E145: Why life insurance policy dividends are so important to Infinite Banking success
In this episode, we discuss why life insurance policy dividends are so crucial to the success of infinite banking and the main factors that affect dividend amounts.
This topic of insurance policy dividends is a bit analytical. But it is something that gets brought up a lot in the discussion of infinite banking. So, this episode will be an exhaustive discussion on life insurance policy dividends. And it is way more exciting to more people than it may sound.
- How insurance policy dividends are fundamental to what makes infinite banking policies work
- Why leaving money sitting in a traditional bank checking or savings is a money-losing proposition
- What do dividends symbolize in the finance world and why does this matter to you
- Mutual life insurance companies
- How the interest rate environment affects your policies
- How precise actuarial science has become and why that’s good for policies
- What rising interest rates do and do not do to IBC policies
- Simple IBC habits to make the most of dividends
- Gain access to our Beginner’s Course now FREE to listeners of the podcast here now
- What is Infinite Banking
- Who was Nelson Nash?
- CREDIT: Episode art background photo by Towfiqu barbhuiya
Podcast transcript for Episide 145: Why life insurance policy dividends are important for infinite banking success
In this episode, we have a discussion on life insurance policy dividends, why they are so important to the concept of infinite banking and the main factors that affect dividend amounts. She’s Holly and she helps people find financial freedom.
Holly: He is Nate. He makes sense out of money. This is Dollars and Nonsense. If you follow the herd, you will be slaughtered.
Nate: All right. Well, Holly, it’s great to be back with you today and I’m excited for the topic we’re going to talk about. This topic is a bit analytical, I guess. We’re diving into one specific topic, but it is something that gets brought up a lot in the discussion of infinite banking. And so, that is doing an exhaustive discussion on life insurance policy dividends.
So, the things we’ll focus on today is, why are they so important to us, and also, what are the things that impact the dividend amounts that we receive from the insurance company? So, Holly, let’s go ahead and just dive into the question of, why are life insurance policy dividends such an integral part in the overall idea? Let me paint that in another way. I think some people just think dividends are just part of how policies grow. That’s true, but they’re actually fundamental to what makes infinite banking policies work to begin with, or the infinite banking concept work. They’re a symbol of this, so let’s dive in and talk about why it’s such an important piece to this concept.
Holly: Well, I think, Nate, part of it is the way of switching from being the customer to the owner. With infinite banking, we want you to really recognize and understand that you are an owner in this bank, and that is the life insurance company, because you are a shareholder. Therefore, you have ownership and because you have ownership, the dividends are what allows us to participate in a big banking business because we’re not just the customers.
When we go to our bank traditionally and our bank is making anywhere from 400 to 1,700% annually off our money, we don’t see any of that. We see 0% of that, that they’re making yet with the life insurance and mutual paying dividend or life insurance, we are the owners, so the dividends are those profits that are coming to us. They’re part of how you can change that mindset from being just the customer to say, “No, I am an essential piece or an owner in this business.” You have to think of the policy as your bank in this as a business and you are the owner of it.
Nate: A phrase I like to use is that, dividends are a symbol of our ownership in the banking world. Some people get caught up in the numbers and they actually lose the whole idea to begin with. The idea of infinite banking or the becoming your own banker process is all about profiting like an owner of a bank instead of being a customer of a bank, which you just brought up, so that’s the whole process.
We have to figure out a way to plug into the financial world, especially the banking world as an owner, not as a customer or a depositor. The dividends are our symbol of ownership in the banking world. Many of the people who listen to our podcast may have heard us talk about the fact that, there really is no difference between a bank in the conventional sense and a mutual life insurance company.
A mutual life insurance company and a bank are essentially run on the same exact business model, where they’re trying to attract capital. They’re trying to attract depositors, whether it’s at a bank, you deposit money, or whether it’s at a life insurance company, you pay premiums. Then, they’re going to use those deposits to essentially invest in loan. So, banks lend money, we all know that. They take our money, they lend it out. Insurance companies really do the same thing. They take our money and then they lend it out. They pay us interest in return or at least a bank used to pay us interest in return. Now, they really don’t do anything except for the convenience of having bank accounts.
Holly: Well, we pay them.
Nate: Yeah. We pay them practically, fees and stuff. It’s weird that we still use them, but this is what infinite banking’s trying to solve. We’re trying to say, “Hey, the regular banking world makes us no money.” We’re like an integral piece. We’re bringing all the money to the table for a bank to run its business with our deposit. We deposit money. The bank takes that money and lends it out to other people, so we’re already giving the bank all the money they need to run it. We, as a society, that’s what we’re doing when we make deposits with them.
So, we’re providing all the money. The bank uses that money. They lend it out. They pay us a little tiny bit, if anything, and then they keep the rest and that’s the banking business. The question is, is there a better way to do it? Is there another way to practice or live in this banking society without having to forego all of the profit? Hence, a la the infinite banking concept. Mutual life insurance companies banks, they do the same thing. At the end of the day, what is the difference? It really just boil back to ownership.
That, as a policy holder, we own the company, so we’re not just a customer there, we’re getting paid interest from the insurance company in the form of guaranteed cash value growth, but we’re also participating the profits the insurance company produces as owners. Dividends are a symbol of our ownership in the banking world, so it’s a crucial part of the concept. A crucial part is that we want to own the bank, not be a customer of the bank, and the dividends are the ultimate symbol of that. That’s how we know. That’s how it’s happening.
As Holly, we like to say all the time, if somebody already owns a bank, if you guys own like a local bank, you probably don’t need to talk to us. You guys are probably doing fine.
Holly: Yeah. They should be making plenty of money.
Nate: Making plenty of money. You’ve got an actual bank you can run, but for the average person who does not have the time, energy, money, know-how, entrepreneurial mindset to build a bank from scratch, honestly, we think that this is the next best thing as far as banking is concerned. If there was another way to do it, maybe we’d go do that. This is the next best thing to actually building your own bank. It’s the closest thing we can get to and dividends are the symbol of our ownership in the banking world. So they’re very important, Holly, to what we’re doing to the concept as a whole.
Part of what we get asked questions on all the time is, what really factors into how much dividends we earn? I thought maybe we could dive into that. Like, what are some of the main factors that affect dividend payouts? Maybe we could also bring up some things that you and I can do to help manipulate that a little bit. How can we have our policy earn more dividends than we thought it would? So we’ll talk all about that, I guess. Let’s go ahead and dive in. What are some of the main factors at a mutual life insurance company that will impact the amount of dividends that are getting paid to policy holders?
Holly: Well, I think, Nate, really there’s three main factors. We have overhead, we have mortality, and then we have the interest rate environment that we’re in. When we talk about interest rate environment, I think those of us who are owners through the Infinite Banking Concept of a bank, we’re getting those dividends, we don’t totally understand the interest rate environment. We think that whatever is going on with the interest rate right now means that, if the interest rate’s going up, like we’re seeing right now, then our dividends are going up and that’s actually a wrong concept.
You have to understand, what’s taking place in the interest rate environment does affect your dividends, but just because the interest rate’s going up, doesn’t mean your dividends are going up.
Nate: Yeah, you’re exactly right. So, if I can recap to maybe point a little bit of a magnifying glass of a few of these, as Holly said, there’s really three main factors that impacts policy dividends. There’s the overhead of the life insurance company, there’s mortality experience, and then there’s the interest rate environment. Two of those three, Holly, are very controlled by the insurance company.
The overhead that it costs to run a company is very controlled. The interest company knows how much money really that they need to spend each year to operate the company. And so, obviously this doesn’t impact dividends too much from year to year because it’s already set in stone, there’s not big changes to their overhead cost. I do know some companies may choose to take some capital that they could have given back to policyholders in the form of dividends, and maybe they’ll reinvest it into the company to boost sales.
So, maybe they’ll build out like a brand new technology platform to recruit agents to want to work with them or improve customer experience. They may choose to do that, but obviously they’re doing it just like any other company would. They could have sent it out in a dividend and maybe they could have had higher dividends for that year, but instead they reinvested some of that money to increase sales and boost dividend importance for years to come. So, overhead may have a small impact, but it’s typically a very low impact or very low volatility in that type of world. It doesn’t really impact it too much. The same thing goes with mortality.
The mortality experience, its actuarial science, it’s a real science, you’d be very surprised if not mortified at how good they are at figuring out how many people are going to die. It’s kind of freaky. I know Ray Poteet, our founder, talks about this. He’s been alive for a long time. He had a, what was it? A 50-year high school reunion a few years back and on the wall when he got to the reunion, there was pictures of those people who had passed away already that were a part of the class. They were honoring the classmates or the graduates who had passed away before this reunion occurred obviously.
Ray thought it was a little bit much, didn’t he? I think that’s what he said. He thought it was like, “Wow, that’s actually more people have passed away than I thought should have over the last 50 years.” So he went to an actuary and he came to him and the guy who worked for the company just asked him to run it out. “We had a graduating class of X amount. We’ve had how many people should have died over that period of time,” and the guy nailed it to a T. I mean, it was unbelievable. It was eerily wild that they could know, I don’t know the exact number. I can’t remember. It was like essentially 67 classmates had died. The actuary said it should be somewhere between 65 and 70 and he was like, “Wow, that’s crazy how on point they are.”
That was a long discussion just to say that, mortality experience is very well controlled. They understand how many people are going to pass away very well, very tightly. In fact, the mortality typically helps in the world of dividends, Holly, because it is true that, for the most part, people are living longer. So, if people are buying policies based on certain life expectancies that exist in 2022, by the time that it’s 2050, it’s likely that once again, we’ll be living a couple years longer by that point, due to medical advances and so forth.
Mortality is very controlled. It doesn’t typically cause great swings, but for the last probably 50 years, it actually has been a net plus for policy dividends because people are living longer than what was predicted 50 years ago, so that’s a plus. As long as medical science continues to go that route, we expect it to be a net plus that, the current ideas of how many people are going to pass away over a period of time is probably going to overshoot. Less people are going to die early than what’s actually being predicted due to medical advances. Okay. That was a big run through of those two.
Holly: That was a big run through of that.
Nate: Yeah, a big run through. People are like, “Nate, I don’t care about any of this.” I’m like, “That’s fine. It’s a good point not to care about it.”
It is true though, Holly, that you brought up interest rates are the one piece that interest companies have no control over. They have no control over what’s happening in the interest rate environment. And so, in times of high interest rates, the insurance company is able to make loans to lend out money in their bond portfolio, their mortgage portfolio, and so forth. They’re able to make loans at higher rates of interest, so that means that, there’s more interest being paid back to the insurance company and they are more profitable than they otherwise would be.
In times of high interest rates, dividends are higher, and in times of low interest rates, dividends are lower, but as you brought up, they are not directly tied to interest rates. Dividends are not directly tied to any interest rate. It’s just simply the reality of the interest company is more profitable when their loans pay higher rates of interest back. But people can get confused in this Holly, which I think you brought up.
People get confused because they think, “Oh, interest rates have a big impact on dividends. That means that, any movement of interest rates up or down will have a direct impact on my next year’s dividend.” Well, that’s actually not the case. That’s actually not the case because the interest companies invest in long-term cash flow producing loans, long-term bonds, low risk, long-term bonds, low risk, long-term mortgage and things like that. So, they’ve got like this $50 billion general account of invested money in these various long-term assets. There is no way that some short-term interest rate environment changes are going to have any impact on their $50 billion portfolio.
Like right now, we’re in a rising interest rate period. Some people think that, that is overall good for an insurance company. That’s good for their profits. They’re probably excited for interest rates to start going back up. That means that, as their older low interest rate bonds are being paid off, that their bond portfolio, as those bonds get paid off, they can reinvest them into new bonds at higher rates. But the question is, how long is it going to take for their entire portfolio to be transitioned to the new rates? It’s going to take many years.
Typically, dividends are what’s called a lagging indicator you could say, where in times of rising rates, that’s overall good for an insurance company. It’s just going to take some time though for those rates to really materialize in any significant way in their overall portfolio. Then, on vice versa, like coming back from the financial crisis of ’08, dividends dropped dramatically like overnight with quantitative easing and the federal reserve, so dividends gradually reduced to the level that they are today. They didn’t just overnight reduce like an interest rate. They gradually did because those old bonds that they owned were at the higher rates of the early 2000s. As those were being slowly dwindled away and the new lower interest rate bonds were being purchased, it’s taken some time before it’s fully materialized.
All this to say, it’s a lagging indicator. I would try to cut off that myth if I could of, hey, any short-term movement, up or down, is going to directly impact my dividend right away. It’s very unlikely that, that’s going to happen.
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Holly: You have to understand that, even as a business or as an owner, you’re thinking long-term, we’re not thinking short-term. So we’re thinking long-term, how does this impact and affect us long-term? And to really understand that, as long as the interest rate stays high, we can expect our dividends to rise over time. But on the same hand, when interest rates drop, our dividends decrease over time, but like Nate said, this is not overnight. It does not mean next year you’re going to see this huge jump in your dividend because interest rates went up. That won’t happen.
Nate: But it is true. At the end of the day, as an owner of a lot of life insurance policies at mutual companies, I welcome some increases in interest rates, because I know that if things stay that way, if they’re able to invest and get higher returns in their bond portfolios, that it will have a positive impact on our performance over time, but it’s just not going to happen immediately or anywhere close to immediately.
In fact, you may still see potentially some possible dividend decreases over the next year or two, even if interest rates are going up because it’s a lagging indicator. Dividends are lagging indicators. So for the last 15 years, the interest companies portfolios have been based on lower interest rate timeframes, lower interest rate bond investments, and so forth.
That was a big deep dive into the main factors of dividends, what to expect in terms of higher interest rates or lower interest rates. But maybe we could wrap it up by saying that, there is some element where we can control how much gets paid in a dividend to us in an off way. I mean, not necessarily directly. I would say it’s relative, so in other words, if an insurance company’s dividends stayed exactly the same for forever.
So, we buy a policy, we look at what’s called a life insurance policy illustration and it’ll show what the dividends are today, and then it’ll just blast that out for the life of a policy. If they kept their dividends exactly the same as they are today, we would know exactly what all the dividends will be in the future. Now, that’s not going to happen.
Holly: That magic bullet. Right, Nate?
Nate: Yeah. That’s not going to happen.
Holly: That’s not going to happen.
Nate: They’re going to move the dividends around based on profitability, just like everybody else. But if that was the way that was going to happen, the question is, is there a way to get off that track? You actually can improve the performance of the policy relatively, because if your policy is set to pay $10,000 a year of premium and we’re just going alongside paying $10,000 a year and we’re using policies to go do some things, the question is, how can I make my policy perform even better and earn even higher dividends if there’s room inside the policy to fit a little bit of extra money?
Let’s say that I borrow money from my policy, and I’m going to pay myself back at a high rate of interest. I’m going to pay myself back at 10% or something like that, because I’m going to go purchase a car and pay me back. Or maybe I’m going to pull out money to make an investment in real estate or some sort of cash flow producing asset and I’m going to pay myself back at 10% for this. Long story short, essentially what we’re doing when we do that is, we’re adding a little bit of additional capital above our scheduled premium amounts. So, that money’s going directly into our policy, the extra interest that we’re paying and immediately boosting the cash value.
Well, what happens whenever you have more cash value than you thought you were going to have? Well, dividends are going to increase because of that. This is why we try to tell people and Nelson Nash did this in his book too, if you pay yourself back at high rates of interest and just make that a habit, then even if interest rates are reduced in the market rate environment, you can actually have a continual increases in dividends just by how you operate with it.
Now, obviously it would require you to pay yourself back a higher rate of interest than just the minimum policy loan rate. For those of you who’ve been around, you would also have to have a little bit of extra room in your MEC limit inside the policy to fit some of this extra interest. But assuming those two things are available, you can actually manipulate future dividends by how you use the policy and how much you contribute towards it will have an impact on dividends as well.
Holly: I think you have to think of it as like an owner, Nate. You wouldn’t want to pay a bank that you don’t own more money and let them make the profit, but there’s no problem in paying yourself more money. You bearing as a result of that, a direct profit from it because of the dividends.
We can’t say every dollar you put in there is going to go directly back into your policy, but you can help your dividends. You actually can increase those dividends by paying what we call the extra interest or a higher interest rate back to yourself than what the insurance company is charging. When it’s paid back to yourself, I don’t know about you, Nate, it’s a lot easier to make that payment when I know it’s basically going back to me versus going to somebody else and into their pocket and their bank account.
Nate: Absolutely right. So, essentially, to wrap that up and in some way, some people call it extra interest. It’s like making a habit of paying back to your policy a set rate of interest that’s even higher than the minimum policy loan rate.
Now, not everyone has to do this. It’s essentially just adopting a new habit. The same style thing could apply if I was planning on putting $20,000 a year into a premium, if I was just to add an extra 1,000 or $2,000 to it, assuming there’s room for it. Then, suddenly, I can start earning more dividends than I thought I was going to be able to earn because there’s more money in there.
I have a policy that I could show right now if this was live screen, where the original dividend that was expected to be paid this year is actually lower than the dividend that I’m actually receiving this year. But the insurance company that I’m using has actually had to slightly lower their dividends just due to the interest rate environment and things that have happened obviously, and that should be expected with the prolonged low interest rate environment.
But I’m saying that, they’ve actually had to slightly lower their dividends, but my dividend amounts higher than I was originally expecting. Well, why is that? Well, that’s because I’ve contributed. When I take money out, I’ve been in the habit of putting back more in than even the minimum loan rates. So, just the way I’ve funded, has actually caused it to produce higher dividends than what was originally expected. It had nothing to do with the insurance companies dividend rates and how much they’re paying out and so forth. It had to do with how I used it.
Now, of course, I’m impacted by that, but nonetheless, how you fund your policy will impact your dividend. You can actually increase them by adopting some new habits, I guess I would say.
Holly: Nate, it goes along the lines of, if you have a mortgage and somebody tells you, you should make an extra mortgage payment, you’ll pay off your mortgage quicker over time. I’m not promoting that by the way, so don’t do that, put it in your policy. But we do that because somebody told us, “Oh, we’re paying off our mortgage more quickly. It’s an extra benefit. You yield zero rate of return.”
At least by being disciplined to actually put a little extra into your policy, you actually are buying a guaranteed death benefit that actually does affect your dividends long-term. Remember, we’re looking at this, not short-term, long-term, how is this going to affect us? So, over time you’ve benefited in both ways. You put extra money in, but you got more than… I’m just going to say this, if I put $1,000 more in, I didn’t just buy $1,000 of death benefit. Typically, it’s a little bit more than that.
In the reality of things, you guys have to start thinking like that banker, where a banker will encourage you and a mortgage company will encourage you to make an extra mortgage payment. Well, in the same way, make an extra payment to your policy. Make an extra deposit because it’s going into your account, not their account. Why do the banks want your money? Because then it gives them more money to use. Of course, they want you to make an extra mortgage payment.
Nate: Making extra mortgage payments have a tiny benefit to you, possibly a negative benefit.
Holly: Negative really.
Nate: I mean, we could talk about that, but it has a great benefit to the bank. That is, the faster you repay bank, the happier they are. I know it’s surprising. People are like, “Well, if I pay them back fast, then they don’t get as much interest.” They don’t care. They just want the money back, because they’re just going to lend it right back out.
In other words, the faster they get it back, the more times they can turn the money, the more profit they’re going to make. They’re happy for them to have collateral against your whole house.
Holly: “Give us some more cash,” that’s all they’re telling you.
Nate: The reverse is true when you’re dealing with the policy loan. You putting more back in only benefits you, nobody else, it’s always a good idea. You’ve never made too much deposits into a place that profits you and only you.
In other words, remember, dividends are the symbol of our ownership in the banking world. Don’t get too analytical with it. The reason why they’re important is not due to just the rate of return of the life insurance policy, no. Remember, this is a concept of how to become your own banker. The tool dividend paying whole life insurance works so well because it allows us to plug into essentially a big banking organization as an owner, as opposed to a customer. And so, the dividend is just the symbol. It’s just us realizing our ownership and having it work the way it was supposed to work.
There’s three main factors. Dividend amounts, overhead and mortality experience are very controlled by the insurance company. There’s very little changes with those two. The third one is the interest rate environment, which of course the insurance company has no control over. And so, that one will have the biggest impact on your future policy performance to some degree or dividend performance at least. But it certainly does not mean that short-term changes are going to have any impact, good or bad.
It’s typically long-term trajectories are what’s going to impact actual dividend amounts. It’s more of a lagging indicator and you can impact dividends for your own benefit by adopting some new habits to adding a little bit more capital each year than what you were planning, which will automatically boost your cash values and thus boost dividend payments, regardless of whether the insurance company changes their dividend or not. Anything else, Holly, before we close it down?
Holly: No. I think we summarized it very, very well. Think like a banker and that you’re the business owner. You really have to have that mindset and I love that you said dividends symbolize ownership. If you can recognize that and remember that, I don’t know if it’s an easier concept to understand, but the way your brain thinks about your premiums, they’re no longer payments or deposits.
Nate: They’re just a way to acquire more ownership of a banking. Every time you pay a premium, you’re acquiring more ownership in a banking organization and your dividends are being increased. You have more ownership now, more ownership level. Every time you pay them, you’re getting more and more ownership of a banking enterprise that profits you.
We love it. It’s the symbol of our ownership in the banking world. It’s why we use mutual life insurance companies as opposed to any other vehicle, because it’s the only way we really know of to do this in this way. If you have another idea, let us know and go ahead and show us how it’s working for you. We’re happy with how this is working for us though, so it’d have to be pretty darn good to beat what we can get in a mutual life insurance company.
Remember as well, one more point that, if you want to get in the banking business as an owner, you can go start at your own bank. It’s just going to be really hard and time consuming, but it’s probably worth it, maybe more of us should do it. On the flip side, it’s far easier to plug into a banking business that already exists and start participating as a profit where every single premium we pay gives us slightly more and more ownership of essentially a banking enterprise where we can become more and more profitable. Well, that was fun, Holly.
Holly: It was.
Nate: It was fun.
Holly: It was.
Nate: I hope the listeners enjoyed it as well. If you have more questions, feel free to reach out to Holly or me. We’re happy to answer some specific questions, but with that, this has been Dollars and Nonsense. If you follow the herd, you will get slaughtered.
Holly: For free transcripts and resources, please visit livingwealth.com/e145.
Announcer: Listeners, one last thing before you go, start your journey towards financial security and wealth today. Visit livingwealth.com/beatinflation. You’ll gain instant free access to the beginner’s course Ray, Nate, and Holly made just for you. Again, that’s livingwealth.com/beatinflation.
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