Content: Page 23-24 Becoming Your Own Banker Fifth Edition
Now, let’s go back to our scene on John Doe’s policy – he has had it for a few years and the Directors of the company ask the accountants, “How did we do on John’s policy this year?” They say, “We collected $1.10 but, after calculating all the earnings and expenses we found that it took only 80 cents to deliver the promised death benefit in the future.” This means that the Directors can make a decision with 30 cents. There is no way that they can calculate whether this was a good year or not and to be prudent, they put .025 cents in a “contingency fund” (this does not show up in cash values) and distribute .275 cents as a dividend.
Most people have the impression that this dividend is an income-taxable event. It is not really a dividend in the current sense of the word. It is a “return of capital” and it is not taxable until the amount withdrawn exceeds the cost basis, i.e. the amount put in. If this dividend is used to purchase additional paid-up insurance, what you have is an ever-increasing, income tax-deferred accumulation of wealth. It is only limited by your imagination.
These dividends can get to be very significant over a long period of time. In 1959 I bought a policy from a major insurance company and the annual dividend is now over eight times the annual premium. It would be even larger had I not used the dividends to reduce the premium during the first fifteen years of the policy. I should have been using them to buy additional paid-up insurance during that time. These things are just not adequately explained by life insurance folks because of the limited understanding of their home office personnel. A tragedy!
So far, this is a pretty simple, straightforward business. The complication is in the perception of it by the general public. We all see things through a filter of prior understanding – and that filter is awfully cloudy as it relates to life insurance!
Life insurance agents are taught to help clients calculate their human life value, (the now value of their future earnings, less their personal upkeep. This is their value to family and others that are closely associated) and insure for that figure. It really is a quite nebulous concept because there are so many variables that change with time. Once a figure is agreed upon, the agent shows “how little it will take in premium for my company to insure that amount.” This premium figure could be as high as 15% of income, after taxes.
My word! If you will take an honest look at what the average young man is doing – paying over 35% of every dollar of after-tax income to interest alone (see p. 19 in the book) – it should be obvious that his need for finance during his lifetime is much greater than his need for life insurance protection. If he will solve for his need for finance through dividend-paying life insurance, he will automatically end up with more life insurance than in any other concept and he will recover all the interest he is now paying to someone else.
But this almost never occurs because of the “cloudy filter” implanted by financial geniuses that “life insurance is a poor place to store money.” What a limited outlook of just what is going on in the banking world! Again, if you know what is happening, you’ll know what to do.
So, the typical young man puts $50.00 per month into life insurance premiums and complains about it. Then he goes down to an automobile dealer, makes a purchase, and gets a loan from a finance company to pay for it. Remember, there is only one pool of money out there in the world. The fact that a number of organizations and individuals are managing a portion of that pool is incidental. It is even more specific when it comes to car financing. I have never seen a monthly list of investments of a dozen life insurance companies that did not include finance companies as a place where they have loaned blocks of money. The finance companies simply buy blocks of money, and retail it to consumers after adding a fee for their work.
So, this young man pays $260.00 per month for 48 months for his $10,550 car loan. He repeats this process, every four years, because that’s the way his peers are doing it. If he would take a deeper look, he might notice that he is paying $50.00 per month into a pool of money (the life insurance policy) and paying $260.00 per month to an intermediary (the finance company) who got the money from the same pool. Furthermore, he complains about the premium he pays but thinks nothing of the much larger amount he pays the car finance company. Strange, isn’t it?
We learn how to recapture all this money in lesson 14.