E93: How to Safely Gain Profit and Security Now

Nate: In this episode we will discuss why mutual life insurance companies are some of the safest and most stable organizations in the world and how they have managed to consistently be profitable and pay dividends for over a hundred years in a row. 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: Well, Holly, it seems that people who hear us on the podcast will say things like practicing the infinite banking concept, which would always include buying a whole life policy from a mutual life insurance company. We always mentioned that it’s very safe, that it’s guaranteed to grow and that’s part of the benefit of owning it. But it is true in times of crisis, which we’ve seen this year with the Coronavirus and the economic issues that have resulted from it, we do get asked more and more from people the reason why.

Why are they so safe? Why should we not be concerned when the stock market collapses or when there’s an economic recession or things like that. Why have mutual life insurance companies been able to weather every storm that we’ve seen so far and still be profitable, paying dividends to their policy holders. So that’s going to be the main goal for this day or this podcast, is there are real reasons why and we’re not the only ones who’ve come up with those reasons.

Holly: And I think, Nate, the reason why too, is a lot of people are asking how is my life insurance policy doing? How is it performing? That with everything happening with COVID-19 and the reality is that even in a downturn like we saw in 2008 and 2009, our policies are growing on a daily basis. They are growing, if not daily, they’re growing monthly as well as annually. And so in reality, one of the biggest reasons is because they are investing in low risk investments.

Nate: Yeah, exactly right. So we’re going to cover a few reasons, but one of the reasons why mutual life insurance companies can be seen to avoid catastrophes is due to the fact that; a couple of things, they have very low risk mentality. They know that they’re… One of the major strengths of working with them is their stability. So they want to maintain that obviously. And so they invest only in low-risk longterm investments typically. And on top of that, they’re some of the most well capitalized organizations in the world. They have so much capital at hand at any given time that it’s just very difficult to break through and cause real damage with how low their risk threshold is as well as how much capital they have sitting around to weather pretty much anything that comes their way.

In fact, Holly, one of the companies we work with, and we work with a lot of companies. But one of the companies we work with back in, I think it was 2015 during one of their annual meetings that I attended, they had mentioned at that meeting as kind of a, “Hey, work with us. We’re really great.” Mentioning to us obviously, but they had said, “We’re one of the only companies…” It wasn’t like a lot of companies were dealing with a lot anyway, but they were one of the only companies who could brag and say we had zero defaults throughout the entire Great Recession.

So that’s from 2008 to 2015, they didn’t have a single default in their entire portfolio of assets. Just as a way of saying, we like to talk the talk but we’re walking the walk. There’s very little risk associated with what we’re investing in. That’s why they were able to pay dividends and be highly profitable and practically just not even a hiccup through the last Great Recession. And that’s really what we’re experiencing now in COVID-19 from all the insurance companies that we work with. They’re just coming out and saying, “Yeah, the things we’ve always said are still true. We’re still doing really well.”

Holly: It goes to the fact that because they’re very strategic in regards to their investing, that it goes to show they don’t really have, even right now as you said, no change in their operation in what is growing and how the policies are performing and how they’re able to continue to pay dividends. I think the other point to realize is that a life insurance company is a business, but they are very, very profitable as well in what they’re selling, which is life insurance, term insurance, all different things like that, but they’re-

Nate: Annuities, disability insurance. Yeah, you’re exactly right. Not only do they make a ton of money from their investments just by having this huge pool of capital that’s constantly bringing them money in a very low risk way. But you’re right, they’re an operating business. They create a lot of revenue just from selling stuff just like any other business does. They sell products and they’re profitable because of that. There’s never really been a time when people said, “You know what, I don’t need life insurance.” I don’t need the protection that maybe an annuity would offer or some of these various things that are being sold by these insurance companies.

They’ve been successful doing that for a very long time. They’re very profitable. They know the game of insurance. It’s a game of numbers so they know exactly how to price things to be profitable and it’s nice to know that. And all of these mutual insurance companies that we use, they’ve been paying dividends for over, since the 1800s every year without missing a single year. There’s just really, you can’t find that track record anywhere else.

Holly: And I think that’s the security part that even I feel like when we talk why about why is it life insurance and why do you put your money there? Because I really feel like it is the safest thing out there to be putting my money into because they actually are strategically working for me. And because I can look at the history and say, hey, for 100+ years or more, and it’s really like 120 or 130 some years they’ve paid dividends to their shareholders and that says a lot. We don’t have anything in this country that equals that to be able to show that consistency of constantly looking out for the shareholder, which is you and I.

Nate: Exactly right. And another reason why they’ve been able to weather all these storms very well is just their ownership structure allows them to focus on what they really need to focus on. And so what I mean by that is them being a mutual company, there are no stockholders in the company, there are only policy holders. And so if the only ownership of the company belongs to the policy holders, then the leadership of the company is directly aligned with what’s best for the policy holders. And if you contrast that to other businesses, many businesses have owners and customers. Even a stock life insurance company would have owners and customers. One of the articles that was written actually during the last recession, which still rings true today, was written by Standard & Poor’s and the rating agency. And it said, in the midst of the downturn… This is the title of the article, In The Midst Of The Downturn, Many US Mutual Life Insurers Aren’t Nearly As down As Their Publicly Held Peers. And that was one of the reasons they said, why are the mutual companies doing so well whereas the stock-held companies are actually suffering during this.

And one of the reasons that they came up with was that very thing, that a stock company has customers and owners and there’s always a friction there between giving the customers a fair shake and then also being profitable for their shareholders. One of the benefits that the mutual life insurance company had is it doesn’t have to worry about two different sets of people to please. It’s just this one set of people. The policy holders who act as owners and customers kind of merged together. These are the only people they have to take care of.

So it allows them to focus better and it allows them to hold more capital as we’ve already said, because they’re not needing capital in reserve to pay out death claims and different things that they have to do as an insurance company as well as send a whole bunch of dividends and different things back, stock repurchase programs and different things like that. They don’t have to waste money trying to please outside sources. They only use their money to please policy holders and to maintain stability.

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Holly: And we’ve said this before, that a mutual company, the only thing the life insurance company is working for is you the shareholders, the ones that actually own the policies. So because you’re an owner, you’re a shareholder. Versus a publicly stock company, they’re working for the owners, they’re working for the shareholders to produce that money. They got to give them money. But then they’re also trying to satisfy their customers and it doesn’t give them… Number one, it doesn’t give them the liquidity, but it also separates them. They’re pulled in many different directions. They’re not just working for one individual, the customer. They’re working for multiple individuals: the customer, the shareholder and the owners. So there are like three ways instead of, “Hey, we’re working for you and we want to give you dividends.” So I’d rather be working for one versus several different ones.

Nate: Well, I think that brings up a good point, Holly, too. One of the questions we get asked, and this may be a little bit off topic, but one of the questions we get asked all the time is, the system, the infinite banking concept, sounds too good to be true, how does the insurance company make money? Where do they come in? And once again, we’re bringing our old way of thinking into this new structure in that the mutual life insurance can be, yeah, it makes money but every business makes money for its owners. That’s the reason it’s in business. If you go buy a policy from a stock held company, it’s a fair question.

Okay, so this policy is doing this for me, but then how does the shareholders make money? How does the corporation make money in and of itself? It’s a little bit of a change to realize that, hey, when I buy this policy, yeah, the insurance company makes money, but what happens to the money it makes? They don’t send it to Wall Street like a typical corporation would. They send it back to the policy holders who are the owners. So, it’s a bit of a different world to be in a place where the company is actually making money for you as opposed to making money off of you. It’s the difference between being an owner and a customer. They make money off of their customers and they give it to their owners. That’s just business 101.

But in a mutual life insurance company where you fit both roles, yeah, of course they’re going to be profitable, but since we’re the owner, we’re the only people they get to send the money back to that they make. So we’re the only ones who receive dividends. And so, it is a bit of a different world but you’re right. It kind of answers one of the common questions we get is, how does the insurance company make money? And it’s a bit of a different mental energy level to switch from saying, “Oh yeah, this mutual life insurance company is not out to get me. They’re out to only make money on my behalf as soon as I buy this policy.”

Holly: Even when we talk about money in general and we look at even banks and stuff, we are the customer but the bank has an ownership and their goal is to make money for the owners and their shareholders of the bank. It’s not to make money for you and it’s not to give money back to you. When you really have to differentiate that understanding that as long as we are putting our money in a regular bank, there are owners and shareholders of the bank and you are not one of them because you’re the customer.

Yet with the life insurance company, that’s mutual, you are a shareholder. So their job is to make that money. And it’s really a hard shift to really get your brain around or wrap your brain around the fact that we actually are the shareholders of this company that we’re giving our money to so that it’s doing two things instead of just one. Because we’re so used to just depositing our money in the bank and watching the banks make all kinds of money versus us being on the receiving end of receiving dividends or even interest. I mean, even with the bank, the interest we might make, which is relative, is still taxed. At least with the life insurance company it’s not even taxed for growth.

Nate: Yeah, exactly you’re right. I mean, there’s a big difference. If you owned a bank, of course you’d make all your deposits at your bank. Why would you deposit money at somebody else’s bank. When you deposit it at your own… A bank owner can have a checking account at his bank. He probably does have a savings account in his bank. But it means more to the owner because not only are they sitting in the customer’s chair now that they’re a customer, but they’re also an owner so they know that all of the profit that’s going to be made off of their money sitting there is going to come back to them.

That’s actually what the infinite banking concept is 101, is how the company is structured makes us sit in the owner’s chair and so we start profiting like an owner. It is kind of interesting how the interest being aligned, the Standard & Poor’s rating agency says is a huge plus for stability sake of the company as itself. And it’s also the reason why the infinite banking concept exists by having the interest be only aligned with us.

And one of the last ones we could talk about. We may have a couple of other things, Holly, but one of the last ones is, with this history of dividends, there’s always been this cushion involved with these policies in that, “Hey, there’s millions and millions of dollars that’s being sent out every year in dividends to the policy holders.” And that’s one of the things this article mentions as well, that the potential to reduce policyholder dividends can be considered as a financial cushion that can be used in times of stress to preserve capital.

One of the things they’re trying to say is that, “Hey, if these insurance companies ever get into a time of stress, they can simply reduce dividends as a way to withhold a lot of capital to be able to maintain it.” Now honestly, it’s pretty much never had to happen, Holly, where there’s a huge reduction of dividends at any of these companies, but they’re saying just having that potential is extremely valuable for the longterm viability of life insurance company.

Holly: And I think that’s the point, that they could reduce. They could even eliminate, but they could reduce the dividends, meaning that maybe it doesn’t perform as well as they thought it did for that year, maybe the next year, but it doesn’t mean that the dividends won’t increase or go back up at all. And the reality is that the companies, majority that I’ve seen and even worked with, they have a track record of always paying dividends for a long period of time. Like Nate said, over a hundred years. So even if they’ve had to reduce, which we haven’t seen that happen even with 2008 and 2009 volatility of the market and things that happen, I actually thought our dividends did better during the downturn than they had in the past.

I haven’t seen a real drop-off for it to change. So I think the reality is that that is a cushion and you have to be aware of it, but it actually is in your best interest even to be able to have that cushion because we don’t have stock held companies that have the potential to do that. They either are going to go in the red and go out of business because they can’t reduce something like that or you have the ability to reduce it and bring it back up when the company starts performing or the economy turns around. It depends on the situation, but they have the ability to do that with their shareholders and still make a profit and still increase the capital to give back.

Nate: Exactly, right. I mean, one of the other big things is that these stock companies are so focused on quarterly earnings as a public company, so they’re always trying to push the limit, taking risks that they probably shouldn’t have. And that’s what happened to AIG back in the 2008/2009 crisis. Whenever they had to get bailed out by the federal government, it was mainly that very thing. It was taking a lot of risk with these derivatives that no mutual life insurance company even owns any of. But as a public company they were trying to present value to their shareholders and it came at the expense of their policy holders.

If it wasn’t for the federal government coming in, policy holders would have been left out. But once again, that’s the huge difference and that’s why this article was written. There’s a big difference between what stock held life insurance companies do and what mutual companies do. And just the world at large is starting to realize that mutual life insurance companies are some of the most stable organizations that can be created just by how they’re created and how well capitalized they are.

But one other thing that just came to me, Holly, was that on top of that, similar to banks… banks are insured by the FDAC, or at least your deposits are to a certain level at the FDAC level, which we can all debate whether or not the FDAC’s claim of insuring your money is actually reasonable concerning of how, if you just research, how little money the FDAC actually has, you’d start to question whether or not they would have the ability to. But either way, in a similar way that the FDAC ensures bank deposits, the insurance companies also have a level of security or you as a policy will have a level of security through your state since it’s not federally run, it’s state run as far as how insurance is regulated.

Every state has what’s called a guarantee association, which would act similarly to an FDAC of sorts, ensuring certain levels of deposits, maybe 100,000, maybe 200,000. It actually varies a little bit from state to state. I think the minimum is a 100,000 of cash value that they insure. So it acts similar. There’s even a level of protection, even similar to the banks, that we receive as policy holders. However, as we’re trying to stress, nobody who’s owned a mutual life insurance company has lost money due to the company going under. It’s just never happened yet. So it would be an unprecedented event for it to start to occur sometime in the future.

Holly: If you believe in that history repeats itself, then even historically, if this has never happened historically, then why would it happen now?

Nate: And how bad would it have to be? It would have to be worse than the depression significantly. Not only were they doing just fine during the depression to some degree. I mean, of course they were affected, but they were still paying dividends during the depression. I mean, they may be have affected but it would have to be a significantly worse than the depression for these insurance companies to just not be profitable enough to pay a dividend, let alone have actual financial crisis.

And then there’s some also last ditch resorts, which we may not even need to bring up, Holly, but here I go of whether de-mutualizing and becoming a public company and raising a ton of money that way, whether it’s the guarantee association taking over, whether it’s being bought, one mutual life insurance company taking over another, which has happened a couple of times where companies have merged where one that was doing well took over the other company that was not doing as well and the policies that moved in continued to perform the same exact way as if nothing had happened. There’s so many things that can happen. I mean, the goal of this episode was just to encourage us to realize that, yeah, we are in a very good position as policy holders of these large, long standing mutual life insurance companies.

Holly: And I want to point something out too, Nate, that for me what makes me feel really secure is that the life insurance company has a lot of capital, but they also aren’t loaning out money or producing money they don’t actually have. It’s based on Austrian economics, a different money system than our banks even that can loan out more than what they actually have to loan out. So the insurance company isn’t creating money they don’t have, and I think that’s a key point here is that they have to have something in reserve even to take your money, at least a dollar for every dollar you’re giving them. So it’s actually money that is not made up.

It actually is actual deposited money that they’re using to actually invest this money. So it’s not a, Nelson always called it funny money. There’s no such thing as funny money with the mutual life insurance company. It is truly cash that they have that they are actually using and investing on your behalf. They’re not creating a loan, even of money that doesn’t exist, to give to somebody else.

Nate: Exactly. Yeah. That’s awesome. I do think we could probably keep going on and on about the different areas and different reasons why mutual life insurance companies have weathered the storm and why Holly and I would believe they are going to continue to be profitable in spite of downturns. But I think we probably should close it down for today. If you do have more questions on the stability of these companies and why they’re so stable and want to go even deeper, just feel free to reach out to Holly or me. Send us an email, nate@livingwealth.com or holly@livingwealth.com. We’re happy to answer those questions and help you in any way that we can.

Holly: Don’t follow that herd. I mean, really that’s what we’re trying to get you to understand. Get out of that herd mentality and move to something new and different.

Nate: Exactly. Something that solely is there to profit you. But yet, 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/e93.