Rising Interest rates & Par dividends discussion – The “smoothing effect” of the Par pool with dividends
Key Takeaways
Impact of Rising Interest Rates on Participating Whole Life Policies
Positive long-term impact:
Insurance companies invest primarily in fixed-income assets (like bonds and mortgages).
As market interest rates rise, new investments generate higher yields, which over time increase the returns in the participating account.
Stable returns through “smoothing”:
Insurers don’t react immediately to rate changes. They smooth returns over ~5 years.
This creates steady dividend payouts instead of volatile swings like in the stock market.
How the Insurance Company Operates Financially
Insurance companies function like banks in some ways:
Premiums are collected.
Funds are invested, especially into secure, cash-flowing assets (e.g., mortgages).
Dividends are distributed to policyholders from the surplus.
Mortgage lending is a major area:
Insurance companies lend on both residential and commercial real estate.
They benefit from secure cash flows and loan-to-value protections.
As mortgages renew at higher rates, insurers receive more income.
Policy Loans and Interest Rates
Policy loan interest rates may also rise over time—but:
Policyholders borrow from the insurer’s general fund, not from their own cash value.
If you borrow to pay off higher-interest debt (e.g., bank loans), policy loans can still be advantageous.
The strategy works best when you’re recapturing interest inside your own system vs. paying external creditors.
Dividend Scale Interest Rate vs. Market Rates
The dividend scale is a calculated figure, not a direct yield.
It incorporates:
Historical investment returns.
Expense and mortality assumptions.
Smoothing adjustments.
Despite market volatility (e.g., 2008 financial crisis), the participating accounts delivered positive returns due to their long-term, low-risk investment strategies.
Insurance Company Thinking: Long-Term Horizon
Unlike banks or investment firms that operate quarter-to-quarter, life insurers plan with 100-year timeframes.
Their management philosophy emphasizes stability, capital preservation, and predictable growth.
Visual Data Shared
Equitable Life’s historical dividend scale vs.:
5-year Government of Canada bond yields.
5-year GICs.
Clearly shows how insurer returns remain smoother and more stable, with gradual trends rather than spikes and crashes.
Final Thoughts
Rising interest rates are a net positive for policyholders in the long term, though there can be lag effects.
Mutual life insurance companies manage money conservatively and share profits through dividends.
Your policy is built to weather rate changes and remain a stable financial asset.