Alyssa Lane
Auto insurance companies, particularly mutual insurers, offer dividends to policyholders if the sale of auto insurance has been profitable. The main factors that determine whether dividends are paid out include the number of claims made, expenses, and investment/financial performance. If an insurance company has fewer claims than anticipated, spends less than predicted, and experiences favourable investment returns, then it is more likely to pay dividends. Dividend amounts can vary from 5-20% of the annual premium and can be received as cash or put towards future premiums.
| Characteristics | Values |
|---|---|
| Type of insurance company | Mutual insurers are more likely to offer dividends to policyholders |
| Company performance | Dividends are more likely to be paid out if the company has had fewer claims, lower expenses and better investment performance |
| Policy type | The policy must be "participating", i.e. designated by the insurance company as eligible to receive dividends |
| Policyholder status | To receive a dividend, you must be a policyholder at the time the dividend is declared |
| Dividend amount | Depends on factors such as company profits, investment performance and the amount paid into the policy |
| Dividend payment options | Cash, applied to future premiums, or used to purchase additional insurance |
What You'll Learn
Dividend policies vs traditional policies
Amica Insurance offers two types of policies: dividend and traditional (non-dividend). While both types of policies offer the same coverage, a dividend policy has additional benefits.
Dividend Policies
A dividend policy returns a portion of your premium back to you, known as a dividend payment, if certain conditions are met. On average, payments are 5-20% of your annual premium. A dividend policy may cost more upfront, but you can save more in the long run. You also get to choose how you receive and use your payment: you can receive a check in the mail or apply it toward a future policy premium.
Traditional Policies
Traditional (non-dividend) policies do not return a portion of your premium back to you. They may have lower upfront costs but will not save you money in the long run.
How Dividends Are Calculated
Annual dividend calculations are based on the individual insurance policy's guaranteed cash value, the policy's annual premium amount, the company's actual mortality and expense costs, and the dividend scale interest rate. Insurance companies need to earn enough in premiums each year to cover their expenses, reserves, and contingencies, but they may choose to share a surplus with their customers.
Factors Affecting Dividends
The main factors that insurance providers that give out policyholder dividends consider are their claims, expenses, and investment/financial performance. If an insurance company has fewer claims, lower expenses, and better investment performance than expected, then policyholders have a better chance of receiving a dividend. Dividends are most common among mutual insurers, as publicly-traded insurance companies often pay dividends to their shareholders instead of policyholders.
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Annual dividend calculations
An insurance company predicts the number of claims it will have to pay in a year by looking at its claim history. If the insurer pays out fewer claims than expected, this may result in a dividend payment. Similarly, if the insurance company spends less on expenses than predicted, it could lead to a dividend being paid out.
The third major factor is investment performance. Insurance companies invest money to build up their reserves, and if these investments perform well, policyholders may receive a dividend. This performance is based on the actual investment returns compared to the guaranteed interest rates required to meet the company's contractual obligations. The investment portfolio of an insurance company typically includes bonds, stocks, and other market-based investments.
The amount of the dividend is also influenced by the individual insurance policy's guaranteed cash value, the policy's annual premium amount, the company's actual mortality and expense costs, and the dividend scale interest rate. Policyholders who have borrowed against their policies may receive reduced dividends until the loan is repaid.
Dividends can be received as cash payments or applied to future premiums to reduce overall costs. Some companies may also offer flexible dividend payment options, such as applying the dividend towards the purchase of additional insurance, known as paid-up additions (PUA), which increases the policy's value.
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Policyholder dividend eligibility
Insurance Company's Financial Performance
The primary factor influencing dividend eligibility is the financial performance of the insurance company. Policyholders may receive dividends when the company's revenues, investment returns, operating expenses, claims experience, and prevailing interest rates are favourable. Specifically, insurance companies examine their claims history, expenses, and investment performance. If the company pays out fewer claims than anticipated, spends less than predicted, and achieves favourable investment returns, policyholders have a better chance of receiving dividends.
Type of Insurance Policy
Not all insurance companies or policies offer dividends. Policyholders should ensure they have a dividend insurance policy, as some companies provide both dividend and non-dividend policy options. Additionally, the policy must be "participating," meaning it has been designated by the insurance company as eligible to receive dividends. Mutual insurance companies, where ownership lies with the policyholders, typically pay dividends when the company performs well. In contrast, non-mutual insurance companies, such as publicly traded stock companies, may offer dividends on participating policies.
Timing of Policy Ownership
To be eligible for a dividend, policyholders must own the policy when the insurance company declares the dividend. Dividends are typically paid just before the policy's renewal date. Therefore, if a policy is purchased after the dividend declaration date, the policyholder should not expect to receive a dividend for that period.
Dividend Payment Options
Policyholders who are eligible for dividends have several options for receiving their payments. They may receive a cheque or apply the dividend amount towards their future policy premium to reduce overall costs. Some companies also offer flexible dividend payment options, such as using the dividend to purchase additional insurance coverage or leaving the dividend on deposit to accumulate interest.
Factors Affecting Dividend Amount
The amount of dividend payout depends on various factors, including the profits made by the insurance company, investment performance, and the amount paid into the policy. Generally, long-standing policies with larger benefits will receive higher dividend payouts. Additionally, dividend amounts can change from year to year and are not guaranteed, as they are subject to the company's financial performance.
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Dividend payment options
Amica, for example, offers dividend and traditional (non-dividend) policies. While both types offer the same coverage, a dividend policy has the added benefit of returning a portion of the premium to the policyholder and lowering the overall policy cost. On average, dividend payments are between 5% and 20% of the annual premium. Policyholders can choose to receive a check in the mail or apply the dividend towards their future premium payments.
It is important to note that dividend policies may cost more upfront, but they can result in greater savings in the long run. Policyholders should carefully consider their options and choose the payment method that best suits their needs and financial situation.
Additionally, some insurance companies may have specific requirements or conditions that must be met to receive dividend payments. For example, policyholders may need to be enrolled in AutoPay or have their policy in effect during a specific period to qualify for a dividend. It is always a good idea to review the terms and conditions of the insurance policy to understand the dividend payment options and any associated conditions.
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Dividend interest rate
The dividend interest rate (DIR) is determined by a company's board of directors each year. It is influenced by the company's financial portfolio, which includes bonds, stocks, and other market-based investments. The DIR is used to calculate the investment component of the dividend, which is the difference between the DIR and the policy's guaranteed interest rate. For example, if the guaranteed interest rate is 3.75% and the DIR is 6.10%, then the investment component will be based on 2.35% (6.10% - 3.75%).
The DIR is calculated using a portfolio average method that reflects the earnings on all assets supporting participating permanent life insurance and participating annuity blocks. This method considers the gradual impact of changes in new money interest rates on the DIR, providing stability over time.
The overall value of dividends in a whole life insurance policy depends on the company's divisible surplus, which is the amount remaining after covering all contractual obligations, reserve requirements, operating expenses, and other business purposes. The amount of the dividend and individual dividend payouts are subject to change based on the company's performance in a given year.
When choosing an insurance company that offers dividend policies, it is essential to consider their claims history, expenses, and investment/financial performance. Additionally, policyholders should closely examine the credit rating of the insurance company to assess the sustainability of potential dividends in the future.
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Frequently asked questions
The dividend is calculated based on the company's divisible surplus, which is the amount left over after the carrier has set aside the funds required to meet all contractual obligations, particularly reserve requirements for its policies, as well as what it expects for operating expenses, contingencies, and general business purposes. The divisible surplus primarily comes from three sources: a mortality (death claims) component, an expense component, and an investment component.
The main factors that insurance providers consider when determining whether to pay dividends are their claims, expenses, and investment/financial performance. If an insurance company has fewer claims than anticipated, spends less than predicted, and has favourable investment returns, then it is more likely to pay dividends to policyholders.
The amount of the dividend will depend on the individual insurance policy's guaranteed cash value, the policy's annual premium amount, the company's actual mortality and expense costs, and the dividend scale interest rate. On average, dividend payments are between 5-20% of your annual premium.
