Since 2013, we have published the only public analysis of variation in dividends for major participating whole life insurance products. This analysis is a better gauge of product dividend performance than traditional reporting that focuses on the absolute declared dividend announced by each company.
We have long argued that our analysis is superior because of the critical role variation over time plays in our approach. Rather than allowing a singular good or bad year influence perceived value, we use the rate of change in dividends over time to compare dividend actions taken across life insurers.
This is preferable because there is no standardized reporting method used in the life insurance industry for dividend scales. Mathematically we do not have a coefficient for the dividend variable, so the raw numbers reported by insurers are meaningless when compared to one another.
We can, however, use changes in the variable (whole life insurance dividend rates) to make meaningful inferences about the superiority or inferiority of one company’s dividend performance vs. another over a period of time.
The information taken from this analysis is broad, which means we can only identify large trends and not superfine explanations regarding actions taken by one company or another. This broad trend, however, is very useful for our purposes.
Why the Dividend is so Important
We use whole life insurance to build wealth. This wealth is not so much focused on the death benefit that will eventually be left to the heirs of the insured under the policy. Instead, it is focused on the buildup of cash value inside the whole life insurance policy.
All whole life policies have a set of guarantees with respect to the buildup of cash value, but this guarantee is mostly uninspiring in its purest sense. The reward of dividends paid to policyholders through the legal promise mutual insurers have is the key driver behind this strategy as one for wealth creation.
To put it another way, better dividends create more wealth through policy cash value buildup and we want to speculate on where the best dividends can be earned.
We measure the standard deviation and compound annual growth rate of seven top life insurers using their declared dividend rates over the most recent 10-year period.
We look at these two metrics for the following reasons:
We use standard deviation as a volatility marker. Has the dividend rate move sporadically over the 10 year time period, or has the company tended to hold the dividend constant?
A higher standard deviation likely indicates that the dividend has experiences sharper movements (either up or down) over the time period than a company with a lower standard deviation.
Compound Annual Growth Rate
Compound annual growth rate shows us the change in the dividend rate taking time into account. This means it shows us how much the dividend rate has tended to change year over year for the specified time period (10 years in our example).