Episode 88 of the LIFE Pod is up. MassMutual announced a 6.6% dividend interest rate this year. Guardian raised theirs to 6.25%. Carlo Viqueira and I spent the episode on one question: is that the return you'll see if you own the policy?
No. The announced number is a gross dividend rate. Expenses come out of it before anything reaches your cash value. How much comes out varies by carrier, and on the good carriers with a well-designed policy it runs somewhere between 0.7 and 1.3 points. So a 6.6% declared rate with an optimized design lands you an internal rate of return in the 5.3% to 5.9% range at best. You're paying for insurance inside that policy, and that cost never goes to zero.
Carlo's point on illustrations is a fair one. People in this business like to say you can't match an IUL illustration. A whole life illustration doesn't match real results either. You might beat it a little, you might come in a little under. It'll usually land close, but it isn't a promise. The assumption baked into almost every whole life illustration is that today's dividend rate continues forever. You can stress test it by dialing the rate down, and that's still a guess. Where the illustration is useful is comparing how different carriers project their expenses out over time, because they're all working from the same kind of assumptions.
Design decides how close you get to the declared number. Two people can buy from the same carrier in the same year and experience very different rates, and the gap is widest in the early years, when the policy hasn't hit break-even yet. That's why the internal rate of return on whole life is negative for the first few years. Sticker shock is real when somebody saw 6.6% and then watches what actually gets credited.
The dividend column on the illustration confuses people for a different reason. That number is the surplus dividend, meaning the amount above the guaranteed rate, and the guaranteed rate on most whole life sits between 2% and 4%. So a policy with a 2% guarantee will show bigger dividends than a policy with a 3% guarantee at the same declared rate, even though the two are getting credited almost the same total if the death benefit and expenses match. It's the same money, labeled differently.
Which leads to the mistake we hear most often. The guaranteed rate is a subset of the gross dividend rate. It isn't added to it. There are people online claiming a policy with a 4% guarantee and a 6.6% dividend rate is earning 10.4%. That is not happening in anybody's policy.
Ask for the internal rate of return report. Most carriers can print one. Some won't, and Carlo's read on why is that a carrier with high expenses doesn't want the flashy declared rate sitting next to the real one. I've got one carrier in mind that won't give us an IRR report at all. Run a max blended design with them and the early cash growth looks strong. Thirty or forty years out, the IRR is in the low 3s against a 6% declared rate. It took me a while to figure out why: they don't credit any surplus dividend on the paid-up additions, and paid-up additions are most of what goes into a high cash value design. That's why the list of carriers either of us will put a client with is short.
Two more things that move the rate you experience. Direct recognition carriers can adjust your dividend down when you take a policy loan, so how you borrow affects what you're credited. And a few whole life products now offer an index option in place of the declared dividend. Carlo would rather keep whole life as the guaranteed base and take index exposure on the IUL side, and I'm with him on that.
Dividends are not guaranteed, and an illustration is a projection. I'm a licensed insurance broker, not a CPA or an attorney, so treat this as education rather than a recommendation on any specific policy.
Next week Carlo and I talk about assets that don't move with the stock market, and why holding one changes how you can use the rest of your money.