Content: Page 45, Becoming Your Own Banker Fifth Edition
In studying table 1 [on page 45 of Becoming Your Own Banker] comparing the results of the two methods – the usual reaction of most people is to ridicule what I’m teaching in the early years and disbelief when they look at the later years in the schedule. “That can’t be true,” they say, “because everyone knows that life insurance is the world’s worst place to put money to work.”
Imagine this scenario: The twin ladies put $5,000 into their respective plans the first year and at the end of the year they have a coffee break to discuss results. C/D Sister says, “I put $5,000 into my plan, and after the IRS stole from me, I have $5,200 left over. What do you have, Sis?” Insurance Sister says, “I called my life insurance agent and she said I have $1,933 in cash value.” C/D Sister’s response will probably go something like this: “Sis, please don’t tell me that you put your money into whole life insurance! Don’t you know any better than to do that?”
The following year they had another coffee break and C/D Sister says, “I made another C/D purchase of $5,000 and now, after taxes, I have $10,608. How is your accumulation plan coming along, Sis?” Insurance Sister responds, “I have put into my plan the same thing you have, and my life insurance agent says I now have $6,359 in cash value.” C/D Sister is horrified! “You did the same dumb thing you did last year!! You put more money into whole life insurance? Sis, I’ve got to quit associating with you – after all, we are twins, and whatever you have might be contagious – and I just can’t afford that to risk that!”
As we progress down the schedule, please notice that the reasons for ridicule are disappearing and that there is equilibrium at the end of the 14th year. From that point on Insurance Sister’s cash values accelerate and the difference between the methods become wider with time. That is because C/D Sister is only earning interest – and Insurance Sister is earning interest and dividends.
Remember, whenever you start any new business there is a time lag before profits begin. This time lag is understood and accepted in most every other business venture. What’s more, it is longer and more expensive in most anything else that one might undertake. But, when this same person looks at the schedule of accumulations in a whole life insurance contract, his qualities of reason and logic seem to disappear! I really don’t understand this phenomenon. Maybe it’s because the life insurance industry has never explained these things to him before.
A life insurance contract is a long-term plan and it is engineered to get progressively better with time. It becomes more efficient because the cash value is guaranteed to equal the face amount of the policy at age 100. Therefore, the cost of delivering the promised death benefit is disappearing as time goes by. Furthermore, the earlier you start the contract– and the longer it is in force – the better it gets.
The dividends that I have continually emphasized throughout this course accelerate all of this even more. When one uses the dividends to purchase additional paid-up insurance, the face amount of those additions have a cash value, too, and that cash value is also guaranteed to equal that face amount at age 100. The dividend additions also pay dividends. Now, do you begin to understand why the accelerating cash values in Table 1, Method E, on page 47?
Does this help in understanding why the cash values are continuing to grow at retirement time, although Insurance Sister is withdrawing $50,000 for retirement income? Please, also, understand that she could withdraw even more than the $50,000 income per year – but if she does, then the death benefit would erode as time goes by. The choice is hers.
My whole point in this exercise is to dramatize how poorly dividend-paying whole life insurance is understood and that commonly accepted other vehicles just don’t measure up when they are studied over a long period of time. Most folks just never look at the performance of the life insurance more than the first ten years or so.
In the next lesson we will look at some test questions to measure your understanding of the principles we have studied so far.