7702 Whole Life Insurance Dividends Update (2021) Part 2
Are you considering whole life insurance, but want to know more about the new products the life insurance companies have released in response to the 7702 changes in 2021? How a whole life dividend rate is computed? Is cash value life insurance improving? Well, the new products are finally here! Let’s dive into the 7702 whole life insurance dividends update discussion.
What does the 7702 tax code mean for whole life insurance dividends? Tune in now to get the need-to-know information so you can see what to expect for new Infinite Banking policies.
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Table of contents
- Recapping the 7702 Whole Life Insurance Dividends Update
- Guarantees Have Gone Down… What Does This Mean?
- How Interest Rates Really Work
- Illustrations are Not Contracts
- Is Death Benefit More Expensive Now?
- Is it Too Late to Have a Policy Without The Changes?
- How Does Convertible Term Work with the New Changes?
- Book A Strategy Call
Recapping the 7702 Whole Life Insurance Dividends Update
In our previous blog post(7702 Whole Life Insurance Updates), we discussed some of the changes to life insurance products because of the updated 7702 tax code. Naturally, this raised some questions that we want to personally address. This is a new thing for us all, and it’s important to have a good understanding of it going forward.
These new products are great for the death benefit, which is really the insurance portion of your insurance. The death benefit is what protects your future income, and can help your family members in the event of a loss. Yet, we’re rightfully getting a lot of questions about what this means for cash value.
Guarantees Have Gone Down… What Does This Mean?
Most of the new life insurance products have lowered their guaranteed cash value increase, yet what does this really mean? Is this a good thing, or a bad thing? We think it all depends on your point of view.
The obvious concern is that if the guaranteed interest rate is lower, that means that cash value build-up is going to be much slower, right? Fortunately, this isn’t quite true. A life insurance company’s first responsibility is to meet contractual obligations. This means delivering all death benefits, paying out profits, etc.
In a low interest rate environment, especially during a long-term one, this can be detrimental. By lowering the guarantee, insurance companies can continue to fulfill their role with confidence, and without needing to take more drastic measures, like demutualizing.
Gross vs. Net
It’s also important to know that guarantees are Gross—this means that they are projected before fees and other costs of the policies. So a guaranteed rate, no matter what the number is, is likely to be lower than you think it is. Does this make it bad? No, this makes it realistic.
Fortunately, there are a number of other ways your policy can grow, including the profits the company makes, in the form of a dividend. If you didn’t know, the guaranteed interest rate is actually a portion of the total declared dividend. So what the companies are doing is actually changing the structure of the declared dividend, and making a lower portion of the full declaration guaranteed.
In other words, if they’re making a reduction in the guaranteed interest rate growth of your policy, that does not necessarily mean that they’re reducing the declared dividend rate. What the insurance company is doing is reducing the guaranteed portion of the total declared dividend. This may have very little impact on what you actually make in growth each year.
How Interest Rates Really Work
If you’re thinking that a 1% increase or decrease doesn’t matter all that much, here’s some food for thought. When interest rates go down, bond values tend to go up. This happened in the 80s and 90s, and we’re likely to see it again.
And even a 1% increase can make a large impact on bond rates. For example, say the bond rate increased from 2% to 3%, as a result of dropping interest rates. That’s not a 1% increase, that’s a 1% spread. The increase is 50% because you have increased the rate by half of its original value.
7702 Whole Life Insurance Dividend Updates
That’s some powerful math, and might help you better contextualize the power of how interest rates impact bonds. Insurance companies are primarily invested in investment grade corporate bonds. This also shows how bonds directly feed into the dividends of policy owners.
Illustrations are Not Contracts
Another point of confusion for many people is in life insurance illustrations themselves. It is important to understand that illustrations as snapshots in time, not contracts. That’s because each time you run a new illustration of your policy, you’re seeing the future projections based on current dividend rates.
All of your history is cemented, but your future is still able to change. And as soon as you receive a new dividend, your illustration becomes outdated. This happens because instead of guessing what you might receive, now you know for certain, which changes all future projections.
The declared dividend rate can also change once per year. So even if you received exactly what the illustration projected in one year, your illustration would still change the next time a dividend is declared.
In the example we show during the podcast, the actual returns of a particular policy were 29% greater than what the illustration projected. This happens because dividends can change each year, and profits are hard to predict. Yet time and time again, policies perform better than projected.
Is Death Benefit More Expensive Now?
One of our viewers raised an important point about new whole life insurance policies: you can now put in more cash value for the same death benefit. Depending on your goals, this can be a negative. For example, insuring up to your full Human Life Value may become more difficult.
This could mean you need term insurance, or convertible term insurance, to have your full death benefit.
Is it Too Late to Have a Policy Without The Changes?
All insurance companies must offer these new policies by January, and many of them have already made the switch. There is a lot of noise on the internet using fear to push sales before the end of the year. I am personally applying for a new policy using the newer product when I could have gone with the current products.
For all intents and purposes not too much is changing. The biggest difference will be early cash value build-up and death benefit. But premiums build cash value, so don’t shy away from higher premiums.
Working with a trusted advisor can help you design a policy that meets your needs. These changes ultimately reflect the strength of the life insurance industry and ensure that these companies can continue to serve you.
How Does Convertible Term Work with the New Changes?
A listener asked, “If you already have a convertible term policy when converting portions of that policy into whole life must it convert to the new product, or would someone be grandfathered into the old?”
Unfortunately, it’s not possible to be grandfathered into the old. Your convertible term insurance is just term insurance until you choose to covert it. When you do convert it, you enter into a new contract. The actuaries who calculate these things cannot possibly calculate the old pricing with your future age, at an unknown amount. All convertible term insurance is converted into products that the life insurance company has at that given time.
Book A Strategy Call
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