Dividend Scale Interest Rate How Does It Work For Whole Life Insurance Canada?

Capitalize a business. I have an expectation of profit, much like anyone else who is prudent with deploying capital. If you capitalize a business, your expectation is profit. And so if I have the ability to capitalize a business that has been profitable since inception, we're talking about weathering the Spanish flu, the Great Depression, H1N1 SARS, the tech bubble bursting in early 2000, the financial crisis of 0809, COVID 19, gosh, I want to say 26, 27 plus recessions and the business continues to be profitable every single year. That's a pretty good place in my view, to multiply money. And if I get a death benefit thrown in for good measure and all the contractual guarantees, these policies are not an investment, they're a unilateral, binding contract, then how much capital do I want residing there? The calculation of dividends in participating whole life insurance contracts. Thank you for tuning in for another episode of Wealth Without Bay Street. Now this episode is really actually going to be a good one because Richard and I like to jam. As we like to say, we like to have jam sessions on topics of this nature. Joined today again by my amazing co host, colleague, dear friend, Richard Canfield, hailing from Chilliwack, Alberta, otherwise known as the wac. Richard, we are going to provide our listeners with some incredible value today.

And now before you go too far though, Jay, I want people to understand that although we like jam, like we're, we don't mind peanut butter. So like we're not trying to, we're not, you know, going down a condiment track of like, what's the best thing to put on a sandwich here? It's just that it seems to, it just seems to be more fun to jam. It's less fun to peanut butter.

Well, good point. And that brings me to setting up this episode because what we're seeing out there in the marketplace as dividend paying participating whole life insurance contracts gain more popularity in the financial space, what we're seeing is questions. We're seeing questions from the general public around, oh, you know, I took a look at this particular life insurance company. Now I'm going to be naming some of Canada's largest life insurance companies. We're not running an advertisement for any one of these life carriers, but we need to be transparent in the carriers that provide these types of contracts. So an example would be a phone call from someone saying, yeah, I took a look at Equitable Life of Canada who presently has a dividend of 6.2%. And I compared that with Canada Life, who presently has a dividend of 5 point X percent. Which company's better? And shouldn't I go with the company that has the higher dividend rate? And so for any advisors who are tuning into this episode now, you may be thinking as well that when a life insurance company announces a dividend rate, and we're going to clarify the exact nomenclature of that, but if you just think of a dividend rate, then an advisor as well can take a little bit of information and reach an absurd conclusion. And so we want to provide some great value to whether you're an individual business owner, an advisor, a designated professional who's advising clients financially to some degree, we want to provide you with some clarity on how dividends are calculated and how dividends are paid to each individual policy. And so, Richard, what else would you like to add in setting up this episode?

Oh, so much. Okay, well, first I'm going to start off with is Nelson taught us very clearly that as soon as the conversation goes towards rate, when people get around the water cooler, the conversation sooner or later circles around to rate. And percentages can be deceiving. You know, Jason, one of our favorite movies, you know, 60% of the time, percentages are right all the time. And so it's a percentage in our brain. It causes our brain to start assuming things. And because one number is larger than another, our brain says, oh, well, that logically means that this must be better in some way. That is not necessarily the case because we're not taking into consideration a whole bunch of other factors. And we also don't even know what are the inputs that we're getting, what are we being fed specifically without input, so we don't have a full picture. And ultimately you need to be able to have a full picture. And so we going to, hopefully this conversation will provide a lot of clarity to folks. Now, if you're listening to us, you're driving in your car or you're on one of the podcast channels. That's great. You're going to want to probably circle back and check out the YouTube on this because a little bit later, we're.

Going to bring up a visual that.

Jason's going to help us out with. And we're going to actually, you know, do a couple of calculations, but we'll, we'll do our best to vocalize it for anyone who's listening in now on this topic, here's one thing that I hear. I'm just going to share a pet peeve of mine. And if you know what mine I'M going to get off my chest. And that's when we speak to other members of the advisory community and we often hear them. There's no ill will, there's nothing bad about it. It's just something particularly for me, I find to be a little bit vexing is when someone says, oh yeah, so and so has, you know, the dividend rate on this company is really awesome. Or you know, this, hey, this company's got a really long standing dividend rate and they're always just focused on the rate. But then, you know, I recall an experience, this is about four years ago, but actually about five years ago I was at a training event and in this training event we were going to get CE credits, update CE credits. And it was actually an event with one of the carriers who was talking about their participating product and they were, they were showing it off a little bit. We were getting some CE credits and learning a lot of other really cool advanced stuff, good things for companies and whatever. There was about 40 people in the room and you know, I, I, I'm not a, I don't think I'm an old guy, but I don't think I'm a young guy either. I'm kind of pretty mid, mid range in today's day and age. But in that particular room I was definitely on the lower end of the spectrum when it came to age. I was probably, I would say I was maybe the third or the fourth youngest person probably in the room with everyone else being a fair amount more wiser, you could say, than I was. And when the conversation came around the dividend scales, there was so many questions that came up from the advisory base of people that had no, they didn't understand, they didn't know, they had said, oh, you mean, I've been telling my clients for the last 30 years that that's the rate of return. And they were surprised that when they found out that the dividend scale, interest rate is not relevant to the rate of return of a policy, it just isn't. And it created a huge discussion in the room to the point where I actually got up and I went to the front of the room and I started drawing on board with the insurance carrier person and we kind of did some back and forth a little bit. It was a little bit of fun. But ultimately I just got frustrated because all these individuals who'd been in the industry much longer than I had, they're wonderful people. I'm sure they helped their clients an absolute ton. We no ill will, nothing against these individuals. It was simply a lack of knowledge because their areas of specialty or what they focused on, their business simply wasn't par insurance and they hadn't done the due diligence and the research to truly understand the mechanics behind the tool.

That's a great point. And we're going to dive in a little bit into the tool and we're going to start from the basics and work our way through to more of the technical element of it. And our hope is, is that it adds value and that people get a lot of clarity from this and that we can help, you know, make sure that the right messaging is getting out there in the marketplace. And so we want to start with the basics. So when you purchase a dividend paying participating whole life insurance contract, if you are dealing with a carrier, there are two different types of carriers. You have what's called a stock company and then you have what is called a mutual company. Now the difference between the two is that the stock company not only has participating policy owners, but the stock company has shareholders, stockholders. The mutual company is solely owned by the participating whole life policy owners. So we have two different company types. The stock company, the mutual company. Now, when you purchase a contract, and that contract is dividend paying, when the insurance company declares dividends, which the insurance company declares typically for all the carriers we work with, they've been declaring them since inception once a year, that dividend is contractually guaranteed to be paid. It cannot be repossessed and it cannot lose value. And so just pouring a very basic foundation because our preference, as basically mentored to us by the late R. Nelson Nash for a variety of reasons, is to ideally place your contract with a mutual company because there are no stockholder interests to cater to. We're not chasing the next 90 days on Wall street or Bay Street. We're dealing in theoretical 100 year lifespans. And the mutual company's mandate is clear and that is to manage the company in a fashion that enables them to fulfill the legally binding contractual guarantees and their mandate to their participating policy owners.

So further to that, Jay, I really.

Want to mention, I'm going to jump in here because with the mutual company, all of the products that they sell, all lines of business, they all end up going to one bottom line. Okay, so if they're selling group insurance for businesses, if they're selling critical illness plans, term insurance, whatever, segregated, all these different things that they do as a business, it's all one organization, it's all one entity. It all shows up in the accounting done to determine how did they do for the year. And the only way you can have an ownership stake in that company is to own that particip contract. You can own other contracts. Yes, you might have a policy, might be a policy owner, but you're not a participating or you do not participate in the profitability, so you don't have the ability to earn dividends. In contrast to the stock companies, which, again, nothing wrong with them, but they have a segmented pile of money, a segmented pool called a participating account. And then the rest of the things that they do, if all the other products and things and services that they sell are outside of that account, they're like almost segmented apart from one another. So you don't get to participate on anything else that the company does, only the things that transpire within that participating pool. And there's a small little bit of dilution because the stockholders get to take a chunk. It's a small chunk, but they're allowed to take a slice of that dividend pie that gets paid out on an annual basis that goes back to the stockholders as well. Out of that stock company situation, what's.

Most important is whose interests are prioritized. And so when you're dealing with a stock company, the interests of the shareholders take priority. And when you're dealing with a mutual carrier, the interests of the participating policy owners are the only group of interest that you're catering to. And so, suffice to say, again, it's not that one is better than the other. It's just very important to understand that there are differences between the two. And thank goodness in Canada we have the option of either or. And when we look at this example, because we're going to do a little bit of a deep dive, we're going to look at the tool. Now, again, full disclosure, we're not talking about the process of becoming your own banker, the infinite banking concept. What we are talking about in today's episode is a product. And our conversation is going to be entirely product focused because it's super rare.

And, oh my goodness, in any way shape.

Exactly. However, we need to help clear up some of the noise that's out there in the marketplace. So let's dive right in. Now, before we do that, let's keep things simple. And Richard's going to help us with a component of this here, which is really awesome because this is right from the horse's mouth. He's going to essentially narrate something right from the insurance company. But I want to tell you this. So once a year the board of directors get together, they bring the accountants into the room and they ask how did we do in managing the business this year? And the accountants say, well, here's all the money that came in, here's all the money that was paid out. We have a divisible surplus. We're going to take a portion of that surplus and we're going to earmark that as owner's equity. So that's money that is flagged as equity. The sole beneficiaries of that equity are the dividend paying participating policy owners when you're dealing with a mutual life company. And we're going to take the remaining portion of that surplus and we're going to pay that to the policy owners in the form of dividends. Now the way that each policy is paid a dividend is the calculation of the actual yield is based on what is called the contribution principle. So Richard, can you expand on what exactly is the contribution principle? Now we're going to read what the insurance company defines it as and then we're going to make an attempt here to simplify it for our listeners.

Perfect. So we'll go into the, we'll go into the specifics here first. So again, as Jason said, PAR policies are eligible to receive annual experience dividends. They're called experience dividends because they're based on actual experience of what transpired in the previous year. Experience dividends are determined based on the distributable earnings distributable earnings of the participating account. These earnings are adjusted and to maintain consistency across distribution across different periods.

Okay.

Earnings include all participating policyholder related gains or losses relative to, relative to experience factors. Now here are the experience factors that are listed. That includes investment returns, mortality. So in other words, like death, claims, expenses, expensive operations, how do they keep the business going, Paying for the heat bill and the building and all that sort of stuff. Policy surrenders. So policies that are no longer on the books that they expected to be there policy, loan rate, utilization, taxes. So CRA has got to get their pound of flesh and other policyholder experience. So these are all of the factors that get meshed together that determine and based on different, how different policies are sold, how this gets paid out. Earnings arise when the experience on all of these factors is collectively more favorable than the assumptions used in the calculating of the guaranteed value. So when the lead actuary came in and said, hey, here we're going to design this project, this product, here's how much money we need to collect to make sure we can guarantee all the benefits well, if we're doing better than estimated in all those different line items or in combination amongst them, then that's when a dividend is going to be paid out. Since the dividends reflect the actual experience, they can't be known in advance and that's why they're not guaranteed. Now, they're consistent, they're brutally consistent, actually probably one of the most consistent things.

On planet Earth today.

But they do fluctuate over time. Now, there's a next section I'm going to go into. In order to maintain reasonable equity between the classes and generations of policyholders, the company follows the contribution principle in calculation of individual policy dividends for classes of policy owners. So this is really important. We're going to talk about these classes. The contribution principle again is a generally accepted method for dividing dividends in Canada. Under this principle, the distributable earnings are distributed among policies over the long term in the same proportionate way that the policies are considered to have contributed to the distributable earnings. That is so important. I'm going to read that one more time that the distributable earnings are distributed among policies in the same proportion as the policies are considered to have contributed to the distributable earnings. And then they get grouped based on the different classes and experience factors. One last bullet here I want to jump down to is that the effective policy policy loan utilization and the rates charged for such loans by the insurance company are reflected based on the class of policyholder. Okay, that's a lot of information. Very, very specific. Let's summarize that and put it into some more simpleized language. Jason, I'm going to let you have.

First kick at the can, okay? You pay premium, you become a co owner of the insurance company. Every year the insurance company determines how much money came in, how much money was paid out. A dividend is declared and the dividend that's paid to your policy is based on your policy's contribution to the net earnings of the insurance company. And the only dividend that isn't guaranteed is the one that hasn't been declared yet.

I would say that that's pretty simple.

I hope everyone.

I'll sketch that. Now I'm going to add a little bit to it to flush it a little bit deeper and I'm going to just use an example. So let's assume for a moment. I got a policy. I was 40 years old in 1985 and I got a policy at that time with the same life company. My policy has been enforced now for quite a number of years. Now, today at 40, I go get a policy. Those are two totally different policies. They were sold at the different time frames and the assumptions that were made. The actuary, the designer of this plan, who did all the hard calculations and engineering to determine it, to make sure it was sound, the assumptions at the two different time frames were totally different. I'm sure everyone would be nodding their head in agreement here. And so if we have the same company that has the same dividend scale interest rate, both of these policies will receive a totally different dividend. And the amount that they might see may be totally different. Because hypothetically, the gentleman got the policy in 1985. If the lead actuary was asleep at the wheel and he did a really bad job and he expected that there was going to be a lot more people alive in that group of policies than are today, well, they would actually be below the level on mortality. Maybe they have a lot more death claims than they anticipated on that group. So that could impact the total dividends that that grouping gets in comparison to other groupings. Okay, so all of these factors that apply that we talked about, they all have a direct relationship to when that policy was designed and sold based on the assumptions at that time. And so even though you might have the same dividend scale interest rate, the dividends that are appropriated to different blocks or classes of policies will vary based.

On how they actually contributed. And it's not that there's a dividend yield that is declared for that block and that every policy is going to receive the same yield. Every single policy number is determined in the way of how much did this particular policy contribute to the net earnings of the insurance company. And that determines the actual dividend yield that is paid in that year to that policy. And the policy owner has a wide variety of options of what they can do in terms of election as to what the dividend is going to be utilized for. Now, we know in our circle that purchasing paid up additions is the sole recommendation to maximize not only the growth of the contract, but also to accelerate the contribution to net earnings so that future dividend yields are higher and better because of the policy owner's behavior, not the insurance company's behavior. And so I want to dive right into an actual policy and Rich, jump right in. Let's have some fun. We're going to have a jam session now. If you're listening to this, please continue listening. We'll do our best to explain it, but we encourage you, as Rich said, come back to the YouTube channel. Because you're actually going to see a policy illustration and all of these things. So let me share my screen and what I'm going to bring up is I'm going to bring up a policy illustration. Now we're dealing with a 45 year old male, non smoker and this particular prospective policy owner wants to contribute $30,000 a year in premium into the policy. Now as I walk through this, Rich, just back me up and ask me any questions or weigh in with additional value as this is being explained. Now this particular life insurance company is Equitable Life of Canada. Equitable Life of Canada is a mutual life company. Now this policy owner, proposed owner, he could decide among a variety of companies. There are many to choose from. Equitable Life of Canada, Canada Life, Foresters, Empire Life, Assumption. Who am I missing?

Manulife, Great West London Life, which are all basically now amalgamated into Canada Life.

Yeah, they're all part of the same Power Corp. Group.

Power Financial Group.

Yeah.

And so this policy design is the policy owner says, look, I want to put 30k in. Okay, well what we're going to do is we're going to allocate a portion of that premium. So you see the 13,169 is the minimum premium required. That's the amount that must come into the policy each and every year. We are creating this as a pay to 100 where the policy owner has the contractual authority to deposit the premium all the way to age 100. And then the second portion of the premium is the accelerated deposit option which has been maximized here at 16,008, 30 and 25 cents. We put in 16,830 and 24 cents to keep it at an even 30,000. Now of course, moving to the application stage, we would just top it off with the extra penny to make sure we get every available penny into the policy. Now here's a quick calculation that we want to do. I'm going to get a little technical here, Rich, if you can help me with the math. If we take $13,169.76 and we divide that into the starting death benefit of 483,767, multiply that by 100 to express it as what are we paying in pennies? For every dollar of death benefit.

We are paying a whopping 2.72%.

So 2.72 pennies for every dollar of death benefit. Again, the calculation, very simple. 1316976 divided into $483,767 is 2.72 pennies for every Dollar of death benefit. Everybody with me so far? Excellent.

As one of our mentors used to say, it was dollars for pennies apiece.

That's right. And now, God forbid, if the life insured passed away, the beneficiaries would receive at minimum $483,767 income tax free. Now, the moment that this contract is in place, contractual guarantees are in force and the insurance company is legally bound to fulfill those guarantees. The first guarantee is that the total cash value of the policy will match the total death benefit by age 100. So every single day that that life insured is aging closer to 100, the cash values of the policy are rising on a daily basis. Not an annual basis, a daily basis. And so very important to understand that now, the moment that the insurance company declares a dividend, which Inequitable's case has been every single year since the inception of participating policies. So with Equitable, that just happens to be in 1936, right in the midst of the Great Depression. When a dividend is declared, it is contractually guaranteed to be paid. It cannot be repossessed, it cannot lose value. Now, what this participating policy owner is electing to do is to use that dividend to purchase paid up additions of death benefit which must accumulate their equivalent in cash value. I'm going to work here. And Rich, this would be a great opportunity to weigh in as well. I want to work from left to right. Now, right here you can see what the insurance company has illustrated in the category of guaranteed values. The guaranteed values encompass the required annual premium, which is the minimum premium that must be paid in the cash value and the death benefit if the only deposit was the minimum premium. So the insurance company is outlining these three columns as guaranteed because that is all that the insurance company can control. The insurance company cannot force the policy owner to put in more than the minimum premium, nor can the insurance company force the policy owner to do any one thing with their dividend in any given year. The policy owner has total contractual authority in whether or not they deposit any extra premium and what they do with their dividend in any given year. So based on what the insurance company can control, if all the policy owner did was deposit the minimum premium every single year, all the way to age 100 of the life insured, and they took their dividend out in cash every single year that it was declared and they never chunked it back into the system to purchase more paid up additions, the insurance company is saying, based on what we can control. This is what we guarantee will occur if all you do is fulfill your end of the bargain, which is depositing the minimum required premium. That's all we need you to do. The moment that you put in $1 more than the minimum required premium, you're now over on the right hand side of the illustration and you can never go back to the left hand side. So, presuming that the policy owner is going to deposit $30,000, let's see what the impact of that behavior has had on the policy values. We had a starting death benefit of $483,767 the moment that the total premium of $30,000 was deposited. The moment that the dividend was chunked right back into the policy. Take a look at the total death benefit at the end of the first policy year. It has increased from $483,000 to $541,000 just in the first year. Now, this particular life company has a dividend scale interest rate, Richard, of 6.2% at the time of the recording of this episode. So if we follow the mainstream financial understanding of dividend scale interest rate and the misunderstanding that it has something to do with the actual dividend that's paid to this particular policy, let's do some basic math. I'm going to take the annual dividend in the first year of $1,619. I'm going to divide that into the $30,000 of premium that was deposited in that first policy year. Now, that would equate to 5.4%. So if the dividend scale interest rate is 6.2%, then why was the dividend yield not 6.2% in the first year? The reason, in all simplicity, is because the dividend scale interest rate is what informs the insurance company that A they can confidently declare and pay dividends to all the classes of policies, and B, there's a formula that supports the dividend scale interest rate that enables the insurance company to gradually bring in the returns from the participating account into the actual dividend yields over a period of time. Now, let's go to the second year.

One more thing to add to that too, Jay, is that the the dividend scale interest rate which we're reflecting on here is only something that's relative to the investment components of the power count. So it's not. It has a different relationship over the mortality charges and the expenses of operation and the taxes the insurance company pays and all the policy surrenders. All of those other factors are factors that are outside of the metric on how they did their investments. And so the dividend scale interest rate is a reflection of one of those primary factors, but not necessarily of all.

The factors and very good points. And the total cash value piled up by the insurance company in the first year is $22,913. Now I want to share something again that is so important for a participating policy owner to be aware of because you're a co owner of this company when the application was submitted.

And.

If you think of this in simplicity, you've got an actuary that says, okay, look, we have a 45 year old male non smoker who wants a starting death benefit of 483,000 and we need to collect $12,210 in premium every year to make this contract profitable for this policy owner and for everyone else who already participates. Well, the rate maker comes in and says, okay, your formula is good, but we're not going to collect that 12,200, we're going to collect 13,169 because we need to create a capital surplus reserve just in case this particular proposed life insured dies early or someone else within their pre screened group of millions of insured lives dies early. We need to maintain a capital surplus reserve. So they collect the premium, the policy owner does something a little extra and puts in the accelerated deposit option. The insurance company puts that capital to work to begin multiplying it. And at the end of the year they sit down and they look at and they say, hey, is this life insured still with us? Great. Did they deposit the minimum required premium? They sure did. Not only did they do that, they put in more. They put in the accelerated deposit option and they chose to chunk their dividend back in to buy more paid up additions. So the dividend didn't leave the money pool. Let's reward this policy owner with a dividend. And somebody in the room who doesn't know says, okay, so should we just take $30,000 and multiply it by 6.2% and that should be the dividend that gets paid to this policy owner. And the board says no, no, no, no, no, no. We need to determine using the of course, the life insurance proprietary formula, they don't disclose that to anybody. No life carrier discloses that to anybody. They say, look, we need to determine what contribution did this specific policy have to the net earnings of the insurance company. And if the policy owner is accessing policy loans and repaying policy loans and putting extra capital back into the money pool, that impacts the dividend yields for that Class of policies. Just like Nelson says in his book becoming your own banker. Would you have much of a grocery store if you were the only person who shopped there? Of course not. You must build it so that your needs are met and so that others can prosper as well. Now I want to take you to the second year. Rich, what is the dividend illustrated in year two? What is the amount?

The amount is 2,726. $2,726.

Okay, 2,726. Let's divide that into $30,000 of premium that was deposited that year. Whoops, I should have multiplied that by 100. So that's 9.09%. Why is it not 6.2%? We've already explained that. Let's take both dividends from 1 and 2. So 1619 for year one plus 2,726 for year two. Divide that into 60,000 of premium that was deposited. That's 7.24%. So if we were to show this very same proposed policy owner putting $35,000 in premium into the policy each year, Rich logic would dictate that the annual dividend would be higher.

The annual dividend would be higher that they would get than what we're illustrating on this illustration for sure.

Right.

And so if you look at again, the policy owner's behavior being far more impactful than the behavior of the insurance company, and if you recognize that the dividend scale interest rate is not the dividend yield that is paid to each policy owner and recognize that the policy owner can, through their own behavior, contribute more to the net earnings of the very company that they co own and by proxy be rewarded with more of the divisible surplus. Then you'll recognize that this really truly is the ultimate in simplicity and has absolutely nothing to do with rate of return. What is the rate of return here? If, heaven forbid, the policy owner passes.

Away.

We paid pennies to generate dollars that must accumulate their equivalent in cash value growth. And we want to clarify again, because we hear from the general public, because they're advised, while dividends are not guaranteed, the only dividend that isn't guaranteed is the one that hasn't been declared yet. And the moment that this illustration was created, Equitable has already declared dividends. So when the policy is put into place, the policy owner is already contractually guaranteed to be paid a dividend on their first policy anniversary. Isn't that good?

It's very good. And furthermore, I think it's really important to identify for the folks who are watching us on YouTube or again, if you're listening. So in this example, we've got. We put $30,000 in. In the year. We're contributing 30,000. Now, we didn't come up with that number. The policy owner came up with that number. They demonstrated that they had the cash flow and the means to do that, and that's what they wanted to put into their system. Okay. And they wanted flexibility. Well, they have flexibility from 13,169 all the way up to the $30,000 kind of cap. That's the maximum that that policy will accept in premium in a given policy year for them to make sure that that policy stays in a tax exempt status. Now, if the very first year, the policy owner said, yeah, I really want to do that. But they started the initial contract, they only paid the base premium. They only paid the 13,169. And then life changed. Let's say, for example, Covid happened in some way in their life, and they temporarily found themselves off work because their business was shut down for a while. And they said, you know what? I really want to do my 30,000, but because of what's transpired, I won't be able to get the whole 30 in this year. So then at the end of the year, they've only put in the base premium, but they still have the ability to put in, you know, the next year they can put in their 30. Well, Jason's just bringing up a second illustration, which you did very fast, by the way, Jason. And in this example, now we can see if we only put in the minimum base Premium in the first year, the dividend is now only $1,293. Well, what was it before, Jason, when we did the whole thing, it was 1619.

And we also have to look at the paid up addition as well. So the total death benefit increased from 483,000 to 541,000 in the first year when the entire 30,000 was deposited versus only increasing from 483,000 to 487,000 when only the minimum required premium was deposited. Not to mention the cash value that was piled up is also proportionately different because of a lower amount of capital coming into the money pool.

Now, this is really, really important. So in other words, if we didn't fund that first year, assuming we got our dividend, which would have been declared anyway, our dividend would have been lower. So, number one, the dividend was less. Which, by the way, that means every future dividend potential you can earn beyond that year is also Going to be less because of what you did as a policy owner, but not what the insurance company did. The death benefit increase tax free to protect your family, which also, by the way, is the mechanism that helps grow your cash value. Because cash follows the death benefit, cash follows the leader. We did an episode on that already. You can go back and reference. And so we only gained $5,000 in new death benefit versus the example where we did what we said we were going to do. As a policy owner, we met our voluntary choice of putting in the whole 30,000 because we could. We had a $58,000 increase in total death, vastly superior cash value, and our dividend paid in the very first year was greater. The reason the dividend was greater was because of our contribution. The contribution principle kicked in. And so if you didn't overfund, you got a smaller dividend versus if you did overfund, you got a bigger dividend. Now, it doesn't stop there. You got to take it out to a longer distance. You got to recognize the impact of that single dividend over your lifespan is dramatic.

And in addition to what you just said there, rich, and we catch ourselves too sometimes with this, there's no such thing as over funding a policy. There's no such thing as that. You've chosen a total premium and the premium has been allocated where the maximum accelerated deposit option is chosen. And that's what it is. It's an accelerated deposit option. The policy owner has the privilege of depositing some or all of that option, but they're not contractually obligated to put that amount in. And so one more thing that I wanted to talk about, which is really important, when people say, well, dividend scale interest rates change. And again, the conversation goes back to, well, if the dividend scale interest rate changes, then my dividends are going to go down. So I can tell you from firsthand experience, going into my 13th year in my journey, as the dividend scale interest rates have been gradually declining over the last five years, my dividend yields have only been going in one direction. Take a guess what that direction is.

Up.

And it's been the same with all of our clients who have been putting in the minimum premium plus the accelerated deposit option, Their dividend yields are only going up. And so even though the dividend scale interest rate is going down, the actual yield is increasing. Why is that? It's because of the policy owner's behavior. And by virtue of depositing what they had earmarked to go into their policy, they're contributing more to the net earnings of the insurance company, and they're rewarded with a higher portion of the divisible surplus. And so it really is the ultimate in simplicity, and it doesn't need to be something that one would overthink. But let's look at the impact. As you shared earlier, Rich, let's look at the impact of one more year of premium deposit. In this case, if the policy owner said, listen, I want to pay the premium into this policy for a period of 10 years, and that's fine, the policy owner has the privilege of doing that. But let's take a look at what the impact is of just depositing one more year of premium. And so, Rich, this illustration that I'm referencing now is showing that after the 10th year, after the 10th year, the policy owner is not putting in additional premium from their own capital outlay. Now, the minimum premium must still come into the policy. So what we do is we use the dividend of $10,136 to offset $13,169 of minimum required premium. The dividend is insufficient to offset that amount. So the total paid up additions of one. Pardon me, the total death benefit of $1,000,010,05,000,000 includes paid up additions. And a portion of those paid up additions are surrendered to cover the remainder of the minimum required premium. But Richard, what happened to the total cash value from year 10 to 11?

It still went up. It went from 348,000 to 362,000. Even though we did not make any deposits out of our own cash flow out of our pocket. We had an internal transaction that took place with the insurance company.

And then let's scroll down all the way to age 100. Okay, so if we go down to age 100, let's trust but verify. We can see that the total cash value and total death benefit are identical again, with the assumption being that the policy owner did not put in any additional premium from their own capital outlay all the way to age 100. Now, if we contrast this with one additional year of premium. So let's go to the policy design now, where we're putting premium in for 11 years, not 10. Well, immediately we can see the impact, but let's scroll all the way through now, rich to age 100.

So just to recap for everybody, we've just put in one additional year of premium instead of just funding it for 10 years because we're in control of the situation. Situation. As the owner, we funded year 11 as well. And so now we have a total cash value again, the Cash value death benefit is the same at age 100 of $2,107,178. So $2,100,000 versus previously we had $1,900,000 and change. I think it was $1,911,000. So we have almost a full $100,000 difference. Actually, I think it's more than $100,000 difference for that decision because of the decision that we made in year 11.

And so what Nelson taught us in his book Becoming youg Own Banker is he said, look, if you're concerned with the dividend scale interest rate, then use your imagination. Just put in another year of premium. Because the contribution principle applies for as long as the policy is in force. And so if you've contributed more to the net earnings of the insurance company by virtue of that 11th year of premium deposit, that contribution advantage is with you for as long as the policy is in force.

And just to recap because I misspoke here is actually, it's $200,000 just shy of a $200,000 impact by making that one deposit in year 11. So that one decision to put an extra 30,000 in had an input of 30, but an output of 200,000. When we look out over time. That's simply the power of compounding. That's why we say that this is one of the best machines for warehousing your wealth. Because it has uninterrupted compounding built right into it. You get the advantage of also the death pennant, of course, which we all know it's going to happen. It's a fundamental thing that will take place in everyone's life. But this is all taking place over the entire time frame. Without giving up the ability to utilize capital by collateralizing that policy. Being able to access a collateral loan from the insurance company itself. The same one that guarantees the collateral at unrestricted terms. Because you control the terms. If something happened because of COVID you didn't have to. You weren't able to make a payment for the year because your income has been reduced. Well, you can make that decision. Interest will accumulate to the life company. That interest goes back to the general fund, which is for all parties, which includes you, by the way. It goes to the into the mix. You don't get that direct interest back to your policy, but it's shared amongst everyone who participates as part of the divisible surplus. And you were in total control. Nobody came. And if you use that policy loan to buy out your car or your truck, no one shows up to repossess your vehicle, you own the vehicle, it's yours. It's total control. It's peace of mind. Meanwhile, your policy kept rising in growth every day because you continued to bring air into your lungs. That's a beautiful system.

Yeah, it's a great system. And it's not, of course, again, as we always say, it's not meant to be accomplished with one system. To truly become your own banker, and we said we're going to focus on product for this episode, but to truly become your own banker, it's meant to be a system of policies over a period of time. Now, I want to show people something because, Rich, I'd like you to follow my logic here. So if you look at this particular policy again, we have $30,000 going in. Again, the assumption being that the policy owner is actually depositing $30,000 into the policy, even though they're only contractually obligated to put in $13,169. Let's fast forward. Let's go to year five. So how much premium has been deposited into the policy up to that point?

Was that $150,000?

That'd be $150,000. The total cash value that the insurance company has piled up is $148,865. And so the policy owner thinks I'm behind. And what the policy owner doesn't see and what most I've never met and with all due respect to financial professionals out there across Canada, and again, all I can tell you is the truth. Not one financial professional that I've ever talked to has ever said that they know what I'm about to share. So, Rich, take a look at the total cash value at the third policy.

Anniversary for our listeners. It's $84,430.

Now, what was the cash value at the second policy anniversary?

So in the second year, it was $50,854.

And so the annual increase in cash value is how much, Richard?

Well, based on Jason's calculator here, he just subtracted those two numbers, as Nelson would say, he did some third grade arithmetic, and the annual increase was $33,576. You made a deposit in year three of $30,000, and the cash accumulation was $33,576. So you made. And the insurance, you put some money in, and the insurance company piled up way more than you put in.

Now, I'm going to articulate why that actually occurred. But before I do that, what interest would we have to earn in a traditional savings account without triggering a taxable event in order to deposit 30,000 and have $33,576 12 months later. Let's calculate it.

Well, yeah, it's just shy of 12%.

It's 11.92%. Now, I want to clarify something here. The annual increase in cash value did not occur because the policy owner simply put $30,000 into the policy in year three. The policy owner has been feeding this policy with financial energy since year one. And so Nelson describes this beautifully in the book titled Becoming youg Own banker on page 15. If we flip to page 15 of our Nelson Nash's book, I'm going to read this out loud. Nelson shared it all reminds me of a phenomenon in physics. Take a pail of water to the seaside. I want you at sea level and heat it up to 210 degrees Fahrenheit. And all you have is very hot water. But if you heat it up to 212 degrees Fahrenheit, you have live steam with unbelievable power. The steam engine changed the world, but it doesn't happen until you get past 212 degrees. Lots of heat goes into the process up to the boiling point, but the dramatic power comes suddenly. Now, if you think about this, what Nelson is describing is he's talking about the premium deposits into the contract. So that is, if you imagine for a moment every premium deposit is heating up that, that water.

And once you get it's adding more sticks of wood onto the fire to.

Stoke the fire, it just keeps getting hotter. And once you get to 212 degrees, you've created live steam. So the question to ask yourself is, am I redirecting the financial energy away from my family and away from my business, or am I depositing and creating that financial energy in my own system? Well, you can see as evidenced by the annual increase in cash value, that this policy owner has a significant advantage because he's creating live steam fairly early in this contract. So, Rich, pick any other year just for trivia.

Well, I'm going to zone in on one because I'm going to pick year six. In this particular example that we have in front of us, we have this particular individual has put in six years of deposits, which is $30,000 over six years and that's $180,000 in deposits over that time frame. The total cash value, the asset value of that policy at this stage is 185,000. So you have a machine now where you've contributed financial energy of $180,000 worth into it. Over a period of time. And that machine has more capital than all of what you've contributed in it. And it's growing at a rate far superior to what you're contributing. And there's a massive tax free death benefit building up on the sidelines as well.

And you've added a significant amount of paid up additions to the policy. We had a starting death benefit of 483,767. The death benefit at the sixth policy anniversary is 850,548. So the difference is $366,000 of paid up additions, which must accumulate their equivalent in cash value.

Now again, another way of saying that is that means we've added almost $370,000 in death benefit, which means we forced the insurance company's hand for the rest of our natural life to accumulate cash values that must equal the new amount of death benefit that we've helped add in, which is almost 370,000. We forced the insurance company to continue the accumulation process to match that number by age 100.

Now, again, we are assuming that the policy owner is going to deposit the premium. We're assuming that the insurance company is going to confidently continue to declare dividends as they've been doing every single year since inception, without fail. And we are assuming that the policy owner is not going to terminate or surrender or forfeit the policy or withdraw the cash value versus borrowing against the cash value. And so that is all attributed to whose behavior?

It's all about the policyholder.

It's all about the policy owner.

With the exception you are your own banker.

With the exception of the dividend declaration, if the insurance company declares a dividend, that's one thing, it's what the policy owner elects to do with that dividend which is attributed to the policy owner's behavior. Because if the policy owner is withdrawing dividends out in cash, then the cash value pile up, the paid up additions will be much lower. And so if the policy owner agrees that they want to maximize the growth of their policy, then they need to understand that it is their behavior that is far more critical than the behavior of the insurance company. Now, I know we started this whole thing off to talk about and clarify dividend scale interest rates. So if you're watching or listening to this episode, please understand that the dividend scale interest rate is not, is not the percentage, the rate that you use to determine what your specific policy dividend yield is going to be in any given year. And to all of our colleagues out there in the industry, we Hope that you got value from this and that it clarified it for you. Because I can say with a very high degree of certainty based on all the financial professionals that we talk to every day of every week of every month of every year of every decade, that predominantly this is not taught, they are not taught this by the very company that's providing the contracts. I'll never forget the CEO of Equitable Life leaning into my ear while we were enjoying each other's company over dinner at one of their leaders conferences. And he said, Jason, you have a higher degree of knowledge of participating dividend paying whole life contractors than our own home office personnel does.

Well, and on that note, Jason, again, it's not a slight because it's, you know, for the financial professionals and you know, other other people, they're the marketing material. The materials that are used and presented by the companies themselves. Is the, is part of the problem. Yeah. The reason, the reason this belief structure or that, that, that this even comes into question. What, why it's so popularized as something within our industry and discussions and then unfortunately can lead to the misinformation, the misleading unintentionally the unintended concept misleading the client or the prospective user of the policy, the owner, into thinking that that's what they're going to get as a rate of return. First of all, because we try to. The industry has talked about the insurance in trying to compare it or make it into an investment type vehicle, which it just simply isn't and it doesn't need to be, you know, there's no reason for it to be that and their own marketing appeal, it does have to declare things. They're required through regulation to declare certain things. And what do they declare? They declare the dividend scale interest rate and they have, you know, three paragraphs and tiny font to kind of explain little bits of it. But you know, you have to be some kind of a wizard to understand that. And nowhere on that material does it indicate that it all ties into a contribution principle. And you actually have to go digging and know where to look to even find where the contribution principle exists with each one of the carriers to even read their own statement on their dividend policy. Most people have never read it.

Here's what I know. If I capitalize a business.

I have.

An expectation of profit, much like anyone else who is prudent with deploying capital. If you capitalize a business, your expectation is profit. And so if I have the ability to capitalize a business that has been profitable since inception, we're talking about Weathering, the Spanish flu, the Great Depression, H1N1 SARS, the tech bubble bursting in early 2000, the financial crisis of 0809 COVID 19. Gosh, I want to say 26, 27 plus recessions and the business continues to be profitable every single year. That's a pretty good place in my view, to multiply money. And if I get a death benefit thrown in for good measure and all the contractual guarantees, these policies are not an investment, they're a unilateral binding contract, then how much capital do I want residing there?

As much as I can get in.

Much as they'll let me put in.

That's right. And so Richard, I always enjoy our, I'll refer to them as our peanut butter and jam sessions.

I think this was probably the first real like rant session that we've probably had. I would put this on the rant category. People have actually been asking for a rant and again, it was like this was way more, you know, even though we tried to keep it simple, we went into a lot of technical. In order to create the simplicity, to give the context and be truthful, we have to go into some of the more complicated stuff. But ultimately now it's out there and people can reference this and hopefully people get a ton of value out of it. Again, if you're listening to the podcast, make sure to circle back, check it out on the YouTube channel as well to go walk through and see the illustration that Jason presented and hopefully my little knickknack drawings with my mouse because I didn't have my pen on me today. You can see some of those as well. And I think you'll get a ton of value out of it because the more we deepen our understanding, the more you're in a position to succeed as.

A policy owner and never lose sight of the fact that you can put the best tool for the job in the hands of an incompetent. And not only will that person not turn out any good work with the tool, they'll likely break the damn tool. And so if you're purchasing participating dividend paying whole life insurance policy and your objective is to implement the process of becoming your own banker, the infinite banking concept, then you would be best served working with an authorized infinite banking practitioner who is not only thoroughly familiar with the process, but is also able to demonstrate to you that they are practicing it in their own lives and they can show you through real example that they're putting this process into action. Because banking is not a product, it's a process. And so, with that being said, Rich, awesome episode. And to all of our listeners, thank you sincerely for tuning in. We'd love to hear your feedback and your comments on this particular rant episode. And if you just look right up here, you're going to see a playlist so that you can continue your journey of learning. And we want you to make the rest of your day great. And we look forward to seeing you on the next episode of Wealth Without Bay Street. Thanks for tuning in. Have a great rest of your day.