49. Earn Dividends Like An Oak Tree – Infinite Banking Concept Whole Life

You are listening to the Wealth Without Bay street podcast, a Canadian guide to building dependable wealth. Join your hosts, Richard Canfield and Jason Lowe as they unlock the secrets to creating financial peace of mind in an uncertain world. Discover the strategies and mindsets to a financial future that you can bank on.

An episode that's all about dividends. And when people hear the word dividend, they, they think, here comes revenue Canada. Well, not as it relates to the process of becoming your own banker, the infinite banking concept, but more importantly the tool that's used dividend paying.

Participating whole life contracts. Richard, are you as excited about this episode as I am?

Well, I am, I don't know if I'm excited as you are. Um, I'm pretty excited. But you know, you've, you're, you're pretty excitable guy, Jay. You're, you're hard act to follow, let me tell you sometimes. Um, but what's, what, what I'm excited about specifically is, you know, when I think about this, this topic specifically and it comes up all the time, we have conversations with people all the time. Yeah. Is I always come back to certain memories I have of Nelson and chats and discussions that we have with him or, or Nelson delivering his, you know, his 10 hour seminar on becoming your own banker. And I think about how Nelson relayed this information and he did it in a variety of ways, but one of my favorites was always how he referenced, you know, he talked about his forestry background and he would, you know, Nelson was like the master of analogies. He was the king of crafting a story. And he would, he would share these like life events and circumstances and you'd kind of be like, where's Nelson going with this? Like, why am I learning about artillery school? And why, how am I learning about.

All Martians that are.

Yeah, yeah, the Martians that zapped, zapped my logging truck and melted it into a pile of metal on the ground. And, and he would, he would use that example to explain how you can self insure for like, for collision, collision and damage on your vehicles. So good, so good story everyone. Like, what is he talking about these Martians? Like, oh yeah, you just have this picture of like this literally a ray ray gun blowing up and just melting some logging truck. Be like, oh my God, like there's my business, there's my logging truck. And then he's like, well actually if you need the money and you capitalize the system, well, we've got the money to replace your logging truck because you were paying yourself a premium that you would have paid the other auto insurance company and you actually have more capital. So it's just Nelson's way of telling fun and engaging stories, life event type stories, and then also like connecting it to a lesson. He was a real master in that, in my opinion. So one of those things is in dividends is he talks about, he talked about his forestry background a lot and he would talk about how, you know about trees and he would say, hey, you know, you have a, you have a pine, you know, a pine tree. That pine tree has pine cones. Well, eventually a pine cone falls down to the ground and you know, and then there's a, obviously there's a process of how seeds get, you know, germinated and everything so that you can create another tree. He says, well, if you have this, these two components, land, and it lands on bare mineral soil, you got a tree. Right. That's dividends, he would say. And, and then he would always relate it to the fact that, well, what happens when the logging truck comes along and cuts down that tree? Well, if it cuts down the tree, then that tree has, doesn't have the ability to make additional trees anymore. Right. And it's not just that next season, it's every season for the rest of that tree's life. Right now some trees live a really long time, some don't. There's trees that are like bigger than the size of my house, I'm pretty sure in planet Earth, because they've been around for like hundreds and hundreds of years and they have this huge potential to, to extend throughout time. And so every time you chop a tree down that had that potential, you're cutting down the potential of what that tree had. And so that's a reference point for us to understand. The same impact can exist inside of a part of an impaying policy.

Absolutely. And.

One thing that we hear among many that are frequently asked questions or frequent comments that come up in different forums, we interact with not only the general public, but we interact with a number of people who are in the financial services business. And there's a lot of misinformation out there in that part of our dealings with people. And so I think it's really important for us to address some of them. So one of the more common ones is where if you're in a situation where somebody's looking at this tool and.

They'Re being sold against it, well, dividends are not guaranteed.

And Nelson put it so brilliantly.

Gosh, this was back, this is going back a few years and someone in a talk that he was doing had said that. And Nelson so eloquently said the only dividend that isn't guaranteed is the one that hasn't been declared yet.

And if you look at the history of the carriers that we work with, one in particular that's mutual and they've been declaring and paying dividends every single year since the inception of participating whole life contracts with some carriers being long before.

The Spanish flu, long before Canada was even a country. And so it's super important to understand that it's not a dividend. When you hear that word and you're thinking about maybe you've invested in stocks or equities and you receive a dividend and that triggers a taxable event, or maybe you roll it back in and buy more stock. We're talking about you being a co owner of a company that's never failed to produce profit because you can't declare and pay a dividend unless you have surplus. And I want to address some of the most common things, Richard, so I thought I'd kick it off with that. What else have you been hearing over the years that we want to tackle?

Yeah, so that's absolutely. And so here's another. So people look at illustrations and we need a reference point. That's what it's meant to be. It's meant to be a reference point but people will look at it and they'll try to make it become more than it is and an illustration will have a segment on it that says non guaranteed dividends side or whatever. But what those illustrations lack because they're only. There's only so much room on the paper, like you can only fit so many columns. It doesn't really indicate the impact that there should be a column that says impact created by policy owner. Right, right. And then you would see as a policy owner when you make your contributions, when you make your deposits into that system or your premium deposits, the breakdown of those components. There's the minimum required amount to get the policy off the ground. It's required every year. And then there's the, the excess or the paid up additions amount that we're working with that is very flexible, it's optional, it's completely on the policy owner's shoulders and decision making process to put that capital into the program. Well, the impact of the dividend in that. So if we're in year one and you put extra capital in than was required, the dividend you receive in year one is greater than had you not made that decision. Right. But it's not just the dividend in year one. It's the dividend for every future year that that policy is in existence.

That's right.

And then the. So the impact is beyond year one. Nelson taught us you got to think long range. If I have the ability to put just for example, let's say 10,000 extra dollars into the contract in the first year and I make the choice voluntarily of my own discretion to do that, and I have a larger dividend, let's say my dividend was going to be 100 bucks and now it's going to be $300. Just to provide a reference point. Well, that was in the first year, but now every future year thereafter, I'm going to be able to earn whatever dividend is paid, which isn't up to me. But whatever I do receive from the life company, whenever I get it will always be paid out based on what happened previously. Not previously, the year before, previously, every year before.

Right.

So we're creating a ripple effect. It's, you know, you're dropping a rock in a pond and as those ripples extend out, those are the impact of the dividends that you're creating by your decision making process.

Well, and Nelson used to, he used to say that the policy owner's behavior was far more critical than the behavior of the insurance company. Because what you described right from the onset is that the policy owner can elect in any given year to do a number of things with that dividend in that year, whether it's taking it as cash, leaving it on deposit, using it to purchase paid up additions, using it to partially or fully offset the minimum required premium in the policy, and so much more. And so it's your decision, it's your behavior that's far more critical. Because if you chunk that dividend back into the policy to purchase fully paid up additions at no additional cost, you're not only creating a pretty remarkable result just in that year, but like Richard said, this is for the life of the policy.

Your behavior is compounded either in a positive or in a way that took something away and you maybe didn't even realize it. And it's super important to point out that at the very basic. It's super important to understand that the moment that the life insurance company declares a dividend, it is guaranteed, it is contractually guaranteed to be paid, it cannot be repossessed and it can never lose value.

It only has one way that can keep going and that's up. Got it? The only person that can kill that whole thing is the policy owner by saying you Know what? This constantly growing financial vehicle that I've got here that's protecting my family every single day that I'm alive and providing guaranteed cash accumulation. I don't really want it anymore. You guys could take it back. Like, that's the only person, the only two things that can kill it. That's somebody dying, who's. Who's the insured person, in which case you receive the benefit. And then if you have multiple policies in the family or in the business. Yeah, that benefit can come in and it can be. It can now be extended beyond that person's lifespan to provide more blessed value to other parties. Okay, so it doesn't. It ends that one contract, but it doesn't end the system. It only ends that one contract. Okay. Because Nelson taught us to think in terms of a system, a system of policies which is beyond one. A system is a combination of parts working together. That's how I always describe it. Just like an end. Yeah. So, you know, you can. It's just thinking differently about how that, how that is. Well, when you. When you just. If you decide to give the policy back to the life company and terminate it or cancel it, I mean, again, that's of your own volition. You can do that. But you're killing the potential of every future dividend that happens. And even to this point, even if you were, you know, if you were in the middle of a policy year, you're 10 years into a policy, then you're in the middle of the year. Well, the dividend's already been declared for the year. If you cancel in the middle of the year, you're technically entitled to a dividend on your anniversary date. And you're not going to get it because you terminated it early. So you're always giving up that option and that potential. And again, it comes down to our thinking. We think that the insurance company.

Who we're beholden to in some way to produce all these results, it's just really not the case. It isn't. So your decision, this is really about putting you in the driver's seat of your own financial life. And the more you understand about how you can impact positively or negatively, you can impact the outcome for your own financial life in the future for either you. Well, for you for sure, but also for the people that come after you, whether that's a family member, you know, child, grandchild, or perhaps it's even just something you care about. Like as an example, I met a lady recently, wonderful lady. She was extremely passionate about rescue dogs in the spca. And a specific type of dog. So she's already plotting, as part of her legacy to have capital come in to fund a specific program or resources for that one thing, because it's, it's part of her passion. She's truly passionate about it. Well, now every, all these dividends and the impact of her decision making will dictate how much money is available to help fulfill that obligation.

Nice. And that leads me to the next one. And I'm going to put on a real quick dividend scale interest rate clinic.

So dividend scale interest rates, I knew.

You were going there.

Here's one of the things that comes up.

Save some for me.

So company A has a dividend scale interest rate of 6.2. Company B has a dividend scale interest rate of 5.25. Company C has a dividend scale interest rate of 6.32. And so what that means is that when I put a premium into the policy, I put 10,000 in, I'm going to get a dividend of 620 bucks.

That is so wrong. It is beyond incorrect. And here's the basis, here's how it works. Without.

Doing a 10 hour podcast episode.

Without teaching everyone how to become an actuary. Right.

And so here's what happens. The policy itself. So the payment of the dividend once it's declared is guaranteed. The calculation of what that payment amount is going to be is based on what your policy's contribution was to the net earnings of the insurance company. It's called the contribution principle. Now, it goes a little bit deeper than that in the sense that every single year. And again, this is trivia for existing policy owners. They love to hear this knowledge. And for folks who are researching it, let's get some of the facts straight for you. When the insurance company is being, I guess, stress tested, their money pool is stress tested once a year. It's called a dynamic capital adequacy test. And so there's a third party agency that takes a look at the insurance company's money pool and subjects the money pool to a number of mock adverse scenarios to include more people dying than what the actuaries forecasted. Now, the carrier that we work with primarily has pandemic modeling already engineered into their contracts, which is a very good thing. And, you know, more people surrendering insurance.

Company predicting the future.

Yeah, and forfeiting. More people are forfeiting the policies than what they projected. Severe and prolonged negative interest rate environment. The stock market declining by 99.0percent and staying there for several years. So all of these Mock adverse scenarios. They provide the insurance company with a report back that says, listen, here's how your money pool survived the stress tests that we subjected it to, so to speak. And the insurance companies remain the most financially solvent institutions on the planet. They're required to maintain continuing capital surplus reserves. And they do that very well because without those reserves they can't operate as a life insurance company first and foremost. But when they get the result of that report, among all the other accounting that we do, how much money came in, how much money went out, you know the standard functions of looking at how a business, I guess, gauging the health of the business, and then they say, listen, based on the results of this, we're quite confident that we can declare a dividend. Now the dividend scale interest rate is something that informs how they're going to take the returns that are coming into the money pool. So we're talking about multibillion dollar money pools, how they're going to take those returns and gradually bring them into a dividend payment over a period of years. It creates a smoothing effect and it provides more importantly confidence to the board of directors of the insurance company that they can confidently declare and more importantly pay dividends to the participating policy owners. In addition to that, yes, they are engineering the minimum required premium of the policy so that they know that there's a capital surplus reserve, there's an amount from that minimum required premium that is immediately going to be allocated to that reserve. Because an actuary at the insurance company, when you applied for the policy, they compared you to a select group of millions of pre screened already insured lives and they have a whole formula that gets applied to, okay, how many, you know, 31 year old male non smokers are going to die this year and then the next year they're 32. So how many 32 year old male non smokers are going to die that year, and so on and so on. They can't tell you who, but they can, they can tell you with a fairly scary degree of accuracy how many and, and so that's another.

Method of engineering that informs the decisions that the insurance company makes around dividend declarations and payments. You cannot look at a policy illustration and look at the dividend scale interest rate and find anywhere on that illustration where the dividend payment correlates with that specific interest rate. They're not correlated. And the insurance industry in general needs to do a much better job, frankly at educating.

People who are out there selling life insurance. Because we hear every single day communication that is Just wrong. And some of the things that we hear are frankly absurd. It's super important that you understand the anatomy of this tool and that dividends every carrier that we work with has never failed to declare and pay them. And so if you know that your money can reside somewhere where you can become a part owner of a business that's never failed to produce profit, how much capital do you want residing there?

It's even worse than that is that the insurance company's own marketing materials which are publicly available, you can go to their website and get it. That's where most of the bamboozlement and confusion comes from, is because of the way that they horribly explain what Jason just perfectly explained. And it creates confusion both in the mind of possibly the advisor, possibly, and not trying to throw anyone under the bus or anything, but it most definitely creates confusion in the mind of the consumer. And so it just doesn't need to be that way. You have to put on your thinking cap and you sort of have to ask better questions than like how does this interest rate, like the moment you put a percentage sign behind a number, it's amazing how people's brains turn into like some kind of mush. We just lose focus on everything else. What Nelson taught us to do was to focus on capital. How much? When I put a, when I put money in and I have, how much do I have access to? And then if I keep repeating that. Well, on page 85 of Nelson's book, point number two, he says, if you knew at passive income time, you wouldn't be getting back every single dollar you put into a system potentially tax free, wouldn't you object to putting any more money into it? Well, obviously not. Well, every single program that we put together will do that.

Which means like, where does the dividend scale come in? It doesn't matter. It's irrelevant. It's completely irrelevant. I'm going to get all my capital back. I'm going to totally protect my family. I'm going to have a machine where every time I put 10 grand into it, it spits back out 12. And then the next year I put it gives me 13. The next year I put in 10, it gives me 14. Why do I care about a dividend scale interest rate? It just doesn't make it. It doesn't matter. It's totally irrelevant. And the other thing that Nelson would say, Jason, he would talk about in that dividend experience and talk about the actuaries. He would say, look, the best actuaries on the planet actually live in Sicily because they can Tell you not only which person's going to go, which person's going to die, they can tell you how it happened and where the body's buried.

I use the Mutual of Brooklyn, the mob.

You know, in addition to what you shared, Rich. So.

We try to keep things ridiculously simple. So you get to.

Purchase a contract. It's a unilateral, binding contract. The insurance company itself assumes 100% of the risk to fulfill legally binding contractual guarantees and promises.

Now there has to be some regulatory framework around that, of course, so that we would not see a single documented instance of that not being honored and fulfilled. Because again, it's a contract, it's legally binding. And that makes you a co owner of a business. And your capital injection into that business is your premium.

And in exchange for you depositing your premium, the life company makes a legally binding promise to pay. You'll never pay into the policy what the insurance company is going to pay out to you. It's contractually impossible if the policy is designed properly. And every single year there's an accounting done which we as policy owners don't have to do or participate in.

And it's paid for by the cost of the premium that was already predetermined because it's built into the actuary calculation for them to do all that stuff for you. Precisely.

And then we get to have a dividend party. And we know that we're going to take that money, chunk it right back into the system and so no money's leaving the pool. The insurance company still has the use of that money. And what are they going to do with it? They're going to multiply it for the benefit of everyone who co owns the company.

And the only way you can co own that pool, be a part of that participating money pool, is to have a participating policy. That is the exact way.

Exactly. And so Nelson described it wonderfully in his book when he said two things. He said that the conversations that go on out there, some of them still revolve around rates. And to think that this is a function of rates is a fatal error. And I'm talking about dividend scale, interest rates. And yes, there's a lot of information communicated directly from the life insurance companies. They're required, of course, to disclose.

What goes into the dividend calculation, mortality, investment returns from the money pool. There's a number of factors there, however, determining how each specific policy is going to be paid that dividend and what the amount of that dividend is going to be paid is based on a formula. And it's based on a contribution principle. And so the more capital you put in, the more capital you get out, the larger your system becomes. You create this factor of uninterrupted compounding. You create this factor of. And Rich is going to hopefully show this amazing dividend pick that he had put together if he's able to share his screen here and lead us through that.

You are creating continual, uninterrupted growth.

And this is growth that cannot be repossessed. It cannot be taken away from you. There's no viral pandemic, government intervention, bad economy, risky stock market that can take any of it away because the insurance company itself is assuming 100% of the risks to fulfill those guarantees.

Now, do you see my dividend pick there?

Oh, yeah, it looks good.

Okay, so for, for anyone who's watching us on YouTube, you'll, you'll see this in the video. If you're, if you're listening, you know, on your, in your car, in your podcast player, you can, we'll provide a link to this image. So you can either download it or access it or something, or you can just circle over to the YouTube channel and kind of where we watch this section. So I got this image up and it's, it's, you know, just imagine it's the. If someone's just taken a horizontal cut out of a tree, you know, a log, a slice of the tree. Well, this picture is actually a picture that Nelson Nash took. In fact, you could see Nelson's feet like at the bottom, and there's this big chunk of this tree sitting on top of a table. Now what happened was.

Nelson's house, he had kind of worked out a deal. He'd sold his house that he had built to his son in law and his daughter Kim. And they were renovating and doing this huge construction project and they were knocking stuff down and making the house bigger. And there was this tree that got cut. And Nelson had this idea, he's like, he's like, would you believe when I saw that tree go down, a bolt of lightning hit my feeble brain. And I had an idea. He had one of the guys, you know, take his chainsaw and cut this, this log of the tree and put it on this table. So you see this picture and it's all you can see is the rings of each year of the tree being born. And Nelson, the reason he picked this tree is because he knew that the age of that tree was approximately the age of Nelson.

It was kind of hovering in that 80 to 90 year time frame. And what's really interesting is he used this to talk about dividends. And he started using this later on in his 10 hour seminar in his presentations. And he'd say, take a look at all the rings in this tree. Each one of these rings represents a year of growth, which is effectively like earning a dividend. Now, in the example of the tree, you can see we start at the very center. This tree is very small, but it has a very kind of like a rapid growth in the early part of the, of the years of the tree. So the rings appear to look bigger to our eye than the rings on the outside, which seems, which seem thinner. Okay. Because as a tree gets more mature and older, like the outer layer of the tree only adds like a little bit. But what's also true is, is that those little thinner layers and the various future years of the tree, although they might appear to be a thinner layer, they're actually much, much bigger than the original ones we're looking at. Because it's on the entire circumference of the tree. That's right. That's exactly what happens inside of a PAR policy.

It just keeps getting bigger.

It just keeps getting bigger.

Have you ever seen a tree contract in nature in its growth?

Never.

Never. But you've seen human beings cut them down, right?

Indeed.

So Mother Nature is the life insurance company. Mother Nature is providing the tree with nutrients and water and making sure that that tree is going to keep on growing. And then the human being comes along and slices that sucker down and kills the growth.

And so regardless of what Mother Nature, or in this case the insurance company had set inside her plant. Right, yeah.

And so it's such a brilliant, brilliant way of describing it. It creates that aha moment when someone sees that graphic and says, okay, I get it, I understand what's going on here. Regardless of the rate, regardless of the dividend scale, interest rate, which we cannot correlate to a policy illustration ever, but we can definitely correlate the increasing circumference. Every paid up addition that gets added to the policy increases the circumference of the policy. Every paid up addition receives a dividend every single year that a dividend is declared for as long as the policy is in force.

It just keeps getting bigger in circumference. And regardless of the rate, the bigger it gets. Whenever a dividend is declared, the dividend is paid based on the total circumference because every one of those rings represents.

Basically is a recipient of a dividend. And so it just keeps getting bigger. And bigger and bigger.

And the only thing that cuts it down is again, like say the human being or, or, or the other option being some, you know, the natural, natural death of the life insured. Right. Or natural death of the tree. So in which case it would it grow. It grew to the maximum extent it was going to grow anyway.

All right.

And in that case, when the tree does get cut down in that scenario, well, hey, you still have the usage of all the, the wood from the tree to, for some other productive value. Right? You can heat your home, it can do whatever. So in the same environment, a death benefit, a tax free death benefit shows up for the family, you have all that productive value back that otherwise would have never come into being. It would have never existed for most people, especially if they just bought term insurance and then they never had anything left by the time they died and they have all that productive value blessing the family in some positive way to help them deal with things that come up, you know, with a grieving process, etc. Paying the final tax bill. Now, we're not going to, that's not the purpose of our call. But what you may not know, if you're a listener, is that for most people, the biggest tax year that they're ever going to have is the year that they leave planet Earth. Because every single asset that they own is considered sold on that day. So your registered accounts get sold off, your liras, your pension accounts, all these things. Yeah, there's some rollover rules and everything there, but, but fundamentally it's everything is considered sold on that day, plus any other income you are paid. So that means it all gets rolled up into an income calculation. For a lot of people, they spend a lifetime building things up, a lifetime saving and preparing and building and creating a business or buying real estate assets, doing all this stuff, the hard labor work of creation, to see that 50% of it has to get paid to Uncle Trudeau or to the Revenue Canada people so that, that it can go back into the bigger Canadian system to support whatever they're choosing to do with the money. So you're making a choice for someone else to be able to look after that excess capital, that money, that tax bill that gets paid, rather than putting it into the hands of someone you actually care about or something you care about.

Yeah, very good point. So dividends, there you have it. That's our first clinic. That's our first dividend clinic.

If someone asks you or if you ask someone, have you, did you ever know that dividends are like a tree and they give you a look like they're a dog staring at a ceilings fan.

Well, here's the look. Let's do the look that someone would give.

Now. You can send them this episode.

I love it. All right, well there you have it folks. Our clinic on dividends. And so be sure to if you're on the YouTubes, just continue viewing. There's a playlist that you can see on this side or that side. Whichever way is mirrored, it's there. The playlist is there. Continue watching. We appreciate you and we'll see you on another episode here real soon.

Thanks everybody.

Thanks for listening to the Wealth Without Bay Street Podcast where your wealth matters. Be sure to check out our social media channels for more great content. Hit subscribe on your favorite podcast player and sure to rate the show. We definitely appreciate it. And don't forget to share this episode with someone you care about. Join us on the next episode where we continue to uncover the financial tools, strategies and the mindsets that maximize your wealth.