Stock vs Mutual Companies For Doing IBC

So you participate what we would refer to on all lines of business. When you're in a mutual company, which is, which is really good. And then additionally with, with the stock company, you only participate now on the par pool. You don't participate on the other products and services anymore. And the other thing. And so not to call it problematic, but there's a, some problematic aspect is in a stock situation, stock company, you know, they have stockholders and they have power holders. So they kind of have two masters.

So in Nelson's book, he's talking about working with a mutual insurance company. That is always our goal and our focus. And the difference between the US And Canada, there are some differences between our countries. They're not dramatic on the big scheme of things, they're really minor. But from, from how the stock companies versus mutual companies work is a bit one of those areas in Canada. We're very well regulated here. And so because of that, an insurance company that is stock owned means you can go purchase them on a stock exchange. So most of the major large insurance companies in Canada are like that. In fact, during the late 90s and the early 2000s, roughly between like 1999 and 2004, most of the big companies demutualized, meaning they, they had a vote with the participating owners. They, I believe they needed to have a 75% approval vote. 70 or 75% approval. And you know, if you were an owner, you had a participating policy at that time as an owner, you had to sign off basically and agree to vote to demutualize the company. When that happened, it was kind of like the equivalent of the insurance company doing an ipo. All right, they're going public and so they're going to issue stock. And because you were an owner in the company, the only way they could, you could be an owner prior to that was, was to have participating whole life. So if you already had it, you were, you still had the policy, you still had all your benefits, but now you were issued stock in the new company relevant to the size of your policy. How big of an owner were you? Did you have a million dollar a year premium or did you have a $100 a month premium? Okay. And for many people during that period, that was like the closest to like a lottery ticket win. Basically. It was a hugely financial beneficial for a lot of people. Now those companies have done all that. That was, you know, 20, 30 years ago or whatever when that happened. And now, you know, in Canada there's a very few amount of mutual companies that are left and so we do a lot of our business with one of the largest remaining companies that does that. They're fantastic. I personally own a lot of policies with them. My family. Vern, you do. Most of my policies are with that company. Most of my clients have policies with that company. However, we also do business with other companies and there's many reasons for that. So the, the stock companies in Canada, I mean, we only have so many choice. There's only so many companies that have a good quality product that allows for efficient deposits and cash accumulation as well as a reasonably efficient loans process. So there's, there's a, there's checkboxes that we're trying to hit so that we can get, we can get the right tool in the hands of the client so they can practice the concept. All right. And so we often have to do business with some of those stock companies. They have great pipes, par products and their pool is separated. And that par account is, it's kind of almost like a business within a business. And so it manages and operates the same way. It pays, you know, dividends when it's profitable. It does all the same things that the contract does now. A small, tiny little sliver of that. When they pay a dividend every year, a tiny sliver can be issued out to the stockholders. It's a pretty small amount. And as that pool grows, the amount of the sliver actually goes down. It's kind of interesting. So it's, it's very well regulated in Canada, whereas in a mutual company, it's all one big pool. And everything that the company does is kind of in that pool. So all of their, they sell other products. They might sell term insurance, group benefits, segregated funds, and, you know, a variety, you know, critical illness, all these other types of products, all those products are all kind of mashed together in the, in the financials at the end of the year. How did we do as a business? We took money in, we paid money out, we had expenses, we had some claims, and, and then we took more money in. So at the end of the year, how did we do as a business? And then this determines what amount can now be issued out for dividends. So you participate, what we would refer to on all lines of business. When you're in a mutual company, which is, which is really good. And then additionally with, with a stock company, you only participate now on the par pool. You don't participate on the other products and services anymore. Right. And the other thing. And so not to call it problematic, but there's a, some problematic Aspect is in a stock situation, stock company, they have stockholders and they have par holders. So they kind of have two masters, right. They gotta appease both of these people. And I'm not a stock ninja or whatever, but I understand that every quarter when you are listed on a stock exchange, you have to report some numbers to those people. You know, the shareholders, they're hoping for some decent numbers every quarter and they don't. They get really upset when they're not. So there's a lot of activity on the stock company side to try to make sure that they're pumping out good numbers when they get their quarterly report. Right. And so where their focus is versus in the mutual company, 100% of all their focus is on their par owners because they have no other masters. So there's a mindset differential that's there that I think is really important. And ideally we want to abide by what Nelson has indicated is the best process, which is stick with the mutual company. There are many times where that's not the case. In fact, recently I have a lady right now who's doing a conversion of existing term insurance and she's doing it with a different company because she was actually not denied but postponed due to some recent medical testing on an application with the mutual company. And because that could take 18 months and the time is going to go by anyway, we can get a really similar, similar features, very similar structure of a policy for her by converting existing term insurance with another company. I have another gentleman I met with two days ago, similar process. He got a policy, he was in better health condition. Now not in as good of health condition. He's added a little bit of extra size since the last time he did did an application. And so he would be certainly experiencing a rating on a policy. And so we're actually better off right now, especially because he's also a smoker in converting the other policy with the other company, even though it's a company that I would prefer maybe not to do business with because let's just. Vernon, can I just be honest with you? It's a company that pisses me off. Okay.

I think I know, I think I know which company you might be talking about.

I have a policy with them and so do you.

Yes.

And it's a good policy. I'm. I'm not upset with my policy. I'm upset with the administration of how they administer the policy because they're. And they don't know what they're doing over there. And it causes no end of frustration for A client and for an advisor helping a client. And it's irritating and frustrating and that makes you not want to do business with a company. They're also a stock company. But the policy itself, I'm okay with it. It's. It's working well for me.

Yeah. Well, here's the deal, Rich, that I'll say about that. First things first, at the end of the day, the total cash value has to rise to match the total death benefit. Stock mutual, I don't care. The cash value rises every single day and it can't go backwards. Number two, I have access to, let's just say a general rule. 90% of the total cash value. Anytime I ask for it, they're contractually bound to loan it to me. So all of those factors still exist. Nelson taught us to do the business with using the best tool that was available to you. So just like Richard's point, hey, I couldn't get the policy at the mutual company. Is that a reason not to get started? I'm super pleased with the seven policies that I own at mutual insurance or at, at stock companies. I use them all the time. They grow every day and life is good. So, so that's totally fine. But you did an excellent job of describing that. I love that circle within the circle. I'm going to use that when I draw that for people because I, you know, sometimes help people understand how that works. But you did a great job of explaining all of that. And again, at the end of the day, it just comes down to the process and using whatever tool is available to you as long as it's designed correctly. That's why you got to work with a good coach. But a bit. A quick note about term insurance. I just, I drew a line in the sand. I made a decision. I'm never going to cancel term insurance. Well, particularly if it's with a company, whether it's stock or mutual, that offers participating whole life, ideally correctly structured for banking. But I kind of pulled a little fast one. I'm going to. It's totally on side. It's all good. So, Rich, there is some obviously medical underwriting to get one of these policies, but there can be some financial underwriting, especially if you're applying for kind of a larger premium policy or a larger death benefit. The insurance company wants to know that you have a need for the insurance and ability to pay the premium. So that's part of our job as the coach, as the advisor, is to really sell the case to the insurance company and convince them that it's A good idea and a good fit for the client. Right. And so we have to, you know, gather data and have a plan in place and all that. So I did all those same things for myself. And so I was able to, and I had to go on a big health journey and all that. You know, a lot of people know that, you know, 24 months ago or so I was not insurable. So I had to go on my own health journey and get that cleaned up. So I was able to get the mutual insurance company to approve a pretty sizable policy for me in November of 2021. So, pretty new policy. And I disclosed to them that I had a term life insurance policy that I had for many years, about 500,000 at another company and at a stock company. And so as soon as I got the policy approved at the mutual company, I immediately converted my term policy with the other company. So I, I added another policy to our system. And so it's a contractually guaranteed that they have to give me that whole life insurance with no medical or financial underwriting. So I was immediately able to get that policy approved as well. So that was really good. And, and again, that I'm quite pleased with with both.

So I, and I think with that stock company, they made some recent adjustments where there was less, even less medical type questions. Because you have the ability to convert into a standard base policy at any time, they can't restrict that. Even if, let's say you've got terminal cancer, you can do it. However, there's the flexible paid up addition, top up portion that we're trying to do where you want to maybe get that extra turbo boost into the policy because that purchase is extra death benefit, it adds to the risk profile on the insurance pool, so they reserve the right to underwrite for that excess. And, and, but there is, you know, there's certain carriers have a little bit of wiggle room depending on what you're doing. And so I believe in that conversion you had, Vern, there was a recent change where you were able to implement a pretty decent chunk of that in there without really, without any questions at all. Is that right?

Absolutely. So to your point. Yeah. And I know this might get a little confusing for people because we're talking a little bit about insurance, but basically, you know, you have a base or a required premium in the policy. It all generates death benefit and it all generates cash value and it's all eligible to receive dividends just in different ways. So I have this base premium that kind of drives the long term and the efficiency the daily cash growth in the policy that's 100% guaranteed. When you have a term policy, you can convert some or all of that term and that base is guaranteed. With most companies, that's what they guarantee. This particular company that we're referring to, to Richard's point, there's that additional premium that we want to be able to put in because it buys big paid up chunks of death benefit and creates a lot of immediate accessible cash and it helps increase the daily growth and all that stuff. So we want to have that additional option to put that premium in. Most companies won't just give you that additional premium. You have to be underwritten sometimes financially and medically for it. But this potential particular company recently made a change where they actually will allow you to convert up to, I believe it's about $2 million of term insurance to whole life where they'll actually grant you all of that additional deposit room, non medical, non financial. So I was super thrilled about that. So my base premium on that policy, rich, is about $9,000 a year. And now I have the ability to deposit nearly $26,000 per year in the policy. So there's quite a lot of flexibility. So I was pretty, I was pleased as punch, as they say. But now that same company, I have to mention this, I love this company actually. So I'm very disappointed about this. For a stock company, they're pretty great. But they made a recent change as well. That doesn't make them very ideal though for most people for banking. Because I have intimate knowledge, I understand the process, I understand the tools, I understand how it works. I'm fine with having the policy. But the problem with this company, Rich, and you know what I'm about to say when I access a policy loan from this company and deploy it and use it somewhere, they've now made it mandatory that you must pay that entire policy loan back before your next policy premium date or at least before you're able to put that additional premium in. So I have to borrow 5,000 bucks, 10,000 bucks, 20,000 bucks. I have to pay that all back and have a zero loan balance on my own policy. Otherwise they'll only let me put the 9,000 in, which really doesn't work very well for most people, especially starting the banking process because you're probably going to have loans paid off, loans paid off, loans paid off, or loan pay a little bit, take another loan, loan pay a little bit, take another loan, right? So you're kind of always going to have a loan in your banking system because Loans are good for banks because it attracts streams of payments. So if you have a loan balance outstanding, you must get it paid back before you can put an additional premium in. And that can pose a lot of challenges for people who are, who are new and don't really understand the whole process. You see what I'm saying, right?

Yeah. And just to quantify that. So thank you for sharing that. Because this, this is a new thing. I think we're, I don't even know for a full year around the clock for when this change happened. So for anyone that has an existing policy with that, that company that's, you know, prior to this adjustment, they don't have that issue. And, and many of our, my clients have that as well. No issues there, but it's for new ones going forward. So it's kind of like with the insurance realm. One of our colleagues says that there's no, there's no deals in the insurance industry. Everything comes at a cost exchange. There's a benefit exchange, cost benefit exchange. And so you're paying a premium to get a death benefit. It's an actuarial premium. It's mathematically calculated. And then the advantage that they said is, okay, hey Vern, you can put a little bit more into this contract than you could a year ago. The same contract. You can put more into it. But because we're allowing you to do that and we're not going to underwrite all that stuff anymore, we have to slowly, we have to manage the risk on the pool. There's something that's referred to as anti selection risk. And so if they don't underwrite people for that extra top up that Burns talking about, there could be people who are completely medically uninsurable and they're just willy nilly throwing money in and buying new death benefit. And so if they're also taking policy loans like they have to strike a balance so that they can put an adjustment in place to manage the overall risk for the pool. So that's how they decided to manage that risk. And it doesn't make it ideal for ibc. However, it also doesn't make it impossible. It simply means that the thinking that you have to do must get changed. And there's, there's many ways of still accomplishing the same objective. It's just a matter of having a good conversation with your coach about how to do that. And again, something that's worth doing is worth doing well and worth doing it right. And that company might be the right thing for an individual because perhaps they weren't able to get insured at the other company if they want to go do a policy with Company A. But they weren't able to do that for whatever reason and they already have existing insurance that we can convert at Company baby. Company B B has some kind of silly knickknack rules that we have to bounce around in and play in there. We're going to play in their sandbox.

Yeah.

We just figure out how do we play in that sandbox effectively so you can still accomplish the things you want to do.

Yeah. Really good. Really well said, Rich.

Well, we covered a lot of ground here today, but, you know, for everyone that's tuned in and for the folks who are watching on YouTube, make sure you continue your journey of learning. There should be another set of videos that's going to pop up here shortly, and I bet you one of those is going to be pretty fantastic. It might have my face. It might have burns face or somebody else. Go ahead and click it and watch that next video because you're going to learn a ton. Thanks for being with us today and make your day amazing and make your financial life fantastic.