What to do when your whole life dividend scale is lowered

If your latest statement shows a smaller dividend than the illustration you were given, your insurer has probably lowered its dividend scale. That is not a default, a breach or a sign that the policy is failing. It is the non-guaranteed part of a participating contract behaving the way the contract says it may. What matters is the size of the change, how you have set the policy up to use dividends, and whether anything about your plan has to change as a result.

This playbook walks through the steps in order. Use it with your own statement, your policy contract and the illustration from the day you bought. The numbers in the examples are invented round figures, not any company's scale.

Step 1: Confirm that the scale changed

A smaller dividend does not always mean a lower scale. Before you worry, check three other explanations.

1. The illustration was a projection for a specific year. A dividend in year 12 of an illustration is the insurer's estimate, made years ago, using the scale in effect on the day of the sale. If the scale has not changed since, but your actual year-12 dividend is smaller, something else is going on, such as a loan or a change in option.
2. A policy loan. Some insurers calculate dividends differently on borrowed value, and the difference can be large. These are called direct and non-direct recognition methods, and direct and non-direct recognition loans: how borrowing affects dividends explains how each behaves. If you borrowed, ask the insurer whether the loan changed the dividend.
3. A change you made. Adding or lowering a rider, reducing the face amount, or switching a dividend option can alter what shows up on the statement.

If the scale truly changed, the insurer should have told you. Most companies send an annual notice, a letter with the statement, or a line in the statement itself that states the new dividend interest rate or the new scale. Look for words such as "dividend scale," "scale interest rate," "dividend interest rate" or "dividends are not guaranteed." If you cannot find a notice, call the insurer's policy service line and ask: "Was the dividend scale changed for my product and issue year, and when?"

Step 2: Read the notice for what actually changed

A dividend comes from three sources: investment results above the rate assumed in the guarantees, mortality results better than assumed, and expense results better than assumed. When an insurer lowers its scale, the most common reason is lower investment earnings, but the notice may not itemize. Do not expect a detailed explanation, and do not read too much into a general phrase. What you want from the notice is:

• The effective date of the change, since a change effective next January does not affect this year's dividend.
• Whether the change applies to all policies or to a specific product, issue year or class.
• A new dividend interest rate, if the company states one, and what the old one was. A dividend interest rate is one input to the formula, not the return on your premiums, as explained in whole life dividends: how participating policies pay.

Write down the old figure and the new one. A change from, say, 6.00 percent to 5.75 percent is small. A change from 6.00 percent to 5.00 percent is large. These are invented examples for scale only.

Step 3: Separate the guaranteed from the non-guaranteed columns

The first calculation in the whole process is the one that reassures most owners. Open your original illustration and your current statement. The illustration has two sets of numbers.

• Guaranteed values. These come from the contract: the guaranteed cash value, the guaranteed death benefit and the premium. A lowered dividend scale does not touch them. See guaranteed values.
• Non-guaranteed elements. The dividend and everything built from it, including paid-up additions and the projected cash value, belong here. See non-guaranteed elements.

If your plan could survive on the guaranteed column alone, the lowered scale is an annoyance. If your plan depends on the projected column, it is a problem to solve. Everything that follows is about finding which situation you are in.

Step 4: Ask for an in-force illustration

An in-force illustration re-runs your policy from where it is today, using actual values to date and the current scale going forward. Ask the insurer or your agent for three versions:

1. At the current scale.
2. At a scale one percentage point lower on the dividend interest rate.
3. At the guaranteed values only.

The how to request and read an in-force illustration guide describes how to request one and what to look for. Compare these runs with the original sale illustration. Focus on three questions: what is the projected cash value at ages 65 and 75, when does the projected premium offset (if you use one) begin or end, and what is the projected death benefit?

Step 5: Test the effect on a premium offset

If you use dividends to pay part of the premium, the lowered scale hits your cash flow directly, so test it first.

Say the annual premium is $4,000. The illustration expected a $1,800 dividend in this year, and you applied it to the premium. You expected to pay $2,200 out of pocket ($4,000 minus $1,800). The statement shows a dividend of $1,500 instead, so you pay $2,500 ($4,000 minus $1,500). That is $300 more, or about 14 percent more out of pocket ($300 divided by $2,200).

If the lower scale continues, the shortfall repeats every year, and it can grow because dividends are usually projected to rise as the policy ages. If the original illustration showed a $2,500 dividend in year 15 and the new scale produces $2,050, the out-of-pocket premium that year would be $1,950 instead of $1,500, and the difference of $450 keeps growing.

The practical answer is almost never to stop the offset altogether. It is to know what your out-of-pocket premium will be, to budget for the higher figure and to check that the contract does not require you to pay a minimum amount. A mistake that turns a lowered scale into a surprise bill is covered in paying whole life premiums with dividends: mistakes that bring bills back.

Step 6: Test the effect on paid-up additions

If you apply dividends to paid-up additions, a lowered scale means each year's purchase is smaller and later dividends are calculated on a smaller base. The additions you already own stay in force and keep their guarantees.

Using the same invented figures, a $1,800 dividend that becomes $1,500 buys about 17 percent less in additions that year ($300 divided by $1,800). Over ten years at a constant $300 shortfall, that is $3,000 less going into additions, before any compounding. The compounding effect on projected values can be larger than that straight sum suggests, which is why you should rely on the in-force illustration rather than doing the math in your head. For how additions work, see paid-up additions riders explained.

The takeaway: if your goal is a certain death benefit or cash value at a certain age, the lowered scale may push it out by several years or reduce it by a percentage. Ask the illustration to show it, then decide whether the new number still meets the goal.

Step 7: Check what a policy loan is doing

If you have borrowed against the policy, a lowered scale can interact with the loan in two ways. The first is the dividend itself: some policies credit lower dividends on the borrowed part. The second is the loan interest: it keeps accruing whether or not dividends fall. The risk is not the lowered scale by itself but a loan balance growing faster than the cash value supporting it. See policy loan for the mechanics and rescuing a permanent policy when the loan outgrows the cash value for what to do when a loan gets ahead of the value.

Ask the insurer for the current loan balance, the loan interest rate and the loan's share of the cash value. A loan of $20,000 on $60,000 of cash value is a third. If that fraction has been creeping up, the lowered scale is a reason to start repaying or to stop borrowing.

A worked case: one household, three readings

Say Tomas and Elena, both 52, own a participating policy with a $5,000 annual premium. Their original illustration showed a year-10 dividend of $2,000 and a projected cash value of $48,000 at the end of year 10. They use dividends for paid-up additions and have never borrowed. This year's statement shows a dividend of $1,700 and a new notice that mentions a lower dividend interest rate. The figures are invented.

They request three in-force runs and put the results side by side.

The dividend gap in year 10 is $300 ($2,000 minus $1,700), and the projected year-20 value is $10,000 lower under the current scale ($118,000 minus $108,000). Under the stress case it is $19,000 lower than the original ($118,000 minus $99,000). The guaranteed cash value in the contract has not moved at all.

Tomas and Elena planned to use this cash value as one source of income when Tomas retires at 65, which is year 13. They compare the $108,000 and $99,000 figures with what they had counted on. Since their retirement budget had a cushion, the difference changes their plan only modestly: they decide to withdraw a little less from the policy in the early years of retirement and to review the scale again each autumn. Had the policy been the only source of a planned monthly payment, the same numbers would have called for a bigger adjustment.

The case is not typical in its details, but the method is: read three columns, translate the difference into dollars at the age the money matters, and decide only after seeing that translation.

What not to do in the first week

A lowered scale tends to trigger quick reactions. Several of them are worth resisting until the numbers are in hand.

• Do not stop paying premiums. A missed premium starts the grace period, commonly about 30 days, after which the policy lapses or the insurer applies a nonforfeiture option or an automatic premium loan, depending on the contract. Stopping is a decision with its own consequences, not a way to protest.
• Do not surrender on the first notice. Early and middle years carry the heaviest cost of surrendering, and a taxable gain can appear if the cash value exceeds what you paid in. See surrendering a life insurance policy: what you get and what it costs.
• Do not accept a replacement pitch that begins with the lowered scale. A new policy shown with an optimistic illustration can look better on paper because it has not yet had its own scale lowered. Ask for the guaranteed column of the new policy beside the guaranteed column of the old one.
• Do not assume the change is permanent. Scales can rise again. Equally, do not assume they will.

Step 8: Decide whether anything changes

By this point you should have a clear comparison of what the original plan showed and what the new numbers show. The decision usually falls into one of four buckets.

Most owners end up in the first or second row. The fourth row is rare and should be approached slowly. Surrendering or replacing a long-held policy has costs and tax consequences that a lowered scale alone seldom justifies, and a replacement restarts the high early costs of a new policy. Tools such as the keep, surrender or sell your policy? help frame the choice, but a fee-only planner or tax professional is the right person for specifics.

Step 9: Put a watch on the next scale

Scales are reviewed each year, and they can go up as well as down. After a lowering, set a reminder for the same month next year, and each time:

1. Pull the new notice.
2. Record the dividend interest rate and the actual dividend.
3. Compare it with your last in-force illustration.
4. Note any change in loan balance.

Three or four years of notes tell you more than a single year does. It is also worth noting how the insurer has behaved over time. The company-level history of dividend payments is a record, not a promise, and no insurer has to keep a scale. The agent who sold you the policy may have shown the illustration under the then-current scale. If you feel the sale did not explain this risk, the state insurance department is where to ask about the rules for illustrations and disclosure, and how to read a life insurance illustration explains which columns should have carried the warning.

Questions to put to the insurer

• Was the dividend scale changed for my product and issue year? On what date?
• What is the dividend interest rate now, and what was it a year ago?
• Does my loan change the dividend, and how?
• What is my projected out-of-pocket premium for the next five years under the current scale and under a lower scale?
• What guaranteed cash value and death benefit does the contract provide if I stop paying today?

Key takeaways

• A lowered dividend scale changes only the non-guaranteed part of a participating policy; the guaranteed cash value and death benefit stay as the contract states.
• Before assuming the scale changed, rule out loans, option changes and the fact that an illustration is only a projection.
• Run an in-force illustration at the current scale, at a lower scale and at guaranteed values only, then compare each with the plan you made at purchase.
• A premium offset is the use most exposed to a lowered scale: in our example a $300 drop meant 14 percent more out of pocket, and the gap can widen as the policy ages.
• Most owners should adjust their budget or expectations rather than leave the policy; replacement or surrender deserves a fee-only planner or tax professional first.