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.

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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.

Table of contentsRecapping the 7702 Whole Life Insurance Dividends UpdateGuarantees Have Gone Down... What Does This Mean?Gross vs. Net How Interest Rates Really Work7702 Whole Life Insurance Dividend UpdatesIllustrations are Not ContractsIs 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...