NOTE: This blog post was originally published in 2021. At that time, Ohio National announced its demutualization plans, drastically changing the dividend calculation for life insurance policyholders. Since then, the newly acquired company has changed its name to AuguStar Life. The policyholder whose policy we used for this analysis has decided to cancel that policy and invest their money in another life insurance policy with another company. If you own an old Ohio National whole life or universal life policy and are unsure about your options, please feel free to contact us.
Next in our series on reviewing real life insurance results, this week we’re looking at Ohio National. As with other policies reviewed, we used data from an Ohio National life insurance policy issued approximately 10 years ago. We have the original illustration and compare it to current policy values.
We also used this data to compare the current dividends payable to the Ohio National policyholder with the originally projected dividends.
Actual Cash Value Performance of the Ohio National Whole Life Policy
We’re looking at a whole life insurance policy from Ohio National that utilizes all the key elements of a policy to optimize cash value growth. It’s a blended policy, with the majority of the premium consisting of paid endorsements.
We used the internal rate of return (IRR) to evaluate this policy’s performance compared to the original projections. Here’s what we learned:
The policy was originally projected to have an annualized return of 3.14% at the time of purchase. Therefore, the policyholder was expecting an annual compounding effect of 3.14% on the premiums paid. The policy was purchased approximately ten years ago. Ohio National’s dividend yield has declined significantly since its original purchase. The most drastic change occurred just last year. The actual internal rate of return (IRR) for this policy since inception is 2.26%.
Ohio National’s Actual Historical Dividend Payments
Although I don’t have a detailed breakdown of each annual dividend payment from the policy’s inception, I can compare the currently paid dividend with the projected dividend from the original chart. The differences are not surprising.
The currently paid dividend is 46% lower than the originally planned dividend payout at that time.
We can see that this lower dividend reduces the cash value performance significantly below the policyholder’s original expectations. Also notable is that while the dividend change is not as significant as other companies, the change in the cash value IRR is somewhat more pronounced than some other comparisons. This reinforces our long-standing contention that “whole life insurance” is a broad term for a type of life insurance policy, which can vary considerably in its specific functionality from company to company.
Reasons for Policy Performance
By using non-premium supplements, dividend payments are given less importance in determining cash value growth. This is especially true during the early years of a life insurance policy. The guaranteed cash value interest applied to the cash value created by PUAs results in significant policy growth during this period. Therefore, the change in cash value growth due to dividend changes is smaller compared to the overall policy performance.
Had this life insurance policy used a more traditional life insurance design and approach, the change in the IRR would likely have been significantly higher.
The Timing of Dividend Changes Matters
While this Ohio National life insurance policy slightly underperformed its initial projections, future dividend performance over the next 10 years could result in a completely different performance.
If the dividend remains largely unchanged, the spread between actual and projected value increases. This is simply the mathematical reality of the difference between the initial accumulation assumption and the current reality. If the dividend increases over time, however, actual results converge on the projected values. What is easily overlooked in life insurance accounting is the role the timing of dividend changes plays in the development of cash value. The higher the policy’s cash value, the greater the impact of dividend changes.
This is a double-edged sword, however. A life insurance policy with a higher cash value will experience a significant boost if the dividend increases, but it will also miss out on significant growth if the dividend decreases.
Potentially problematic for this policy is the new calculation that Ohio National disclosed when announcing its demutualization plans. The projected dividend payment for next year is significantly lower than the dividend payable for this policy year. This trend appears to be continuing in the balance sheet. This will result in a growing gap between the actual and originally projected cash value unless ONL revises this dividend upward in the future.
Ohio National’s dividend has changed significantly since the policy’s inception, resulting in a lower return than projected. The policy contains approximately $5,500 less than originally estimated.
Nevertheless, this policy still performed better than some of the other policies we reviewed—even some that performed much closer to their projected values.
