With all the bank failures and drama happening right now, many people are looking for safety in our infinite banking policies. But many will ask, how do insurance companies decide on the dividend rate to pay? How do dividends pay? Where does the money come from? Which companies tend to pay the highest dividends? These are all questions that Chris Miles will answer today. So check out this episode!
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How Do Life Insurance Dividends Work?
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I want to talk about a question that was brought up on YouTube. This is brought up in a video we did on our long form. This is on the show’s channel, specifically where I was talking about the life insurance death benefit. There’s a lot of debate about the death benefit and the cash value. Do you get it at death and all that stuff?
A great question came across from one of our viewers. They said, “I would love to hear something about how life insurance companies are able to pay dividends. Especially with all the bank failures going on right now with all this uncertainty, how do we know that insurance companies can keep paying their dividends? How are they making their money? What allows them to keep paying?”
I thought that even though I have addressed it in different topics and here and there, I have never addressed that, at least I don’t think I have in an episode. I figured I’d do that here. It won’t be a super long episode. This probably be one of our shorter ones, but I want to get into that and dig into how do life insurance companies make their money besides the fact that you pay them premiums, but how do they make money. More specifically, how are they able to pay you dividends? How are you able to earn money by having the life insurance policies?
As you probably are aware, if you have term life insurance, this is normal death insurance. Just like your car insurance, you only use it if something happens. If it’s term life insurance, you can only use it if you die, which means you don’t use it at all. Somebody else uses it. There’s somebody that’s left behind to pick up the pieces and clean up the mess.
I’m not trying to be insensitive here, but somebody that needs to do this financially probably has some responsibility for your stuff after you are gone. This could be used to pay for funeral costs and health bills in general. It could also be paying for deaths and things like that or even providing safety and security for your family.
That’s term life insurance. It’s a death benefit. It’s death insurance. With life insurance, especially when we are talking about dividends, we are specifically talking about whole life insurance. We are not referring to universal life because, especially with Index Universal Life, which is more popular right now. That’s tied to a stock market.
It’s based on the returns and it can be more or less depending on what’s happening. Not usually the thing I recommend, especially if you want some real security and stability in your finances and especially if you want to use Infinite Banking, especially the max ROI Infinite Banking to get that double dip effect. You can’t do that with the Index Universal Life and those kinds of things.
Those are great. It’s got its place but that’s not what we are referring to here because dividends don’t apply to that situation. The dividends only apply to what’s referred to as whole life insurance. Whole life insurance is what it says. It’s permanent insurance that lasts your whole life. You pay one premium. It’s more expensive than term insurance, but it stays the same for your entire life. It’s very similar to buying a house.
If you buy a house with a mortgage on it and you get a 30-year fixed mortgage, that payment is fixed. If you were to rent, you know it’s going to happen. You rent and each and every year, every time you renew that lease, the rent’s going up, isn’t it? It might be cheaper now, but you are going to pay more over the long haul, which is why many of us try to go to home ownership eventually because we don’t want to have to pay more. We want to pay less, especially with inflation. That’s what whole life insurance does. It has that flat premium for their whole life.
The way that we do it is very different. That’s what traditional whole life is. It’s not cash rich in the beginning. You have all your expenses front-loaded in the beginning, those early years, and then you build up more and more of that cash value, that tax-free savings account, as time goes on. You have a cash value account with savings that you can pull money out of and then you get your death benefit. Those are two separate things.
Dividends are paid for whole life. When the company makes money, they pay you those dividends. It’s different with different companies. Let me talk about that specifically because we want to talk about specifically mutual companies. Things like Mass Mutual. Even Guardian and Northwestern are mutual companies. New York Life is a mutual company. Penn Mutual is a mutual company. These are mutual companies.
They are called mutual companies. They are very much like credit unions versus banks. Banks will talk that they can be big, but they will have shareholders. People that have stock shares that when they earn profits, it pays to the shareholders, not to the depositors. Not to you that puts your money in a savings account.
The credit union, the thing that they try to brag about is that you are a member. You are not just a bank account owner. You are a member of that credit union. As a result, when they make money, they try to pay that more into the interest rates. They will brag that they can pay a little bit more on your savings account than the normal bank will. That’s what a credit union does. They try to pay back to the members. That is exactly what a mutual like with life assurance.
When they are stock companies like your MetLife, for example, MetLife is a stock company. They make their dividends and earnings, and those profits get paid to the stock shareholders. Not to the people that have whole life policies with MetLife. I’m using that as an example. There are plenty of other companies out there, but you see those companies traded on the stock market or if they are considered a stock company, they are going to pay their returns to the shareholders. Not so much to you as the whole life insurance account owner or the policy owner. If you have a mutual company, those profits get paid back to you.
Here are the three ways that you get paid from a whole life insurance company when it’s a mutual life insurance company. One, they already factor in a return of premium. This is true with stock companies as well. They always factor in that there’s a return of premium. Why? They essentially make you overpay a little bit. Just in case there are chaotic things in the world, they try to go a little bit overboard, but then if things are normal that year, they pay back those premiums to you. That return of premium like a rebate is also one of the ways that we have been able to have this tax-free for over 100 years.
Thank you very much, Uncle Sam. This is the one time the IRS and the politicians like to agree that they do love keeping life shares untaxed or tax-free. It’s like a Roth but without all the stupid rules that are tied to it. They keep it tax-free. That is because part of it is a rebate. You don’t get taxed on rebates. You don’t get tax on that money.
The other ways. There are two other ways to get paid. The other way is their portfolio performance. Stock companies also do this too. When they make money off of their investments, they are putting their money into, and this can be investments like usually bonds and treasuries. They are typical. They might invest in a little bit of alternative assets. Sometimes real estate, sometimes even investing companies. That’s possible too, but they try to have this portfolio that they make returns off of that helps contribute to that dividend.
The better it does, the more they can pay on the dividend side. The worse it does, the less they pay. This is why they go for very conservative type of things. They don’t like to take high risk of this money and unlike banks, they can’t over-leverage themselves. The nice thing is they are not going to be loaning out so much of this money to other people. They can’t. They can only invest what they have. Unlike banks who are legally allowed to loan out more than what they possess in actual assets, insurance companies cannot do that. They can only use what they have.
Just like you. If you have cash, you invest it and that’s it. The same thing for insurance companies. They don’t take those real unnecessary risks that many banks have done. They have caused some failures. As with First Republic Bank, Signature Bank, and all these Silicon Valley Banks, these kinds of banks who took high risks by essentially loaning out more and then not being in liquid. They do not have enough cash reserves.
Insurance companies don’t have that problem, and as a little side note here, they also have what’s called reinsurance companies that back them up. If they ever do happen to become insolvent or something goes wrong, those reinsurance companies will step in to ensure that your cash value and your death benefit are protected.
It’s very rare. People would disagree with me on this sometimes, but you can argue to say that this is better than the FDIC who has less than 2% of reserves for all the banks out there. If 10% of banks fail, if they are pretty big banks, what’s FDIC going to do? They got to rob Peter to pay Paul, probably. You might not getting your money for a matter of months waiting for all the red tape and the government crap to go through. That’s not the case when you have insurance companies who go out of business anyways. Even if they do, they got another insurance company to back them up. There’s that extra backing that you don’t get with banks.
I mentioned 1) They return your premium. There’s always a little bit budgeted for that. 2) They are investing with the portfolio, and then 3) The last one is if it’s a mutual company only, you also get company profits from the money that they are earning off the policies that they are writing. If that company is strong and solid and they are doing new business all the time, not too much new business because too much new business for most insurance companies, they go in the whole. I don’t know if you know this. Whether you do term insurance your whole life, they lose money for the first few years because they pay for everything including paramedic exams, if you have to go through that. They are paying out commissions to the agents. They make virtually nothing for the first year or two.
They are betting that this is going to be long-term. As they do have those profits coming in, I like to joke to everybody that buys a term insurance policy, term insurance policies are notorious for only paying out less than 1% of the time. Not because they don’t pay out but it’s because people will cancel them before they die, and insurance companies taught you to do this.
I don’t know if you knew this, but insurance companies taught you to cancel your term insurance. Have you ever heard you buy term life insurance and then when you get older, you self-insure? You cancel that term insurance because it’s going to get expensive anyways if you buy term down the road, but instead, you are going to cancel it and then all your assets are your insurance now.
You have enough assets. You don’t need insurance anymore. The very people that taught you that weren’t financial advisors or insurance agents. They were the insurance companies teaching the insurance agents to then teach it to you. Why? Think about it, guys. Why would an insurance company want you to cancel your life insurance before you hit the average age of death? It’s because you won’t die. They won’t have to pay out.
They are the very ones that have taught you to buy term, invest the difference and then cancel it when you are in your 60s. I can’t say nobody dies in their 60s, but the odds of you living past your 60s are very high. This is why less than 1% of all term insurance policies pay out. Not to mention you might end up canceling it anyways, changing different companies down the road, or whatever it might be. That’s all-pure profits from the insurance companies, and where do those profits go if it’s a mutual company? It pays to you if you have a whole life insurance policy. It pays to you as a policy owner.
Those are three ways you get paid. There’s the rebate, the return of premium that they already factor in, they budget that in. That’s usually what the guarantee is. When you hear 2%, 3%, or 4% guarantee, that’s where that comes from. You then have the actual dividend from the portfolio of their investments that they are doing. Usually very conservative, and then the third one is they are making money as they have more business coming in. The more profitable they are as a business, the more you get paid.
This is why I tend to be very skeptical of companies that try to offer high contracts. I’m very skeptical of companies that also try to pay for amazing vacations and they go all out, because if they do that, it means those profits are getting paid back to them. I’m not opposed to that. I get benefits from insurance companies too, but what I do love is if they can keep their numbers pretty lean, they keep their profits pretty lean, and it allows them to pay more back to you.
It allows me as that agent and as well as our team to be able to manipulate those numbers and make it cheaper so that you get paid more. That’s why when people ask, “Do you do Northwestern?” “No, we don’t like Northwestern.” “Northwestern is one of the largest. It’s the second-largest company out there. It’s top-rated. It’s got a 100 rating. Why wouldn’t you use them?”
Insurance companies have such a rating and so much financial strength because they overcharge you to death on your insurance premiums. Click To TweetThe reason why they have such a rating and they have so much financial strength is because they overcharge you to death on your insurance premiums. That’s why. They cost too much. They kill you in costs and they make lots of profit, and that makes them look good to Wall Street. That’s why Wall Street will look at them as well as all the other ratings agencies like the S&P and the Moody’s. They will look at them and say, “They look wonderful. Look at all the cash they have,” because they are taking it from you.
I’m not opposed to insurance companies making profits. They still need to have a good healthy profit, but there’s a reason why those largest insurance companies have high ratings. Three ways that your dividends are paid to you through a mutual life insurance company. Return of premium, dividend increase from the portfolio it’s investing in, and from the profits the company makes with the business that they are doing.
Those are the three ways. That’s it. The best way to figure out what’s the best for you, you do want a strong company, but you also want one that has a good cost structure so that it takes less money out of your pocket. I’m telling you. This is the key secret right here. The dividends, for the most part. You hear different terms thrown out there, like direct recognition versus non-direct recognition, and things like that.
I’m going to share a secret with you that I have learned over many years of being in this business. It’s a smoke screen. It’s all marketing crap that the insurance company is trying to throw at you to make it seem like they are unique in some way. Direct recognition versus non-direct recognition, if you don’t know what it is, it doesn’t matter, but it does matter. It is a smoke screen.
I have seen direct recognition companies that are supposed to be paying you less than you would think when you are borrowing from it to find out they will pay more than the non-direct recognition companies. Why? They got to make money somehow. They got to still stay profitable. That stuff is all smoke screen. It’s all stuff that they try to use in their marketing.
What comes down to the end of the day is which one allows us the most flexibility to cut back on cost? Even if you save 10% on cost compared to company B. The thing is, company B is not going to pay an extra 10% dividend to make up for that because right now, the dividends are right between about 5% and 6%. That’s in the low-interest rate environment that we have had in the last few years. There’s always a lag effect.
As interest rates have been rising, guess what’s going to start happening in 2024 and 2025? You are going to start seeing dividend rates increase, too, as long as there’s not some big world type of collapse here. For the most part, you are going to see as interest rates rise. This is a good thing if you are a policy owner. I’m guaranteeing that rates will rise and I don’t think they will come crashing down like people have been predicting.
What does that do? That means you get paid more on your whole life insurance policies. You get paid higher tax-free dividends. When that environment happens, stocks usually tank. They usually get beat up because higher interest rates means less profits in those companies. Therefore the stock prices go down, and so does your retirement account and your freedom. In a low-interest rate environment, 5% to 6% has been a bad return, a bad dividend. Guess what? In my opinion, especially when it’s tax-free, not so shabby. I wouldn’t mind that the stock market would pay that pretty consistently without all the ups and downs and the bipolar nature of the market.
Even from that standpoint, it’s great. As I have mentioned before, the real power, it’s not the fact that it’s providing a nice dividend. It’s a great place to store your money. It’s a great place to store your cash savings, especially if you want it for emergency funds. It’s going to sit around there, at least fight inflation with that. What I love is I can also invest with it and get that double dip. I can make my money in two places at the same time, allowing my investments to increase the rates of return that they would have paid me normally, but now I make more money on those investments.
Not to mention, if I’m a business owner, I can use it for business. I can write off the interest that I’m using when I borrow from it and things like that and still make money too. There are so many ways to use this that makes it a great tool. At the end of the day, it’s having that stability. If I’m investing in real estate, if I’m investing in my business, or wherever it might be, having that stable cash that I know is there and accessible that I don’t have to worry about bank or insurance company failures, that, to me, is huge because that protects an abundance peace of mind.
When you have an abundant state of mind and you are relaxed, you can make better decisions with your money, allowing you to make more money while the rest of the people freak out and lose money. Do you want to be caught with the masses freaking out, or do you want to be abundant, free, and happy? I choose the latter. I know that for some of you, this is in the weeds, but hopefully, this is valuable to you. If you have questions, you can always reach out to us at MoneyRipples.com. Message us and contact us, and we can answer your questions for you. Make a wonderful and prosperous week. We will see you later.