How Does A Life Insurance Company Make Money To Fund The Growth And Pay Dividends?

The deposit that is going into the life company, we're just choosing to redirect deposits that are otherwise either stored in someone else's bank or cash flow that's already flowing to someone else's bank. So we're just redepositing the capital into a company that we co own for one. And the other piece that I wanted to point out is about the policy loan interest.

And they say, look, we took this much money in, we paid this much money out on all these different line items and expenses. Here's the jelly in the sandwich, this is what's left over. Now they're going to take this jelly in the sandwich and they're going to say, let's take a little piece of it off to the side and we're going to add that to our contingency funds, our capital reserve contingencies. The remaining amount, we're going to distribute that as a dividend to our par owners. And then they measure that against what they refer to as a dividend scale. They measure that against the individual policies and based on when those policies were sold.

So just how exactly did these life companies make money? How is it possible that a life insurance company can even pay these crazy death claims that we keep hearing about? How are they able to pay dividends for participating owners? Well, I'm joined today with my friend Vern and we are excited to chat about a couple of these key questions that people have when walk a little bit about how the process of a life company taking in premium dollars and putting them to work for the benefit of the power owners actually comes together. We're going to go over a little bit of a drawing. So we're happy to be with you here today and we're glad that you're joining us because we're going to cover some fun stuff. And Vern, I'm excited about this topic. Where do we want to begin?

Oh, this is so good, Rich. So Canada, just be clear here. We're talking about the actual tool that we use to implement the process of becoming your own banker. We're talking about a dividend paying participating whole life policy, ideally at a mutual insurance company. So a lot of times what comes up is people collapse the process of becoming your own banker with the product or the tool that we use to implement the process. Nelson made it pretty darn clear, Rich, that we don't actually need a policy to practice becoming your own banker. It's just the best tool we've been able to find to implement the process. So Canada, if you find a Better tool. Let us know because we'll start using that one. Okay, so where I'd like to start, Rich, I think would be a good idea, is just to kind of help people understand what's actually like the flow of the money, what's kind of happening at the life insurance company. And to your point, like, we'll just expand on how are they actually creating profit and then what do they actually do with those profits and how does that benefit us? Why would I be pumping so much money into the life company? Why would I save money there and borrow from them versus someone else's bank?

Perfect. Well, I think, you know, I'm just going to jump right in. I'll bring up a drawing here that we have and we'll just kind of walk, walk through this. Vern. So what we've got here is premium deposits come into a pool. So I've got kind of a pie chart. This is the pool for the participating account of the life company. Now, the insurance company is required to put money to work for who, for the benefit of the participating owners. That, that's, that's who they represent. And especially the mutual company, they have what they refer to as a dual mandate. Dual meaning, like it's not 1 and 2, it's 1 and 1, dual being the same. And that's to, to meet the guarantees of their product. And then on top of that is to support a long term dividend scale for the participating owners. That's their focus. And so premium deposits come into this pool and they have to put that money to work in a variety of areas. And then there's certain expenses that happen. So it all gets kind of accounted for. Now over here I've got a chart that says, or a pie piece that says asset growth and there's a little asterisk that says including loan interest. So asset growth is the different types of investments that the insurance company is putting money to work in. So they do a lot of, there's some limitations on what they can do. They're not like going down to Vegas and, you know, you know, popping, you know, coins in the slot machines. What they're doing is they're buying large pieces of real estate as an example. So they'll know a lot of like downtown buildings in the, in core, core cities that have, that are owned by insurance companies. They will do things like private placements where sometimes there's a development happening and then they'll fund that development project and then they'll maintain a stake of ownership in it. As an example, you know, One that comes to mind in Edmonton, downtown Edmonton, if anyone's ever been there, there's a little area called Oliver Square. And if you're down in Oliver Square, there used to be a Molson brewery and some things in that area. Well, when you drive into this one development, there's a sign that says Oliver Square. And right below the sign is actually a life insurance company's logo. So that's an example of like a private, private placement project. They lend money on things like mortgages, so residential and commercial mortgages, and then they take security on those. And so those are very secure types of assets. And they're never in a position where they need to exit those deals. If someone doesn't make a mortgage payment, well, they own the mortgage. So they foreclose on the property, they take it back, the money comes back to the pool, they reallocate that dollar again. They lend money to participating owners through the means of a policy loan. So that's where we see includes loan interest. That loan interest that they generate is one of the assets of the participating account. It's part of what helps churn that whole thing through. And then there's a variety of other things they do. A lot of bonds, government bonds, corporate bonds, AAA things. These are things that maybe don't pay a lot of.

Rate, but their cash flow and they're stable and they're consistent over time and, and where you're dealing with large amounts of money, you're dealing with a billion dollars and you're putting it to work. If you're getting 2, 3 or 4% on a billion dollars, that produces a lot of cash flow that can go on and do additional things that can go back to work in other places. So there's a ton of things that they're putting into work in and they have these very robust, very low conservative, not risk free, but low risk oriented type of things that they do. And it's managed by a very smart team of people. So anything you want to talk about, the asset side or the growth and investments, Vern, before I touch on some of these other pieces in our pie chart that we're looking at.

Yeah, thanks for your ears must have been burning. Rich. Thanks for asking me that question. I just wanted to point out again, you're talking about how the money's flowing and how the capital is actually growing at the insurance company and how it comes back and all those kinds of things. So I want to touch on the actual process of banking while we go through. I just wanted to point out a couple Things. So, for example, premium deposits, I want to put our Canadians, I want to get your heads thinking like a banker. The premium deposits that Rich and I are referring to is not a cost to you. In my mind, it's not like, oh, I got to carve out this money and pay for this insurance policy. The deposit that is going into the life company, we're just choosing to redirect deposits that are otherwise either stored in someone else's bank or cash flow that's already flowing to someone else's bank. So we're just redepositing the capital into a company that we co own for one. And the other piece that I wanted to point out is about the policy loan interest. Well, again, if I pay interest to the life insurance company or even just make a payment, a loan repayment back to my own policy loan, those payments that I'm sending back to my policy again, represent payments that otherwise would have flowed to somebody else's bank anyway. So I'm redirecting those payments. I'm recapturing the payment on my Ford F150, I'm sending it back to the life company. Well, Rich, if I send the payment that was going to Ford Credit Canada, if I send that back to the life company in the form of a loan repayment back to my own policy, who gets to access that capital again? Is that me? Yes. And who co owns the company? So I do. Right. So who is the life insurance company putting that money to work for? Me and the other policy owners.

Right.

And again, who gets to control the repayment schedule? I do. Right. So I'm actually making the banking process work for me. And again, that capital would have been flowing away, that financial energy would have been harnessed by someone else's bank. But now the life company that we co own is harnessing that energy to grow more assets to share with all of the participating policyholders. Now. Sorry, Rich, go ahead.

Well, I was just gonna say you hit the nail on the head around other participating policy owners. Because, Vern, you've got other family members and you have members of your family that are par owners and you've got a bunch of clients, and those clients are members of that same pool. And I've got a bunch of clients that are members of that same pool and I have a bunch of policies that are member of the same pool that you're in. And well, boy, it's kind of nice to know that when I send my dollars into the life insurance company voluntarily, in free contract, no one's making me do It I'm participating a machine with free. Other free people, other free Canadians who are voluntarily able to make that choice. And we are all mutually benefiting from it. Mutual owned, mutually beneficial. Yeah.

Versus the traditional way where we're still all pumping all that energy somewhere. We're not owners of that bank, so they're benefiting from that process. And the one last thing that I wanted to touch on here, Rich, is just about the policy loan interest is because sometimes people say, oh well, I'm borrowing capital. I'm using life insurance companies to solve my money, to solve my problem. Why do I got to pay interest? How does that make sense? Well, Rich, don't we co own the business? And if you and I were business partners together and I knocked on your office door and said, hey, Rich, I noticed that we're piling up some money inside the corporation here and I have a need for the use of money. Do you think I could access 50 grand out of our, out of our business together? Let's assume you said yes. Would you let me do that for free?

No, because our business might need that capital back. And if you're not going to be on a repayment schedule or there's no nothing for the business, we're actually hampering the growth of our business.

Yeah, 100%. If the money is not working inside the business, if I take it out and it's working somewhere else, I better put more back than what I took because we just lost opportunity on all that capital for however long Vern borrowed it out for. So no different than Life Company. I'm happily paying interest to them because A, it's being put to work for me and my family and B, I get to re access all that capital again anyway, so why wouldn't I pay interest?

In other words, capital has a cost right? Now, speaking of, you know, I guess cost, let's talk a little bit about some of the costs that the insurance company comes. We want to understand. Okay. How are they able to again be profitable? Well, they have premiums coming in. They put that to work. It's got to go to a variety of places. They have expenses of operation. They have a business building and they got a heat bill and they've got to pay for computers and the Internet just like any other business does. And they have employed staff. Well, those people need to, you know, they have no sense of humor at all. They won't work for that life company if they don't get paid. Can you believe that, Vern? And I bet you if you're watching this video, you probably wouldn't work for somebody for free either. So you know, you need to get paid. Okay, well that gets put into the budget, then every once in a while somebody dies. That's what they call mortality expenses. And so those are the death claims that they anticipate. And then there's always a big fudge factor around that. So there's, the whole insurance industry is built around assessing the risks of money going out. How much do we need to take in? And we need to take in more than we expect has to go out so that we can do that over enough years to be profitable. And so they, they have an expectation of how many death claims they're going to have and then they over build for it. So it's like, you know, you drive across a bridge, you better believe or that that bridge has been engineered to hold more cars and more weight and bigger trucks than are supposed to be on it because they have to over engineer it. Well, the same thing applies to, to life insurance. So they have, every once in a while there's policies that get canceled or they lapse. In other words, the people decide, hey, I don't want the policy anymore. Well then if there's any cash value that has to get paid back to the individual. But they don't have that stream of payments anymore. So that gets factored. And sometimes that could be positive or negative depending on what time frame that happens, you know, during the life of the policy. And then there's some other factors. And then we got a big chunk over here called a divisible surplus. So after all of the, you know, they bring the accountants in, they have a, you know, a chat about all this stuff here and they say, look, we took this much money in, we paid this much money out on all these different line items and expenses. Here's the jelly in the sandwich. This is what's left over. Now they're going to take this jelly in the sandwich and they're going to say let's take a little piece of it off to the side and we're going to add that to our contingency funds, our capital reserve contingency. The remaining amount, we're going to distribute that as a dividend to our par owners. And then they measure that against what they refer to as a dividend scale. They measure that against the individual policies and based on when those policies were sold. I'll give you an example. So I have a policy that's about 12, 13 years old. Now the assumptions 13 years ago on when they Thought Richard was going to kick the bucket. Might be different than the policy I got last year. Does that make sense? So they're in different groupings, and they had slightly different assumptions on how they priced the product, how they priced the cost of insurance, how do they price the term insurance and all the things that were in there. And so the expectations that they're measuring against are the expectations based on how they designed the pricing of that product. So they priced the one 12 years ago a certain way. They priced the one last year a certain way. And so they are going to measure that divisible surplus against how they determined, you know, did they expect more death claims, let's say, from Richard's group, 12 years ago? And it turns out, you know, we haven't had very many death claims. We're actually way ahead on our mortality expenses. We expected a whole bunch of more death claims. We have way less of them, which means that group is actually a better contributor to the surplus. Now we've got the new policy, and maybe they had a couple extra death claims in the first year. So they're actually below the line. They expected to be here, and they're below the line, which means on mortality, they're not doing so good. Which means, is that group of people contributing as much to the surplus? The answer is no. They're detracting from the surplus. So they may not get as high of a dividend, even though there's a pile of $100 million of dividends that's going to get paid out. It'll then get distributed based on the size of the policy and the assumptions when that policy was sold. Are you above or below the line on how they assume that policy would meet its trajectory? So it takes in all those factors. It kind of bundles them together, and then they determine how much dividend would an individual policy get. But the. The beautiful thing is that dividend, that's your share, your direct share, based on how your group of policies contributed to that surplus. And that's what we call a dividend. And, boy, when the anniversary date of a policy comes, we call that a dividend party. And we suggest that everyone celebrates. I don't know about you, I like to party. Dividend party. Hey, tag me in, coach. Let's go.

Hey, Rich, you want to hear something really awesome about the dividend party? I have a policy on my daughter, and the anniversary date happens to be on my birthday.

Nice.

It's pretty exciting. I just had a birthday the other day, and it was the dividend day, so that was Pretty exciting. But you know what I forgot to actually mention earlier, Rich people, Canadians are probably watching this right now going, gosh, I want to get more information. So I want to let everybody know that you can go to watchibc.com that's watchibc.com and you'll actually get access to a 90 minute webinar that will give you a good high level look at what the process of becoming your own banker is all about. So remember, process of becoming your own banker tool, dividend paying, whole life insurance, which Rich and I are talking about right now. So Rich, this is really good stuff. I heard you say on a video, and you're kind of touching on it right now because you'd mentioned the bridge, right? Engineering that bridge to hold more than they're actually going to put on the bridge. And we're talking about, you know, how does the insurance company build profit? Well, they've got this long track record of statistics. They know exactly how many 38 year old males are going die this year in Canada. They just don't know which ones. You had said that they might need to charge me a dollar, but they're probably going to charge me $1.25, right? You'd said on a previous video, I can't remember if that was on Wealth Without Bay street or on the Banker's vault here, but you'd said they engineer a profit, they engineer a profit. Could you just expand on that a little bit, Rich?

Yeah, great, great question, Vernon. So we'll use the example you gave. They're going to charge let's say a dollar. And so just keep everything very simple, high level. And that's what they need. They've calculated actuarially, they've engineered that in order to meet their obligations of giving a death benefit for everyone getting a certain type of policy. So whether it's a term policy, they have a calculation for that. Whether it's a universal life policy or whether it's a whole life policy, there's a different calculation method to determine how do we guarantee that benefit will be there. In order to guarantee it on the 38 year old male or the, or the 45 year old female, we're going to charge one $1 to guarantee this amount of benefit. Well, that's the minimum required. So we're not going to do that. We're actually going to charge more. We're going to quote, unquote, overcharge by let's say 110 or 115 or 120. So that gives us more Capital. Because if we were wrong, or we were wrong in the early years in our assumptions, because something goes sideways, they need that extra capital base coming in to make sure they can put that money to work so they can continually grow it to guarantee all those benefit claims will happen. And if at the end of the year they took in more money than was necessary, that extra capital can be part of what forms that surplus. In other words. Hey, Vern, at the end of the year, the accountants came in, we did our math, we needed one to get the deal done, to make sure we could meet our benefit and our contractual obligations. We charged you $1.20. Turns out when everything is said and done and the smoke cleared, we only needed $0.80, $0.80 to get it done. Therefore, we have this extra chunk of capital available. We're going to put some in contingency for a future day, for a rainy day, because the rainy day will happen, you know, pandemic, whatever it is. So you build up a contingency over a long period of years, 100 years plus. And then we're going to take the rest of that and we're going to stack it together with everyone else. Boom, we got a surplus. That surplus. We're going to divide that up and we're going to distribute it. It's a, it's a divisible surplus. That's what it is. And the only people that get to participate in the divisible surplus is a participating owner. That's what participating means. You know, it's a participaction. You remember those participaction commercials from when you were a kid, you know, so we want to get everyone active. You got to participate. Well, the only way to get active and participate is to own a policy with a good company and a power pool. And the end result of that, Vern, all that activity is, you know, going back to the drawing real quick, is that we create this dividend and so that dividend comes back in. And now there's different options on what you can do with the dividend. That's not the subject of our topic today, but for the purposes of becoming a banker and the purposes of efficiency, with a policy, that dividend goes right back and it cruises right back in and becomes a new premium deposit that goes right back into the pool that automatically purchases what we refer to as a paid up addition, a paid up additional block of insurance coverage which increases the size of your policy and therefore it increases the growth of cash value in your policy. And we have a, a whole other podcast and some Other content that we've done that talks about cash following the leader. And in fact, Jason and I have a book that's going to be coming out in the same vein of that. But the understanding that you get to control the environment that you operate in and you get to mutually benefit with a whole bunch of other people you don't even know. And you didn't even have to go do anything to get those people together because there's a salesforce called insurance agents that go and do that for you. And you know, would you believe those guys have no sense of humor either? They need to get paid too for what they do. Well, you want to know the best thing about that, Vern? Because this is a question that comes up. How does the insurance company make money? I mean, they got to pay the death claims, they got to do all this? Well, they also have to, you know, pay the sales force. The distribution mechanism by which that insurance gets out into the marketplace. Well, the, the cost of doing that or the commissions that are paid to insurance agents, those are pre calculated into the premium. So when we said it takes us $1 to get the deal done to guarantee that we can make all this work, the cost associated with bringing that new business onto the books of the insurance company, the commission that would be paid, that's baked into that, engineered into that $1. So the insurance doesn't get a choice what they get paid. The insurance company has already predetermined that amount. It's based on whatever size of plan that the consumer, the client, wants to proceed with. But the key thing is that it's pre baked into the calculation of premium. It's always there because they need to assess all the costs of running a business no different than any other business does.

So Rich, this is so good. So you're saying that, you know, the insurance company, they opened their doors like five minutes ago, right? Like they don't really know what they're doing this. What if they make a mistake? Like, no, that's not the case. So they actually have how long? Like we're talking almost 200 years in Canada of experience and learning and statistics and changing and adjusting, continuing to create profit, but noticing things like pandemics and stuff like that happen. The insurance companies make adjustments to sort of pre plan for these unexpected events that are going to happen 5, 10, 15, 20 years down the road that we don't even know are going to happen. They're already well prepared for that. Is that right?

Yeah, they're well prepared for and they do, they do something called pandemic modeling. So they've seen these kinds of things in the past. They know the statistics and the history. Nothing escapes them. You know, Nelson Nash used to say that, you know, life insurance companies have actuaries. They're pretty good. They can. They can tell you exactly how many people are going to die in a year of a certain age. They just can't tell you which ones. The only better actuaries that exist are in Sicily. They can tell you which one, and they could probably tell you how and where the body's buried. Right? So, you know, but, but, but ultimately, that. That's the thing. It's. It's a science, and it's. No, it's. It's an engineered mathematical science, and it's using a huge amount, huge swaths of data. They're very good at it. As an example, in Canada, there's a company that's been paying dividends every single year since 1848. That's longer than Canada became a nation with the signing of the British North America act in 1867. And there's a history of these other companies. One of our carriers, every single year since 1936. They didn't offer par insurance until the year before. So their very first year, they were profitable with a dividend. And that was during the Great Depression in Canada. So not an ideal time to go out and start an insurance company and try to sell par whole life insurance, except at that time frame in the world, that was one of the primary financial vehicles that people were accustomed to, that was considered a savings vehicle at that time. And it wasn't until many years later, after the second World War, where new products and things started to get created, such as registered accounts and people getting the ability to try to go into.

Different types of the stock market, and all these things that all happened after 1955. And so in the previous world, in the last century, part whole life was one of the core aspects of a savings component of the average household's life. And it still has been. It's never gone away. It's simply our understanding of it, our knowledge on how to utilize it, and, you know, that has fallen out of favor. Well, I think that, you know, we're. We're bringing it back. That's all I got to say, Vern, with your. With your help and you watching, that's how we bring it back when we help people understand how they can have a liberated financial life. Head on over to watchibc.com make sure you check out that webinar. It's a ton of value. You're going to love what you're going to learn there. And get a copy of Nelson's book. There's a copy link right down in the description. Go ahead and click that link. Get a copy of this book in your hands. And in fact there's a great diagram similar to the one we showed you today in there and Nelson has the money pool. He talks about where they put the money to work and he talks about all that in the book and he even talks about the actuarial tables and the engineers of life insurance. So all of this stuff you can get at Nelson's book and we we're glad you're here listening in, hope you got a ton of value, ton of fun and you know there's going to be a bunch of videos popping up on the screen, new playlist. Check it out, keep your journey of learning going because there's some more good stuff right there.