E132: How Dividend-Paying Whole Life Grow and Allow for Being Your Own Banker

Nate: In this episode, we discuss how dividend paying whole life insurance policies grow and why they are the only tool in the financial world that allows you to become your own banker. She’s Holly, and she helps people find financial freedom.

Holly: He’s Nate, he makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.

Nate: All right, welcome back to the show, everyone. Today, Holly and I we’re kind of picking up a little bit from where we left off in the last published episode couple weeks ago where, Holly, did we kind of open a can of worms with that to some degree, kind of got real technical? I’m going to say this episode and the one that we just launch are a little bit different than what we normally get into just due to the technical nature of them and how we’re sure people are going to end up having questions after we launch these.

Holly: And I think the goal, even in the first one in this one, isn’t to necessarily open a can of worms but to make you aware because a lot of people are talking about it. We’re just going to say, “We’re not trying to use a scare tactic at all.” What we want to do is make you aware that there is a change coming, but that really the focus still is on infinite banking and that process, not on the changes taking place.

Nate: Yes. Yes, absolutely. And that’s really what we want to stress in this episode. But as I said in the prior one with this change, there’s brought a lot of confusion. I’ve spoken personally to many clients. Holly, you have toO. There was news in the last year that the IRS, which had rules that life insurance companies had to follow in order for their policies to be classified as life insurance by the IRS and thus be tax advantaged. Be able to grow free access tax free. And if the policies were designed a certain way, essentially, if they were designed a certain way, they would not be classified as life insurance.

They would be classified as this thing called a MEC or a modified endowment contract. And the rules that applied to that, one of the main criteria of is actually this interest rate that was being used to determine of values inside of life insurance contract. And it had been the same. It was stuck at 4% ever since the 1980s when these rules got started. It was a fixed number. It’s been at 4% for forever. So the IRS essentially changed that rule and they said, “Well, now we’re not going to be as stringent.” You can actually change the interest rate that’s being used to compute these values which essentially was put in place by the way for you listeners.

It was put in place at 4% because what the IRS didn’t want is for the insurance companies to build these policies that had these super tiny death benefits and gigantic dividends that were all tax free back to the policy holders. So it was actually to limit the insurance company’s ability to sell policies that had tiny death benefits and massive dividends. If you understand life insurance a little bit, you also know that the guaranteed cash value is directly implicated in the guaranteed death benefit. The guaranteed cash value grows over time to equal the guaranteed death benefit, never gets higher than the guaranteed death benefit. 

So the other thing to note on those types of policies that had tiny guaranteed death benefits is that most of the value of the policy did not come from the guaranteed cash value. They were all coming from these gigantic dividend payouts that were tax free in the world life insurance. So the IRS actually trying to stamp that out and it got into this kind of folklore system of this 4% guarantee and really what I wanted to do today, Holly, and what we talked about before the show was to discuss, I guess, mainly two things. How do policies actually grow? What comes into play when you buy a policy from a mutual life insurance company, right?

And also why did Nelson Nash, who is the creator of this concept called infinite banking; how to become your own banker, why did he say that the only tool that really allows us to accomplish this is this thing called dividend bank whole life insurance policies issued by mutual companies. So those are our two agendas. Anything you want to say before we kind of dive in to this discussion, Holly?

Holly: The only thing I’m going to say, Nate’s going to reference this as well is almost all the information we’re getting related to the infinite banking concept is from Nelson’s book, The Infinite Banking Concept. So we’re pulling the information of why we’re using this product and the whole purpose of this process. Remember, it’s a process we’re implementing, there’s just a specific product we’re using. So if you can accomplish those two things, you can check out almost anything we’re saying because we’re literally referencing his book in the design of the process, the infinite banking concept.

Nate: Yeah. I mean, it’s so funny. This 85 page book that Nelson Nash wrote 20 years ago, no matter how long I’m in this business, I keep coming back and realizing how it really covers everything that you would need to understand about dividend paying whole life insurance and how it can be used to practice infinite banking and practices becoming on banker concept. It’s amazing. We had mentioned a couple things in the last episode to kind of recap and then we’ll dive into some new stuff. We mentioned that the interest rates that life insurance companies can use to compute the guaranteed death benefit and the guaranteed cash values are changing. Where now insurance companies can, if they want to build policies that are not based on the old minimum of the 4% interest factor, now they can do lower than that if they want to, down to 2% and anywhere in between.

And so we understand that there’s going to be some companies who come out with new ones, some of them are going to be dramatically different. Some of them are going to be just slightly different. And we also mentioned quite a bit in that episode, why we’re not really concerned at all regarding our ability to do, the becoming your own banker concept, using these policies because the cash value growth we expect to be either very similar or potentially better, depending on what happens. And so honestly, if you have questions on why that’s the case, we’re going to try to answer that today in more detail. That’s actually the goal of the day, but also you should really just talk to Holly and me, to be honest, because we don’t have enough time to do a PhD course on why that’s the case.

But we mentioned that in that episode that really at the end of the day, the guaranteed cash values might be lower but the overall cash value that includes dividends is most likely going to be higher. And I’d like to expound on that today, why? I’m going to lean a little bit on Nelson Nash’s book because he does such a good job explaining this, how and this is on page 21 through 24 of his book. For those of you who have his book, if you want to kind of reread that but essentially what goes on when the life insurance companies, how do these policies really grow? There’s a portion of the growth inside of a policy that’s called guaranteed cash value. And then the rest of the growth comes in the form of the dividend, and life insurance companies have been operating this way in the mutual life insurance company world for forever and we’re going to talk about that as well in just a minute.

Whenever they go out to design a policy, so the actuaries that the insurance companies get together and they’re going to design a policy, they get together and they’re engineers. So they’re trying to build out the design, “Okay, how much death benefit are we going to put in per dollar of premium? How much cash value is going to grow per dollar of premium?” And so they go out and they build this policy and they start off focusing on the worst case scenarios. So they say, “Okay, to achieve this death benefit and achieve this cash value, how much premium do we have to collect in order to make sure that we can put forth that guaranteed death benefit and that guaranteed cash value.” And they start off thinking on the worst case scenario. Crap hits the fan, everything goes wrong because they’re going to guarantee these stuff. So they have to make sure that no matter what happens, they can do it.

Let’s just say, and Nelson Nash brings this up and I think it’s just great. You can’t really beat it. Let’s say they decide, “Okay, to offer this death benefit in this guaranteed cash, we need to receive $1 of premium. That’s what we’re going to need to receive in the worst case scenario. We know that if we receive $1 of premium from Nate Scott, that we can put forth the numbers in this contract, the guaranteed death benefit and the guaranteed cash value.” And so I start paying my $1 of premium, things are going well. At the end of the year, they look back on it and they say, “Okay, well, did we need the whole dollar of premium to achieve this cash value and this death benefit?” And for the last 150 years or more actually, 170 years, the answer’s been no at all these life insurance companies.

In other words, they were able to put forth the guaranteed death and the guaranteed cash values and they actually didn’t need the whole dollar. So they look back at the policy, they look back at the performance of the company, the profits that they made and they say, “Yeah, we were able to pay out all the death claims, pay expense of the operation, put forth money towards the guaranteed cash value. And we still have money.” And in a mutual life in insurance company world, that is the money that comes in the form of a dividend. So let’s say back, to my little example, they collected my dollar of premium but they find out they only needed 80 cents of that dollar to increase my guaranteed cash value, cover the death benefit and pay for the expense of the operation and everything, they only need 80 cents.

So where does your dividend come from? Well, it comes from that 20 cents that went in my little example above and beyond what they needed. So they send that money back to you as a dividend or actually in the technical IRS terms, it’s called a return of premium. They simply said, “We collected too much. We didn’t need it all to do what we promised you that we would do. So we’re going to send you this dividend and you can roll back into your policy, go straight into the cash value and grows compound and we’re rocking and rolling.” And that’s been the case for that’s how policies are built, but let’s just go back and take a step back and say okay, with this change occurring, where now they may collect that same dollar of premium from me, but now what they’ve done, if they choose to and choose to use a lower interest rate, thus have less death benefit and less cash value.

And this change that the IRS is now allowing them to build policies differently if they want to. Now that same insurance company, I could send that same dollar to them, but inside that policy, compared to what they used to be having, there’s less death benefit to guarantee and thus the amount of guaranteed cash value is going to be smaller, because the guaranteed cash value, it grows to equal the guaranteed death benefit at either age 100 or age 121, depending on how it’s designed. So that’s the trajectory it’s on. So if the death benefit’s smaller, that means the guaranteed cash value thus has to be smaller over time. So now they’re collecting that same dollar or premium from me, but instead of needing 80 cents of that dollar to match the guarantees, maybe now they only need 60 cents of that dollar.

So the guarantee cash was may be solid, but they’re sitting here saying, “Well, on this policy, we only needed 60 cents of what we collected in premium to put forth that.” So what are they going to do? They’re going to send 40 cents out in a dividend as opposed to 20 cents out in a dividend. And this is what we’re trying to say that the growth, this is the fundamental story that Nelson Nash was trying to say. And what we’re trying to say is that the growth of a policy at a mutual company is based on that company’s actual profits and their actual performance. It’s not based on the guarantees of the contract. The only time the guarantees of the contract coming to play is if the companies decide to stop paying dividends altogether.

And all we’re doing is sitting here saying, “Well, that’s an unprecedented event because that has never happened before in 170 years of dividend paying whole life insurance policies. And it’s not on the horizon for any of these companies either. So until that occurs, we’re in this dividend paying environment, the actual performance are poor, doesn’t matter if they guarantee a tiny amount and pay out a ton of dividends or that they guarantee a ton and pay out tiny dividends. At the end of day, the overall growth and performance that we experience as owners of mutual life insurance companies is based on their profits. It’s not directly based on their policy guarantees. And as I wrap up, I’ll just simply say this one last thing, Holly, I know I’ve been on a roll here.

This is actually not even anything new for the most part. In other words, life insurance companies have had the option for clients to buy two different sets of policies for a long time, given that they were both probably based on the 4% rule that the IRS forced them to base it on but what I guess I’m saying is we’ve had many companies that offered two policies, one that has higher guaranteed death benefits and thus higher guaranteed cash values but tiny dividend, or you could go buy a policy from the same insurance company that actually has a lower guaranteed death benefit and has lower guaranteed cash values but higher dividends. And you can kind of choose which one you want. And normally the one that has the lower guarantees but higher dividends, a lot of times that will end up having more cash value over time.

And it’s just more weighted towards the dividend. They’re going to receive this same dollar premium to both. And some are credited higher on the guaranteed side. Some are credited higher on the dividend side and they’ve already been doing this by the way. This is not actually anything new. It’s just now they’re going to have even more flexibility in determining whether they want to focus on high guarantees and small dividends or lower guarantees and high dividends. They’re going to get to choose that. And as far as our ability to practice IBC, it essentially won’t matter to us because of the system at work behind the scenes, which is really what we’re going to end up bringing up here at this point.

Announcer: Are you still stuck in insecurity and uncertainty? Do you want to feel like a financial genius and confident about out your future? Holly and Nate have prepared something exclusively for Dollars and Nonsense listeners. It’s called the secret banking masterclass. You can gain free access to this course by visiting livingwealth.com/secretbanking. That secret banking, all one word. The course will share with you how the conventional system stacks the deck against you and exactly how to break free from their system. We believe in challenging the status quo.

We believe in defying conventional well tools while maintaining traditional values. After all, most of those conventional tools only ever seem to make someone else on the circle rich. Visit livingwealth.com/secretbanking. That secret banking, all one word. Ease worry and start your journey towards security today. Visit livingwealth.com/secretbanking. Now back to the great episode with Nate and Holly.

Holly: The reason we’re bringing it up is to get you back to the point of yes, things could be changing but the reality is the process of infinite banking and the implementation of that doesn’t change just because a product has changed. Remember how old Nelson’s book is, right? And this 4% is from 1980 like we had said on the previous podcast. So in all that time from 1980 to right now, we have had a lot of change take place within the life insurance company and the industry and even the economy yet the reality is even if the products change, the process and implementation of the infinite banking concept didn’t change and it didn’t mean it didn’t work anymore. It continues to work because it’s actually the implementation of something. And the product we’re using is that dividend paying life insurance. That’s the key here is the focus of that.

Nate: And there’s no product available in the financial world that allows you to become your own banker. The way that dividend paying whole life insurance policies allow you to do it. And there’s reasons for that. And believe it or not, the reasons it works has nothing to do with the interest rate used to compute the guaranteed values in a contract. Literally, I hope people hear me say this. It’s not just me saying it. It literally doesn’t have anything to do with it. You need to go back and read Nelson Nash’s book, Becoming a Banker and you need to read it over and over until that becomes very clear to you because he never once mentions a guaranteed interest rate inside of a policy contract one time.

It’s never even put in there, that’s because it doesn’t matter. And some people may get mad at me saying that. They may be listening to this right now. I’m like, “Yeah, it doesn’t matter to me.” No it doesn’t. You have a misunderstanding of dividend paying whole life insurance issued by mutual life insurance companies. I’ve already brought that up with my little previous simple example. Where I’m going with this is to simply say when Nelson wrote book, he looked at it and he said, “You know what? A mutual life insurance company is practically in the same business as a bank is.” And they really are. They do the same thing.

They take our money in deposits in the banking world that you’re literally opening checking and savings accounts and you’re depositing money and the mutual life insurance company world, you are paying premiums as a form of them receiving other people’s money in that sense. Both institutions have guaranteed certain things to their customers, whether that’s like a CD at a bank receiving an interest rate and whether that’s a life insurance company receiving guaranteed cash value. And the only way they can support those guarantees and make event only a profitable business, is if they go put the money out to work. And so banks mainly just lend money. They’re big lenders of money, we know that. They take our money that we deposit and they lend it.

Well, believe it or not, that’s exactly what mutual life insurance companies do. They take our premiums that we’re paying in. They take a big chunk of that money and they make loans with it. They lend money and receive profit and both institutions have built their system to where they’re profitable. Banks a very profitable business. We all know that, we look at them and we’re a little jealous. They make a ton of money. Well, the mutual life insurance company is very profitable, has been for 170 years without ever a year of not being profitable.

So that’s a pretty cool track record. The question is though, who’s going to receive all the profits that those companies make. We all know who receives it in the conventional banking world. They don’t send us depositors bonus checks to be nice. In other words, we buy a CD at 1% but they made 4% on the money that you deposited in the CD. So they send you an additional bonus check for all the additional interest they made using your money. That’s not the way it works, but in a dividend paying whole life insurance policy issued by a mutual company, that actually is how it works. That’s what Nelson Nash wrote the book. He says, the pieces are here.

The dividend paying whole life interest policies issued by mutual companies are here. We can put money in them, use them just like we were using bank accounts previously so we can avoid borrowing money from banks and paying them interest. We can borrow from the policy and pay us back. And also all the deposits we’re making in this capital we’re accumulating is not profiting shareholders of a bank, it’s profiting us policy holders of the mutual life insurance company.

This actually has nothing to do with how much of your growth is received on the guaranteed side of the ledger and how much of your growth is received on the dividend. And it never has applied to that. It just simply the system behind it. The reason why it works is because we’re plugging into the only place we know of that we can practice banking and move money and purchase things we want to or finance the investments we want to make and actually make more money than we put in.

In the conventional banking world that’s really all we get. We have checking accounts, we have financial transactions coming out of those checking accounts. We really get what we put in and that’s it. But to receive profits from the banking side, we still don’t know of anything else other than dividend bank whole life insurance issued by mutual companies that allows us to achieve this. It actually is totally independent of any sort of interest rate used to compute values inside life insurance contracts.

It’s just based on the reality of how a business is built, how a banking business is built compared to how a mutual life insurance companies built. How they’re very similar with one key element different, one receives profits back to policy holders. One receives profits back to shareholders on Wall Street. Which one do you want to be a part of? Obviously we’ve chosen ours, Holly, and we’re having fun.

Holly: And the reality is, we’ve said this before too, banks aren’t working for you. They’re there to use your money and mutual paying dividend life insurance company is there to work for you. Their job is to make you money. A bank’s job is not to make you and I money, Nate, it’s make their shareholders money.

Nate: Exactly. And there’s stock insurance companies. We know that right, Holly?

Holly: Yeah.

Nate: There’s actual stock companies and that is their goal. Somebody owns stock in the company and they sell policies to policy holders, and those policy holders just get whatever their contract allows them to get. They don’t participate in any profits. Profits are sent to somebody else. And that’s why we don’t use those companies. They’re not recommend ended for practicing the infinite banking concept because at its core, becoming your own banker means you actually have to obtain ownership in the bank. So the bank has to be working for you and nobody else. And that’s at its core and we don’t know of any other way practically speaking to do it. You can finance things using anything, Holly. You can use a shoebox to do similar ideas, checking accounts to do similar ideas.

You can use home equity in a house. You can build up capital and have money flow anywhere you want. But there’s just something unique about buying a policy and building capital from a mutual life insurance company in a dividend paying whole life policy that has perks and things occur inside of that, that allow us to do things that we really can’t figure out how to do with anything else and allows us to profit in a way that we can’t figure out how to do in anywhere else. And it really, this is why when change like this happen, it doesn’t change the actual game. As I said, it doesn’t really matter to me how much of the cash value I receive is if it’s high guarantees and low dividends or low guarantees and evidence, but it’s already been a thing for a long time.

It’s just now it may end up being more accentuated that you get to choose between those two options, even more so than you used to be able to. But at the end of the day, using mutual life insurance companies and the dividend paying whole life policies inside of them to practice the Infinite banking concept is actually just not even the reason that the interest rate’s never Nelson’s book is because it’s not even really a thing. It’s actually the truth behind this unveiling it. What’s going on behind the scenes at a mutual life insurance company that allows us to do this and that obviously is not changing, it’s the entire business model is what we’re after.

Holly: And like Nate said in there a few times but I want you guys to catch this, the insurance companies did didn’t have to use a guaranteed 4%. They could have used five or six and there was companies that did.

Nate: Yeah. Back in the 80s and 90, for sure. There was.

Holly: And then just like with this change, they can go to as low as two but they don’t have to. So the reality is that there’s a change but it doesn’t mean it’s to be across the board instituted. It doesn’t mean the company has to, and they don’t have to go as low as two, they might go to three and a half. They might go to three and three quarters. It just depends on-

Nate: And some of them already said that, you’re right.

Holly: … what the company wants to do and if they want to change it. But the reality is that we’ve had change throughout this entire 20, 30 plus years. Right? And we still didn’t matter. I mean, 40 years of the same 4% doesn’t mean that there wasn’t product change across the board.

Nate: Yeah. And even before then, I mean, that’s one thing I mentioned last episode and I know we can keep talking about this but the 4% rule that the IRS put down that says life insurance companies can’t design contracts lower than the 4%. We’ve already mentioned this, that wasn’t a consumer friendly thing. They weren’t thinking of the consumer when they did that. They weren’t thinking, okay, well we got to make sure these insurance companies don’t take advantage of consumers. That that is actually just not what the IRS does by the way. It’s like the actual reason for putting it forth was to keep insurance companies from designing products that allowed individuals to hide a whole bunch of money in life insurance policies tax free.

I mean, that was a whole point. So that essentially the whole point of those rules were to say, there has to be a minimum amount of death benefit purchased per premium dollar for us to call this life insurance. You can’t just have a $50,000 a year premium and only guarantee a hundred thousand dollars of death benefit initially. I mean, well, after two premiums, you’ll put in all of the death benefit money. So you’re getting these gigantic dividends because there’s no more money at risk. And so you just have this super cash rich policy. Well, you can’t do that. If the insurance companies have to use a 4% guaranteed interest rate to compute the values, the death of it has to take that into account.

So actually, it limited what the insurance companies were able to do, forced them to have higher guaranteed death benefits initially to be called life insurance, which means that obviously the guaranteed cash failures are going to be higher because the guaranteed cash failures equal the guaranteed death benefit at age 100 or age 121, depending on how they design it. For whatever reason, I think some people think that this change is going to be anti-consumer. Really, it probably is going to be pro-consumer, you’re going to have more choices but as we mentioned, last pockets, if you really do love, you don’t care about dividends, you just want to have whatever the highest guarantee contract is, you probably do want to go buy a policy ASAP to some degree.

So just so you know that there’s no changes involved in the new policies. Other thing to note, just this was a reminder. This rule only applies to insurance companies creating brand new policies. In other words, they’re not changing contracts that are already in existence. That’s impossible. This is just simply allowing insurance companies to design new policies based on different parameters. We’ve seen already announcements from mutual life companies across the board of just them updating policies. Some haven’t even said they’re going to update them at all, they’re just going to keep the 4%.

Some are saying, “Yeah, we’re going to go all the way down to 2% and focus on huge dividend paths.” And then other people are somewhere in the middle, they’re three, three and a quarter, three and a half. And so yeah, there is just going to be a much wider variety of whether people are weighing high dividend payouts or whether people are wearing higher guaranteed cash values. That was already the case by the way but it’s just now going to be more accentuated than it used to be.

Holly: And remember what we’ve said and what Nate said, really what we’re trying to do is we’re just implementing a process in order to allow you to be your own banker and to receive and share in dividends as shareholders versus a bank that makes the money for other people and uses your money to do it. It’s just a different process and this is the only product in the world that works this way. Dividend paying mutual whole life insurance, that’s the product we’re using regardless of what happens or the changes that occur with those products. Does it mean you can’t still do the infinite banking process? It’s been this way in the past. It’s going to continue this way in the future.

Nate: As long as mutual life insurance companies don’t change their overall business model.

Holly: Yeah. They haven’t changed really in 107 years-

Nate: And they can’t, it’s like that is the business. The business at a mutual life insurance company is the same as it has been for forever. And they can’t change the business. The business model is the business model. So as long as there are still mutual life insurance companies in existence, selling dividend paying whole life insurance policies, that is just such a perfectly suited tool to use to become your own banker.

As Nelson Nash eloquently described in his book, that if you haven’t read, you need to read it, don’t call yourself an IBC expert or be critical of anything until you’ve read that book and preferably read it more than once to actually gain the understanding that you need. And if you come at it with a critical eye, go for it, I guess. Everything’s in there that you could really want to know, no matter all these changes that occurred. It’s like we just keep going back to it. When Nelson Nash wrote the book, he was on to something.

Holly: Well, and I think that that’s the key there. He wrote the book, he answered the questions, but things that weren’t important that we focused on, basically aren’t included in the book because he couldn’t predict what would happen 40 years down the road. And he knew the product would change but the process of it doesn’t change.

Nate: Yeah. I mean the process of IBC doesn’t change, the theory behind it, which is really based on the fact that mutual life insurance companies and dividend paying whole life policies are the best place to bank with. That’s not going to change until dividend paying whole life insurance policies go away and they won’t have to figure up something else, but to figure out another way to do it. But obviously that’s on the horizon. There’s a lot of mutual life insurance companies out there that are great to do this concept with. And we’re just excited for the future. We think it’s going to be fun, we’re going to end this two part series now. As I said, this is not a PhD level course on policy growth.

You’ll need to become an actuary to practice IBC. But just know, I guess, as we sum up this, a few things first off the growth of a policy when you purchase it from a mutual company and then to dividend paying whole life policy is actually based on the company’s performance, their actual profits, not based on the guaranteed side of the ledger, unless you get into an event where they stop paying dividends altogether, which has never happened before. So that would be an unprecedented situation. There are changes to the IRS code that was stringent based on what life insurance companies could do when they designed their policies that was changed at the end of 2020.

Most life insurance companies are just now coming out with policies that are different because of that law now, they weren’t required to change anything technically, but they can change some things. What will likely occur is that the guaranteed side, if they decide to lower the interest rate that’s being used, the guaranteed side of the ledger will be a little smaller while the dividends will be a little higher. At the end of the day, our ability to practice IBC using these policies was not based on an interest rate used inside of it. It was based on the fact that dividend paying whole life insurance policies issued by mutual companies, allow us to access capital and profit only us and no one else.

And that’s still going to be the same and it will always be the same. So we’re not worried about it at all. These new policies very well. So many of them are showing higher amounts of cash value over time than their prior policy. So we think that could be good, but it’s true more of it’s going to be weighted towards the dividend payout as opposed to the guarantees but all that to say, we’re very excited for the future. And we’re still in love with the IBC and always will be because of what it allows us to do. Anything else, Holly?

Holly: No, you’ve said it perfectly.

Nate: All right. Sounds great. Well, is been Dollars and Nonsense. If you follow the herd, you will get slaughtered.

Holly: For free transcripts and resources, please visit livingwealth.com/e132.

Announcer: Dollars and Nonsense podcast listeners, one more thing before you go, ease your worry and start your journey towards security. Visit livingwealth.com/secretbanking. You’ll gain instant free access to the special one hour course Holly and Nate made for you. Again, that’s livingwealth.com/secretbanking.