Below are frequently asked questions regarding dividends. To view the answer, simply click on the question.
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Q. What is a policy dividend?
A. A dividend is paid by a life insurance company on an annuity or life insurance policy. Technically, a policy dividend is a return of excess premium paid on the policy. Dividends are an important part of a participating policy, and they are a way for the company to share part of its favorable results with policyholders. In general, dividends increase as the number of years that a policy is in force increase.
Q. Does the policy design impact the dividend?
A. Yes, in two ways. First, since dividends are a return of excess premium, the higher the premium for a given class of policies, the higher the dividend. Secondly, if the policy design features high guaranteed cash values, there is less margin in the premium, which leads to a relatively lower dividend. As an example, Covenant II feature relatively low premiums and high guaranteed cash values. Therefore, dividends paid on Covenant II policies may be lower than some competitor products. But even if the dividends are lower, the combination of low premiums and high guaranteed cash values may still provide better value.
Q. In what forms can a dividend be received?
A. Dividend options will vary depending on the type of policy. However, most policies allow dividends to be:
1. paid in cash;
2. used to reduce the premium due;
3. left on deposit with the insurance company to earn interest;
4. used to purchase paid-up insurance;
5. used to purchase one-year term insurance; or
6. used in some combination of the above.
Q. What is Dividend M?
A. Dividend M or the Maximum Accumulation Dividend® is unique to MTL Insurance Company. Dividend M is available when the policy includes an Flexible Paid-Up Additions Rider. It facilitates the maximum allowable accumulation of cash value in a life insurance policy. Part of the dividend is used to purchase the smallest amount of one-year term that is needed to prevent the policy from becoming a modified endowment contract (MEC). In certain situations, the dividend may not be large enough to purchase the insurance that is needed to prevent the policy from becoming a MEC.
Q. Are dividends taxable?
A. Since dividends are a return of premium, they are not taxable to the owner of the policy until the total dividends over the life of the contract exceed the total premiums paid. However, interest earnings on dividends left on deposit are taxable. In addition, dividends reduce the cost basis of a policy. If a policy is surrendered and the cash surrender value exceeds the cost basis, the excess is taxable as ordinary income.
Q. Are dividends guaranteed?
A. No, dividends are not guaranteed. The Board of Directors, in an effort to provide additional assurance to policyholders, has guaranteed a portion of dividends for the next calendar year. For example, in November the board directs that funds be put on deposit with the Northern Trust Company to pay dividends on certain polices through the following September. Since dividends depend on the actual experience of the company, it is impossible to provide any other guarantee.
Q. I purchased a life insurance policy several years ago and received a sales illustration showing projected dividends. Would these be the dividends that I actually receive?
A. It is highly unlikely that the dividends received are equal to those shown in the sales illustration. Remember, an illustration is a projection at a given point in time of what may happen in the future. Since an illustration is a form of prediction, actual results will vary from those illustrated.
Q. Why would any actual dividends differ from those shown in the illustrations?
Actual dividends reflect the experience of the company. This "experience" typically depends on the company"s results in some key areas. Three ways typically used to explain these areas are:
1. Mortality. Think of this as the cost of claims. If the company does not have to pay out as much in death claims as predicted, this can have a positive effect on dividends.
2. Investment earnings. The earnings received by the life insurance company on its assets may be higher or lower than projected. If earnings are higher, then dividends may be higher.
3. Expenses. The company's projection of what it will cost in expenses to do business is also factored in the dividend calculations. If the costs per policy are lower than projected, this can have a positive effect on dividends.
Q. If these experience factors were better than projected, should I expect higher dividends?
A. In most situations this will be the case. However, the Board of Directors makes the final decision about dividends. The Dividend Actuary of the company makes a recommendation to the Board in terms of the proposed amount of dividends to be credited to policyholders. The amount credited to each policy is based on the dividend scale that the Actuary has created. The Board of Director has a fiduciary duty to act in the best interests of all policyholders. Therefore, the Board may decide that it is prudent to pay out a greater or lesser amount of dividends.
Q. What is a dividend scale?
A. A dividend scale specifies the dividend that will be credited to each participating policy. The Dividend Actuary creates the dividend scale in order to fairly distribute the total amount of dividends approved by the Board of Directors on each class of policies.
Q. Does Mutual Trust Life Insurance Company pay dividends on all policies?
A. Most of our policies, including annuities, are participating. This means they are all eligible to receive dividends. However, we do not anticipate paying dividends on some policies, including term and universal life policies and annuities.
Q. Which policies do not receive dividends?
A. In general, term and universal life policies and annuities do not receive dividends. Term premiums and universal life cost of insurance rates are set as low as possible in order to be competitive. Annuities and universal life policies receive excess interest credits on their cash values. These products were specifically designed around these unique competitive features in lieu of dividends. Therefore, no dividends would be paid.
Q. If the board of directors of Mutual Trust Life Insurance Company approves a total pay out that is 10% higher than the previous year, will the dividends on my policy increase by 10%?
A. Your actual dividend may change by more or less than 10%. If, for example, much of this increase were due to an increase on investment earnings, then policies with high levels of cash value would benefit the most.
Q. Is the dividend on my policy changed if I take out a loan on the policy?
Yes, the dividend on your policy will normally be lower if part of the cash value has been borrowed at any time during the policy year. The factors used to determine the impact on the dividend include: the amount of the loan, loan repayments, investment earnings and the policy loan rate.
Investment earnings in excess of those guaranteed in the policy are usually a major portion of the dividend. When the company is calculating this factor, it takes into account the earnings from both the portfolio of assets backing up the policy and also the earnings on money that has been loaned to the customer. The amount loaned to the customer is no longer invested in the portfolio of assets. Instead, the interest paid by the customer constitutes the earnings on the loan. Since most policies provide for a low interest rate for policy loans, this means that these earnings are lower than those on assets invested by the company. Therefore, the dividend is normally lower. Offsetting the lower dividend is the security of having the cash value available for use by the policyholder at attractive interest rates.
Q. Some companies quote their dividend interest rates. Is this an important number?
A. The dividend interest rate is important. It determines the excess interest component of the dividend. You should, however, approach this number with caution. Is this the rate before or after investment expenses or other charges? Is this rate artificially high or low because of capital gains or losses in their investment operations? Will these gains or losses continue? It is difficult to compare the dividend interest rate from one company to another without a clear definition of what each company means.
Q. How well do Mutual Trust Life Insurance Company's dividends compare?
A. It can be misleading to just compare one company's dividends to another. Product design will greatly influence the size and growth of dividends. However, a core Mutual Trust goal is to provide superior value to policyholders. We do track the performance of some of our policies, including items like dividends, versus other companies. These studies have indicated that we are meeting our objective of providing superior value.