85: Beyond the Percentage: Understanding Whole Life Insurance Dividends

085 – Beyond the Percentage: Understanding Whole Life Insurance Dividends

[00:00:00] Episode number 85 "Beyond the Percentage: Understanding Whole Life Insurance Dividends.

John Montoya: Hello everyone. I wanted to talk about dividends and John Perrings and I are going to delve into what is it? Is it a yield? Where does it come from? Is it paid on a scale? If so, why, how often is it paid? We just wanted to take this opportunity because I know for a lot of new listeners dividends on the whole sound like it comes from something like a stock dividend in comparison.

And it's just not the case. These are two completely different things. And so, we wanted to have this discussion today to give you a better idea what the dividend is all about. John, let's go ahead and kick this off and I'll I'll start with is it a yield? Is a dividend that you receive on your whole life policy a yield?

And I think the simplest answer is "yes," but it's it's got some qualifications there because [00:01:00] it is very much unlike a dividend that you would receive if you own shares of a stock. The dividend comes from the surplus profit of a mutual based company. When a life insurance company reports their earnings for the year, they minimally have to have a surplus in order to pay a dividend.

So it's not like they automatically just pay a dividend from any amount. I think it's really important to point out that all these insurance companies that we use for infinite banking they've been around for quite some time and they have to meet at least their minimum projected earnings in order to pay out a dividend from their surplus.

So it is part of their surplus. And if you look at the bigger picture, yeah, you can say it's ultimately it is a yield that you're receiving because you're receiving some portion of that surplus profit, but it's[00:02:00] it's not as tidy as say If you have money in a traditional banking system and you're getting what nowadays is maybe 4, 4.5, maybe even 5%, if you're lucky from your traditional bank

if if not 0 01 percent yield it, it doesn't quite work like that. But there, there is a component of these whole life policies where, yeah, you you are fortunate enough to participate in the surplus profit of these life insurance companies.

John Perrings: Yeah. And I the word participate is a key word there. These are participating policies, meaning they participate in the surplus of the company. "Par" for short if you ever read any insurance literature out there, but the gross premiums paid by policy holders, for what are called bundled policies, which is whole life where everything is bundled together and all the costs and prices are baked into the policy as opposed to an unbundled [00:03:00] product, like a UL or IUL, one of those types of things where the costs are not baked in.

So those are annually renewing chassis, so to speak. So with Whole Life, it's a bundled product and the policies, the gross premiums are calculated using the maximum cost of insurance the loading charges and the minimum guaranteed interest rate, right? So premiums are set very conservatively and, it's different than a kind of stock type of deal because the policies , as a group are expected to experience lower mortality charges, higher investment earnings, and lower expenses than it was, what is built into the policy.

Another way to say that is the experience that we're set up to have as policy owners we're set up to experience the minimums, whereas a stock dividend they're very much beholden to, try to provide as much value as possible through [00:04:00] their share price. Whereas on. And an insurance policy, at least a bundled insurance policy, like whole life everything is based on the minimum.

And so anything we experience over those minimums is a, essentially a return of premium where we get to participate in some of that surplus. And so when when the policies do experience these things, if, so they go over and above what. The conservative kind of minimum is the directors and the trustees make a business decision on how much of the total surplus of the company should be retained as a contingency fund and then other, special surplus appropriation versus the rest, which would be what is called divisible surplus.

We've said this before, which is the amount earmarked for distribution. So that's a decision that's made every year by the directors and the trustees and the, and then the actuaries get in and divide that [00:05:00] divisible surplus amongst the participating policies. All right. In an equitable manner.

T

the divisible surplus should be distributed to policies in the same proportions as the policies are considered to have contributed to the surplus, right?

And so how is this done? It's done through In some, most cases, I'd think the, what's called the contribution principle. And so there, there's a three factor contribution formula where they'll say, what do the gains from investment earnings look like? And this is probably, at least historically, the most important one.

The actual investment earnings that are higher than the guaranteed minimums, right? Gains from mortality, which basically just means death claim payments that We're less than expected. So what gains happen from, more less than expected mortality experience and then the gains from loading.

So these are the actual expenses that are built into the policy pricing and. Historically, these things are not really [00:06:00] disclosed to the policy owners or even the agents for that matter. And so when we look at the div, how the dividends get paid um, there, it is a little bit of an internal, decision by the insurance company.

But as your policy matures and you've paid more premium, the more and more premium you've paid over the years, the more you'll have contributed to that surplus. And so you get a pro rata. Dividend payment back to you the longer you've contributed to that surplus, which makes total sense.

And so, you know, we've talked about in the past like, when we, when we are working with a mutual insurance company, we're partnering up with a bunch of like minded people essentially who believe in having guarantees and we're pooling our resources in a manner where the insurance company can offer us the minimum.

in the form of guarantees. And then anything over and above that all comes back to us as owners of the company, as partial owners of the mutual insurance company. So [00:07:00] it's a pretty really key, important thing to understand that this is not just we're trying to give you like investment dollars back.

What we're doing is we're pooling our resources in a corporate manner that allow. Greater scale in financial activities where we don't have to hit these like super high returns. We just have to create the minimums and anything over and above that just adds to what we're doing. And then of course we have all the other advantages like leverage, et cetera, et cetera.

That's the ballpark of where the dividends are coming from. And, um, right now I've seen a few insurance companies release their annual, dividend announcements and it's always funny because they'll publish this dividend rate.

But that actually has nothing to do with the rate that you get in your policy. So it's very misleading and I wish they would stop doing it really. But it's just how they've chosen to do some of that marketing, but really that percentage. So if someone [00:08:00] announces a 6 percent dividend or an 8 percent dividend, whatever the percentage is, that's actually just the divisible surplus.

And that doesn't. So that's the percentage of how much has been earmarked for the, as the divisible surplus. So there is some, a little bit of information in terms of like how much that's going, but we don't actually know, the full picture of what's happening and that's certainly, you're not getting 6 percent or 8 percent added to your policy at the end of the year.

John Montoya: Yeah, and I think one of the main things to take away from what you just said is that the dividend rate is not a specific yield to your particular policy. And so if you see anywhere that the dividend rate was calculated at such and such percentage point, that does not equate to that specific yield into your policy. And I, for as long as I've been doing this, that, that's always one of the [00:09:00] questions that I get most is, you know, uh, even in an annual review, I just did an first year end of review. And the question was my dividend was this amount and it's only a, you know, a small percentage of the.

Premium paid into the policy. And so it sparked this conversation that you're listening to here with both of us explaining how the dividend works. And it's even for someone getting started in IBC and paying first year premiums, you have to revisit the conversation and explain and understand that it's not a specific yield. Like you said it's just part of that overall percentage of the pie that is going to be paid out to all policyholders. And it's paid out on a scale, and I like to point that out to people. When I'm doing the annual reviews and, point out the current dividend scale and let people know it's on my, I tend to make jokes and I tell people [00:10:00] that it's that scale is you and me stepping on a scale, each year we get older, what typically happens?

We, we add a pound or two. Kind of the same thing is happening with the whole life policy where we're paying premium. We get the dividend, dividends reinvested. What does that do? It adds to the cumulative permanent death benefit that we have in the policy. And what happens when we have more death benefit?

We step a little bit heavier on the scale and we're going to get rewarded with more dividends in future years. And it's the same thing and except hopefully, we're not adding to our actual weight each year, but in a whole life policy. That's exactly what we want to do.

We want to pay our PUA premium as much as we can, contribute to the base premium for as long as we can. We do all these things and really, this contract is in motion and we really don't have to focus in on these little details that we think are so important on the front [00:11:00] end. It may be important on the front end, but I can tell you that the further along you get with your policies.

The less you tend to think about the dividends, because at the end of the day, the philosophy behind why we even get started with IBC it's not about chasing yield and chasing rate of returns. It's about taking ownership and control of this cash asset that does so many incredible things for us. But.

Here we go. We're having a conversation about dividends. It's important that you separate what it is and what why it's important to your policy, because one of the other things that I'll get asked about dividends is should I have the dividend paid out to me instead of to the policy?

And I think it's really important that you stay on course because when these policies are set up, they're automatically. Set up to have the dividends reinvested to [00:12:00] accumulate more cash value and ultimately more death benefit. And that's the way that you want it because you're creating more economic value for yourself and for your beneficiaries too.

And so once you start to take dividends. You can, if you have a fully matured policy, you've been paying into it forever, and you want to use it to supplement your income, no doubt about it it is there but up until that point, I wouldn't even consider it, because what you want to do is allocate as much capital under your control as possible, and that's part of what reinvesting the dividends allows you to happen naturally over your lifetime.

John Perrings: And you mentioned something about The actual percentage rate. And so something that you'll see out there, and it's a little too common, unfortunately, is people will say, Hey, you'll get a guaranteed two and a half percent growth on your cash value. And you get this 6 percent dividend. That's the most egregious version [00:13:00] where they'll talk about the guaranteed growth and and then you get this dividend on top and it's completely inaccurate, right?

That's not how it works. And even the guarantees, it's not really how that two and a half percent works. That two and a half percent is part of an actuarial calculation to calculate the guarantees, but it's all, again, an actuarial calculation, not just a straight interest rate. And then of course, we've mentioned already that, you don't get the percentage of the dividend announcement added to your policy.

And so you, you've got to. Look at the illustration and you can make, if you want to make some, rate of return calculations on that, you can do that, but it's not, that's not how it actually works. But I wanted to also point out we were sort of comparing this to like, uh, dividend stocks and the one thing that makes this very different than a dividend stock is the dividend paid from a stock doesn't actually have anything to do with [00:14:00] what's going to eventually happen with that stock price. And so you've got, you own your stocks and you're getting in potentially an annual dividend from that but the stock can still go up and down, right?

Whereas a participating whole life insurance policy with a mutual company, the underlying value will never go down. And once a dividend is paid, it becomes part of the guaranteed cash value. So once that dividend's paid, it's It essentially changes the guaranteed ledger, where now you have a new starting point for the guarantee.

The only thing that's not guaranteed is the next dividend and the one after that. All the future dividends are the things that are not guaranteed. However, once it's been paid It becomes part of the guaranteed ledger, which is not something that happens with stocks. Stocks go up and down, and it really just depends on what you experience that determines what you get out of that stock, even with a dividend [00:15:00] payment, even with dividends reinvested.

So you can reinvest dividends and still have your share price go down and you can lose money in a, with a. With a whole life insurance policy, once that dividend gets paid, it's locked in and becomes part of the new guarantee curve, if you will.

John Montoya: Yeah, and one of the things I like talking about with these whole life policies is when you come to IBC and study whole life policies for the first time, your frame of mind is really coming from the investment world.

Where you are chasing yield and ready to return and this is something that with the guaranteed values. Completely untethered to that world. And it's really important to take a look at your overall financial profile your snapshot and figure out is there anything like that, that you currently have that does what a whole life policy can do. [00:16:00] Meaning do you have something that is built on bedrock guarantees the dividend performance it's the track record is there but it's not interest rate sensitive, like all the other places where you can park money. It is to a certain extent because interest rates are relative, but the guaranteed values of the contract is where you start first.

Because that gives you the foundation to build everything else off of the dividends, they're going to come in a little bit higher, a little bit lower. Dividend scales will change over time, but it's completely out of our control. But the performance of these companies and the guaranteed values that you get year after year, that's the reason why you make this part of your.

portfolio. This is the reason why you add IBC to what you're doing, because you can't mirror all the value that [00:17:00] you get in these policies. Anywhere else. It doesn't matter if, what other investment you're attracted to. Maybe it has a dividend, maybe it doesn't. But don't confuse it with a whole life dividend.

You can't really compare this to any other product. We've called it a financial unicorn. Even though we're talking about dividends today, the focus, I guess what I really want to say in this piece right here is that your focus really should be on the guaranteed values. And the dividends are just the cherry on top.

John Perrings: Well said, and when we focus on dividends. And we're talking about the track record of how often dividends have been paid and for how long. It is important to look at that where, we'll say things like, dividends have been paid every year for, over 100 years or over 150 years in some cases.

However, what really makes life insurance companies and mutual life insurance companies special, [00:18:00] especially the ones that have paid dividends for that long, is the fact that they've paid death benefits for that long. And so they've, they have this excellent track record of meeting their contractual obligations and the dividends, the fact that they pay dividends is actually just a That's a sign that they do the other thing, meaning they've got this great track record of paying death benefits, because what it means is they've done a very good job of conservatively running their business and creating life insurance products that people want to buy and They've priced it conservatively to where they experience something better than what they've actually planned for.

And I think this is how all companies should run, but of course, stock based companies, they've got a little bit of a different incentive where they've got to meet, they've got to have impressive quarterly earnings. They're looking at every quarter and every month rather than, A hundred years down the line [00:19:00] where mutual insurance companies can invest and run their business based on really long time periods and match what they buy in terms of investments to what they expect to experience from a mortality perspective.

So it's a completely different type of company and. You can get involved with it. All you have to do is qualify. And it's a really different game that is being played compared to the, stock market type of game where again, It's a bunch of people that have gotten together to create certainty, which is a much different process than going out there and trying to impress shareholders and create high rates of return and do all this other stuff.

John Montoya: So I think the main takeaways hopefully from this episode is that you understand that the dividend it comes from a very well run company highly regulated industry. And it's from the surplus profits. It's not [00:20:00] a specific. yield to your policy. It's a share of a pie that all policy holders will receive.

And the longer you've had your policy, the more permanent death benefit you accumulated, the greater share on the scale you will receive of that dividend. And, if you happen to have a ledger that you can look at, take a look at that ledger, because it's going to reflect the current dividend scale, which means it's going to use the same percentage surplus paid out for all years. And what you're going to see is that the dividend. Increases over time in that ledger on the non guaranteed side. And you should be asking yourself if the dividend scale is unchanged, how can the dividend that gets paid out goes up over time?

It's because, again, it's paid out on a scale. It's not paid out on a specific. Percentage to your policy a five and a half percent dividend was declared and that's what you [00:21:00] get or six and a half or whatever the case may be. it's just a percentage of what everybody gets. And the longer you've been at this, the more cumulative death benefit you accumulate the greater your share will be.

And you keep this thing going, things only get better.

John Perrings: That's right. Awesome. Good talk today, John Montoya. And if any of this is resonating with you that where you'd like to find out how these principles could apply in your life specifically, you can head over to Strategic Whole Life dot com . You can book a free 30 minute Consultation with us.

No obligations. And if you're the type of person that really likes to just do all the research they can and learn on their own before talking to anyone, we've got an online course just for you. You can see that at Strategic Whole Life dot com and right at the top banner there, there's a link to get to that online course.

 Thanks John Montoya. We'll see you next time.

John Montoya: All right. Thank you everyone.