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- The Dividend Scale Interest Rate (DSIR) affects annual dividend payouts, cash value growth, and premium offset timelines in participating whole life insurance policies
- Insurance companies review and adjust the DSIR annually based on investment performance, interest rates, and claims experience
- The DSIR is not a guaranteed return, but rather an assumed rate used in the dividend calculation, meaning actual dividends may vary
- A lower DSIR can result in smaller dividends and slower cash value growth, but it doesn’t reflect poor policy performance or affect guaranteed benefits like the death benefit
- What is a dividend scale interest rate?
- How is a dividend scale interest rate calculated?
- Key differences between dividend rates and dividend scale interest rates
- Why do dividend scale interest rates change over time?
- How do dividend scale interest rates affect your whole life insurance policy?
- Should you be concerned about falling dividend scale interest rates?
- How to get the best whole life insurance quotes in Canada?
- Frequently asked questions
If you have a participating whole life insurance policy in Canada, you’ve likely come across the term dividend scale interest rate (DSIR). It’s one of the key factors insurers use to calculate annual dividends on your policy. While it may sound technical, understanding DSIR can help you make sense of your policy’s performance and long-term value.
Many policyholders don’t realize how changes to this rate can affect cash value growth and premium offset options. In this blog, we’ll walk you through what DSIR means, how it works, and what to keep in mind as a policyholder.
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What is a dividend scale interest rate?
The dividend scale interest rate (DSIR) is the rate life insurance companies in Canada use to calculate annual dividends on participating whole life insurance policies. Additionally, it reflects the expected investment performance of the participating account — the pool of funds backing those policies.
Key features of the dividend scale interest rate
- Not a guaranteed return: DSIR is part of the formula used to determine dividends, but it’s not the exact amount your policy earns
- Reviewed annually: Insurers review and may adjust the DSIR each year based on factors like investment earnings, mortality rates, and administrative costs
- Impacts dividends, not guarantees: A higher DSIR generally means higher dividends. However, it doesn’t affect your policy’s guaranteed death benefit or cash value
- Company-specific: Each insurer sets its own DSIR, which contributes to the differences in dividend payouts across providers
How is a dividend scale interest rate calculated?
The dividend scale interest rate (DSIR) is based on how the insurance company expects its participating account to perform. This account holds the pooled money in various investment options to support participating whole life insurance policies.
The DSIR mainly depends on the return the company expects to earn from the investment options, such as bonds, stocks, and other assets, after subtracting expenses.
While insurance companies use complex internal models, the basic idea can be shown like this:
DSIR = Investment Income − Investment Expenses/Total Assets in the Participating Account
- Investment income includes interest, dividends, and capital gains from the insurer’s investments.
- Investment expenses are the expenses that include fees for issuing and administering policies, managing the investment portfolio, and other operational costs related to maintaining the policy
- Total assets are the average amount of money in the participating account during the year. These assets typically include bonds, equities, real estate, mortgages, policy loans, and other miscellaneous assets
Insurers set the DSIR using long-term expectations, not just short-term market returns. Also, that’s why the rate usually changes slowly over time, even when the market continues to fluctuate over time.
Key differences between dividend rates and dividend scale interest rates
Many people think the dividend rate and the dividend scale interest rate (DSIR) are the same, but they’re not. The dividend rate is a general figure that includes investment returns, costs, and claims. Insurers use it to show how much dividend you might get.
On the other hand, the DSIR only looks at investment performance and helps calculate part of your dividend. The table below breaks down more key differences between the dividend rate and DSIR.
Exploring differences between dividend rate and dividend scale interest rate
| Category | Dividend Rate | Dividend Scale Interest Rate (DSIR) |
| Definition | The overall rate, typically expressed as a percentage, that an insurer declares to illustrate potential dividend payouts on participating life insurance policies. | The specific interest rate assumption used in the dividend calculation represents expected investment returns. |
| What it Represents | A consolidated figure that reflects all factors influencing dividends, including investment performance, mortality experience, expenses, and taxes. | Solely the investment performance assumption of the participating account, used within the dividend formula. |
| Primary Purpose | Communicates to policyholders a projected (non-guaranteed) dividend outcome based on current assumptions. | Serves as a key internal input in the calculation of dividends, specifically representing investment returns. |
| Reflection of Actual Returns | No, it does not represent the actual return on the policy or cash value. It is an illustrative projection. | No, it is an assumed rate used within the formula as an internal calculation and does not directly reflect actual policyholder returns. |
| Scope of Inputs | Incorporates multiple factors: investment earnings, claims (mortality), administrative expenses, and possible taxes. | Focuses exclusively on the investment performance of the participating fund and net of investment expenses |
| Audience | Publicly disclosed in annual policy statements, product brochures, and marketing materials. | Typically shared in technical documentation and with advisors, not commonly seen by the general public. |
| Frequency of Review | Reviewed and potentially updated annually based on the insurer’s experience and market outlook. | Also reviewed annually, with changes reflecting shifts in investment outlook or portfolio performance. |
| Guarantee Status | Not guaranteed — actual dividends may be higher or lower than projected based on changing conditions. | Not guaranteed — subject to annual review and may be increased or decreased by the insurer. |
| Illustrative Example | If the insurer declares a 6% dividend rate, policyholders might expect a dividend payout based on this rate, but actual payouts can vary. | A DSIR of 5% means the insurer expects a 5% return on the participating fund’s assets when calculating the dividend formula |
| Summary | A projected figure for policyholder communication, reflecting all factors affecting dividends | An internal, non-guaranteed investment return assumption used in the dividend formula |
Why do dividend scale interest rates change over time?
If your life insurance dividend has decreased, it’s likely because your insurer adjusted the dividend scale interest rate. Additionally, insurance companies in Canada review this rate each year and update it based on several key factors like long-term interest rates, investment performance, claims payout, operational costs, and more.
- Long-term interest rates and bond yields: Most of the insurer’s investments are in long-term bonds. When interest rates fall, new investments earn less, which lowers the DSIR gradually over time
- Investment performance: The DSIR reflects how well the insurer’s participating account performs. Poor performance in stocks, real estate, or other assets can lead to a lower rate
- Claims experience and administrative costs: If the company pays more in claims than expected, or if operating costs rise, they may reduce the dividend payout, even if investment returns stay steady
How do dividend scale interest rates affect your whole life insurance policy?
The dividend scale interest rate (DSIR) has a significant impact on different aspects of your life insurance policy, such as annual dividend payouts, cash value accumulation, premium offset timelines etc.
- Annual dividend payouts: A higher DSIR usually leads to larger dividends since the insurer assumes better investment returns. Conversely, a lower DSIR can result in smaller dividend payouts for the policyholder
- Cash value accumulation: Your policy’s cash value grows based on the dividends paid out, which are influenced by the DSIR. Also, a higher DSIR boosts the growth of your policy’s cash value over time, while a lower DSIR can slow down this accumulation
- Premium offset timelines: If you plan to stop paying premiums by using the policy’s dividends (known as premium offset), a higher DSIR can help you reach that point sooner, as it accelerates the growth of the cash value. Also, a lower DSIR might delay the timeline for premium offset.
Should you be concerned about falling dividend scale interest rates?
If you notice a decline in your dividend scale interest rate (DSIR), it is important to understand that such fluctuations are a normal part of the market cycle and reflect changes in the insurer’s investment performance.
However, these changes should be considered in the long-term context, as the fluctuations are generally temporary. Additionally, review updated policy illustrations to understand the impact on your dividends and overall policy values.
You may consult with your advisor to explore alternative options for adjusting your dividend strategy, such as premium offset or cash value accumulation.
How to get the best whole life insurance quotes in Canada?
To get the best whole life insurance quotes in Canada, it’s essential to compare offerings from a wide range of providers.
At PolicyAdvisor, we simplify your entire insurance buying experience! We’ve partnered with over 30 of Canada’s top insurance providers to give you access to the best life insurance policies available. Also, our smart, AI-powered tools and user-friendly life insurance calculator deliver accurate quotes in under 60 seconds!
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Frequently asked questions
How often is the dividend scale interest rate reviewed?
The DSIR is typically reviewed annually by insurance companies. During this review, insurers assess the performance of their participating accounts, including investments and expenses.
If market conditions or the company’s financial outlook change, they may adjust the DSIR. Moreover, while it is updated each year, significant changes often occur gradually over a longer period, rather than suddenly.
Can the dividend scale interest rate ever become negative?
It is possible for the Dividend Scale Interest Rate (DSIR) to become negative if the insurer experiences significant investment losses or economic downturns. In such cases, dividends could be reduced or even eliminated.
However, negative DSIRs are typically temporary and occur during challenging financial conditions. Also, insurance companies aim to avoid such situations, and their dividend scale adjustments reflect both current performance and long-term expectations.
Does a lower DSIR mean my policy is performing poorly?
A lower DSIR does not necessarily mean your policy is performing poorly. It mainly reflects changes in the insurer’s investment returns or broader market conditions.
While a decrease in the DSIR can lead to smaller dividends, your policy’s guaranteed benefits, such as the death benefit and cash value, are unaffected. A lower DSIR may also indicate more conservative investment strategies rather than a failure of the policy itself.
How does the DSIR affect policy loans?
The Dividend Scale Interest Rate (DSIR) can indirectly influence policy loans by affecting the cash value available. When the DSIR is higher, your policy’s cash value may grow faster, potentially increasing the amount you can borrow against.
Similarly, a lower DSIR can slow the cash value accumulation, which may reduce the loan amount. However, remember that the interest rate on policy loans is usually separate from the DSIR.
The Dividend Scale Interest Rate (DSIR) in Canada plays a crucial role in determining the dividends for participating whole life insurance policies. It represents the insurer’s projected investment return, which influences annual payouts, cash value growth, and premium offset options. While DSIRs fluctuate based on market performance and company investment strategies, these changes are typically reviewed annually. A higher DSIR generally results in larger dividends and faster cash value accumulation, whereas a lower DSIR can lead to reduced dividends.
LIMRA. Record Year for Canadian Life Insurance Sales in 2023. March 26, 2024.
https://www.limra.com/en/newsroom/news-releases/2024/limra-record-year-for-canadian-life-insurance-sales-in-2023/
