic downturns.

While you can't predict a company's future dividends, you can take a close look at its past performance, comparing illustrated dividends versus those actually paid. You can also judge a company's investment philosophy by looking at the distribution of assets in its investment grade and non-investment grade securities. Also, independent rating companies such as A.M. Best, Moody's, Standard & Poor's, and Fitch rate companies on financial strength and stability and claims-paying ability. As a consumer, these are your best guides to evaluate an insurer.

What Are Your Options?
How you use your dividends is up to you. For example, you can use them to enhance the value of your policy, or to help fund it, or you can simply spend them. A whole life policy from New York Life gives you these dividend options:

  • Purchase additional paid-up insurance — insurance that requires no future premium payments, already has cash value, and is itself eligible for dividends. As with the cash value of your basic policy, the cash value of paid-up insurance grows tax-deferred.
  • Purchase one-year term insurance to inexpensively increase your overall insurance protection. (Electing this option requires underwriting.)
  • Repay policy loans — use your dividends to repay loan interest, then principal, then purchase paid-up insurance with the balance, if any.
  • Reduce the premium of your basic policy with dividends.
  • Leave on deposit to compound at interest. (The interest you earn on these dividends, however, is taxable.)
  • Take your dividends in cash.

An additional option available to many policyowners is to make consistent premium payments for a number of years and then have future payments made from current and accumulated dividends. While this method of paying premiums eliminates cash outlay, it requires that a sufficient dividend balance be available. However, since dividends can increase or decrease due to a variety of factors — and since dividends, in fact, are never guaranteed — the continued viability of this premium-paying method cannot be guaranteed. If the policy experiences a dividend shortfall, you would need to resume out-of-pocket premium payments to keep your policy in force.

You can choose any one of these dividend options. Moreover, you can change your option whenever you like or as your circumstances change. A whole life policy is a very flexible financial asset, which provides a wide range of dividend options. Managing those options is key to getting the most out of your policy. Your local New York Life agent will be happy to discuss the options with you.


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This material is being provided for informational purposes only. Neither New York Life nor its agents provide legal, tax or accounting advice. Please contact your own advisers for legal, tax and accounting advice.

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