An Nontraditional Dividend Investment

By | October 4, 2012

Almost a year ago, I made my first dividend investment without knowing it. Okay, well I knew it was going to pay me a dividend, but I didn’t consider a dividend investment at the time. For those of you who read my other blog, you will know that I bought whole life insurance last fall. I bought a modest plan, with a $80,000 death benefit and an increasing cash value.

What is Whole Life Insurance

For those of you who don’t know what whole life insurance is, or how it differs from term life insurance it is quite simple. Instead of paying a typically lower premium for a certain amount of death benefits for a certain length of time (typically 20 or 30 years of coverage) as you would with a term life insurance plan, whole life insurance offers you a plan that last for your entire life. It doesn’t end after X amount of years, as long as you pay the premium. The permanent nature of this type of life insurance is just one of the many benefits.

There is also an integrated investment aspect to the plan. The company through whom you buy your plan will also provide a cash value aspect. This grows over time depending on the company’s return on investment. This is part of the reason that I was attracted to the whole life plan. I didn’t need a large death benefit and I would rather pay into something that is always going to be there AND has a conservative return on investment.

Many people, when they hear about whole life insurance, immediately bring up the unknown commissions. They tell me that you don’t know how much your agent is making off of you because their compensation is included in the premium and they don’t like that. What they fail to consider is that even with the fees, you can still get a steady, conservative return on your investment without considering the death benefit. One of the persuading factors was my father-in-law who purchased a similar plan 20+ years before I did. Even at one of the economy’s worst states in recent decades in 2008/2009, he still had an average return of approx. 5%. Not too bad at all.

Surprisingly Decent Dividend

As I mentioned, it was almost a year ago that I bought my plan. It was time to pay my next year’s premium and when I logged into my account, I noticed the 2012 dividend amount. Again, I knew I was getting a dividend, but I didn’t know what to expect.

For those who want to know more specifics, I am paying $600 per year for this plan. Again, while it’s more than a term life plan, it is giving me a cash value and dividend that is automatically reinvested into the plan.

My 2012 dividend is $23.05. That equates to a 3.84% dividend. The cash value is significantly larger than that as well, so that actual return is significantly higher than that. When you consider the cash value, my return for just the first year is even higher. When I originally got the plan, the agent provided me with a projected growth schedule. I went back and reviewed that data and my cash value is right on track for their projections (which is different from the guaranteed cash value). If it continues at this rate, I’d expect to have an annual return of about 6-7%.  Again, that’s without considering the death benefit. If I were to die tomorrow, I my wife would have an astronomical return on our initial $600 investment.

What Will I Do with it?

In case you are wondering, while I do have the option of taking out a loan against my cash value, I am not planning on using the money. If I remember correctly, it is a tax-free vehicle where I can grow my investment. I still have annual premiums to pay in, but that will only allow my money to grow that much faster. Between the reinvested dividends and annual premiums, I expect this plan to grow to a nice sum by the time I reach traditional retirement age. I wouldn’t be surprised if I have at least 1-2 of expenses covered with just this life insurance plan.

Have you ever considered whole life insurance as a dividend investment?