What is a dividend? The simple answer is that it’s a return of premium. The Internal Revenue Code defines a dividend as the return of that portion of the premium that was not used to guarantee the cash values and death benefit of the policy. Therefore, generally speaking, the higher the policy’s premium the greater the annual dividend. But there are other factors that determine the size of the annual dividend.
1) Interest Earned – The company invests the pool of funds across a variety of conservative financial products. They mainly invest in a diverse group of bonds. The interest that these investments earn is one factor that determines the performance of the company and the available dividend.
2) Mortality Experience – The company has obligations to pay when a policyholder passes away. The amount of death benefit that gets paid out in a given year will also affect the performance of the company and the available dividend.
3) Expense Level – The company has expenses. They have the bricks and mortar, salaries, and all other operating expenses.
Factoring together the total cost and the total performance of the company will dictate the annual dividend that the company declares.
Direct Recognition companies recognize when a policy has a loan and credits a different dividend for all loan values in a policy. Typically this dividend is lower than the dividend that is authorized for a policy without any loans. This can have a significantly negative impact on cash flows and effectively punishes policyholders who need the excess to build up cash values.
Non-direct recognition companies issue the same dividend to policyholders regardless of their outstanding loans. Loan or no loan, the dividend is equal. Therefore it’s important to know which type of company your policy is with and how they will credit your dividends.
Looking for a tax-free dividend? Call or email me. (775) 781-5464 or Scott@TheBankingSecret.com
Scott Storace
