Dividends

[David C]

Other than the obvious what is the reason that some companies like Northwestern Mutual reduce dividend payments on policies with loans?

 

[djs]

Okay, I'll bite. Other than the obvious, how much more do they reduce it? Is it reduced dividend payments, or extra charges?

 

[David C]

They reduce the dividends credited to policies with loans. Why? It's a loan, paid back with interest I assume, so why the reduced dividend?

 

[JMO Fan]

The lower dividends presume the company could earn more money if it could invest the loaned cash.

 

[LGilmore]

Do you mean using the dividends to reduce the loan? They cannot "reduce" dividends for one individual over another, that's not how they work. So what do you mean? A change in the dividend election? from pua, to loan reduction? or dividends as cash?

If it's a loan reduction, that's just a way to reduce the loan internally...

Are you familiar with a dividend paying policy?

 

[CHUMPS FROM OXFORD]

The dividend scale of a life policy is not affected by the existence (or non-existence) of a loan. However, many years ago, this was not the case.

As an example, if two identical policies were issued in 1997, and one owner takes out a large loan...both of their dividends will be identical.

 

[James]

Policy Loans

You may borrow from the cash value of the policy. Loans may be taken at a fixed 8% interest rate, or a variable loan rate determined annually. The amount borrowed from the cash value affects the amount of dividends you will receive. Any unpaid loans, along with accumulated interest, will be deducted from the proceeds at death or if the policy is surrendered prior to death. Within contractual limitations, there is a maximum value that can be borrowed that is less than the total cash value of the policy.

http://www.nmfn.com/tn/insprods--life_select100_pg

This is what I'm thinking he is asking about, don't have a specimen contract for this specific WL from NM, but all the brochures of there WL policies reads the same. I would have to see an actual contract language, this is only saying there is an affect, likely a 8% loan will wipe out the average dividend yield, a real loan interest of 0 to 2%.

 

[CHUMPS FROM OXFORD]

"affects the amount of dividends you will receive"

I believe they are referring to past dividends that have accumulated and not the impact on future dividend projections.

 

[David C]

All I know is that I've been told some companies, (NM) being one of them, pay less dividends on policies that have loans. I know it happens, I know what it's called - it's called Direct Recognition, I was wondering what the company's reason is for doing this. I think JMO Fan is probably correct.

Don't know about other companies but I know that Ohio National and NYL do not use Direct Recognition.

LGilmore-I am.

 

[David C]

FYI Use the link James provided, go to upper right corner, type in direct recognition in the search bar. Click the first link they show, second paragraph.