How Can There Be More Than All? – Episode 150

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, bestselling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, this is No BS Money Guy, Todd Strobel, welcome to the Prosperity Podcast. Once again, we have our co-host and bestselling financial author, Kim Butler with us today. And the title of today’s show is, how can there be more than all? And I don’t even want to begin to steal the thunder away from you on this one, Kim, so I’ll let you explain what that means. Well, it’s such a great question. It really makes you kind of stand back and think for a minute. And the correlating subject matter that we’re talking about is getting all of

[00:56] the profits from a particular company that you’re working with. So the question, how can there be more than all, all of the profits? So let’s take a look at some various companies that you might want to work with. And the first logical one that I think of that truly does let you have all of the profits is a mutual life insurance company. So just by way of example, we’re talking about Mass Mutual, Guardian, New York Life, Northwestern Mutual, Lafayette, Mutual Trust or MTL out of Chicago, Penn Mutual, America United, Emeritus. Those are the ones that Ohio is another one that comes top of mind. Those are all mutual companies. And this is a structure, a legal structure of a company that a lot of people don’t

[01:49] know about because when we compare the way a mutual company works with you, the owner slash investor slash saver compared to the way a public stock company works with you, the owner slash investor slash saver, it’s an entirely different world. So this is such a great question. How can you get more than all? So, Todd, let’s start first with what all means. So I’ll let you spell it out just from layman’s terms. How do you get all the profits in a mutual life insurance company? Well, first of all, I think it’s important that people understand that, you know, the term that you’re going to see when you read about mutual companies is dividends. So we haven’t really addressed dividends, but basically that’s what is compensated back

[02:42] to the individual policy owner. So there’s not stock owners and policy holders. There’s just policy owners and each of those policy owners based on the amount of money that they have invested. I don’t want to use the word invest with life insurance. We don’t get in trouble here, but the amount of money that they have inside their policy gives them a right to a percentage of the profits. So there’s expenses like in any company. The money comes in. There’s money that’s expense for expenses. There’s money that’s held in reserve. And then there’s money that the life insurance company takes care of. And number one, it has a profitable business model because it sells a heck of a lot of term insurance.

[03:30] I mean, I think that’s worth mentioning. And number two, they are very restricted in what they can invest in. So you don’t see them investing $10 for every dollar they have, right? Absolutely. And so that’s an important differentiating factor right there in that a mutual life insurance company compared to, say, a bank has what’s called a 100% legal reserve requirement, meaning if they say they have $1 on the books, they actually have 100 cents to back that dollar, whereas many people know in the U.S., our banking system operates on a fractional reserve. I mean, if they have $1, they might only have 7 to 10 cents on reserve for that dollar. But getting back to our question of all, and you were wise to bring up dividends,

[04:24] dividends are paid to policyholders. In other words, people that save, so I’ll use the verb save, you are wise to stay away from the verb invest. So people that save into a life insurance company have an ownership in that company. And by the virtue of them owning a life insurance policy, they own a portion of that company. And nobody else can do that. So you as the owner, policy owner and company owner, get all of the profits. That’s the structure, that’s the legal requirement that the insurance company must maintain every single year is to pay out all of their profits. And no other structure requires that. Obviously, other stock-oriented companies do pay dividends, and we’ll talk about the differences between dividends from a stock company, just not even an insurance stock

[05:30] company, or though there are insurance stock companies, but even just comparing something like Coca-Cola or GM or, well, not them anymore, some type of company that would pay dividends. We’ll do a comparison on that here in a minute. But what we’re talking about is a mutual life insurance company that by law is required to pay out all of their profits. And that technically means that if there are no profits, there is no distribution. But the companies that you’ve mentioned have been paying these dividends annually for more than a hundred years. I mean, I just I can’t name another company on my head, except for these life insurance companies that can say, you know, they went through the Great Depression, they went

[06:21] through the stock market crash, they went through the twin towers going down and continue to distribute profits back to their shareholders. Absolutely. And in every single case, that was after the reserve requirement and after the payment of death claims, even since you brought up the twin towers, even in 9-11, when there were massive amounts of death claims, especially those companies that did business in New York. And yet they still paid dividends every single year throughout this whole time. And you brought up a good reason that they are able to do that. And it is because of their business model. They run a profitable business model that is heavily cash flow oriented because people pay their life insurance premiums typically every year or every month.

[07:17] And there are many, many premiums that go towards term insurance, not only individuals that buy term insurance, and there’s nothing wrong with term insurance, but also groups that buy term insurance, large employers that buy term insurance on all their employees, and many, many, very high percentage of those policies never pay a claim. And so the insurance company, the life insurance company has a business model that’s very cash flow oriented, a lot of money in every month or every year, and then not a lot of money out. Obviously people do die, but not a high percentage of them. And so the insurance companies have this figured out in such a way that they are able to benefit their policy owners, which are the owners of the company.

[08:09] The only people that can own a mutual life insurance company are the people that own policies at that company. Awesome. And I think the reason, but I guess we should be mentioned that we’re addressing this is that when you’re purchasing life insurance and you’re looking at one of these mutual whole life insurance company as a way to, you know, if you buy term insurance from them, you’re not an investor in that company, if you buy a whole life policy, then you become an investor, correct? Yes. Um, to mention that, but how we were bringing this topic up because of how sexy and beautiful it is to look at an indexed policy, because you somehow another believe that you can beat the market and get more than all the profits.

[09:08] That’s why today’s show is here. And the question is whether it’s the company that builds your car, the guy on the corner who makes your pizza or whatever, how long could they stay in business if they paid you more than they made? That’s right. And the idea behind the index policies is that you use some of your money and some of the insurance company’s money to invest in the stock market with the hopes of getting more than what you expected to get from a whole life company, but our question is if the whole life product gives you all of the profits on a sustainable basis, because whole life is designed to be there for the entirety of your life. So you want to work with a company that’s going to be there the last

[10:01] hundred years and the next hundred years. And so a sustainable basis is obviously for them to pay out all of the profits because that’s what they’re bid by law to do, but not more than that. And the indexed equity products that are still often by life insurance companies make an attempt to use the stock market to get more than all of the profits of the insurance company, thereby helping you potentially in the short run. And so I think you have to ask yourself, if you’re a potential owner of a company, do you want to be involved in something that is better for the short run or better for the long run and us human beings, you know, we like our fast food and our quick results, et cetera. So sometimes it’s difficult to look at the long run, but Todd, you

[10:54] brought up GM earlier, how many years did they sell cars for the last 15 or 20 years? They literally, the only money they were making was from GMAC on the auto financing and they were selling cars for less than what it costs them to build them. There were the, you know, union wages and things like that continued to escalate, but yet the competition of foreign cars coming into the country dictated the price they could get for the car. And there actually was, you know, we can keep all the balls in the air for a little while and sell cars for less than what it costs to build them and try to make it up in volume. And you’re just digging a hole faster. Yeah. It’s hard to even say that without laughing, isn’t it?

[11:41] Yeah. So let’s also compare this idea of a dividend payment from a mutual life insurance company to a dividend payment from like Coca-Cola or just a regular stock company. Because I think that’s a critical distinction as well in, in the answer to this question, how can you get more than all when a dividend gets paid from a mutual life insurance company, it turns into guaranteed cash value. So the dividend getting paid is not guaranteed. And again, yes, they’ve paid it every year for over a hundred years, but nevertheless, it’s not guaranteed. However, once it gets paid, it becomes a part of guaranteed cash value. And guaranteed cash value is exactly what it says it is. It is a guaranteed dollar figure that can never go down.

[12:36] So let’s contrast that to a dividend from say Coca-Cola. So let’s say that you got a dividend from Coca-Cola, you owned Coca-Cola stock and you either invested in it as a investor, like the buyer of stock or you could even lend money to it, like the buyer of a bond and that dividend typically gets reinvested into your portfolio and essentially creates more. Let’s just use stock. It’s easier stock shares for you. Now what happens if Coca-Cola as a company rises in value? Well, then your shares are worth more. But what happens if Coca-Cola as a company decreases in value? Well, then your shares are worth less. And so the dividend that just got paid can sometimes disappear pretty quickly in the fluctuating value of that Coca-Cola stock.

[13:34] Now, I don’t mean to imply that life insurance is an investment. I just am comparing the action of a dividend inside a mutual life insurance policy where it’s guaranteed as cash value once it’s paid and then guaranteed to go only up forever more compared to a dividend that gets paid and reinvested in stock portfolio, which of course then can rollercoaster ride. So again, that supports our question. How can you get more than all? Well, if you want to maintain a company relationship long-term and clearly with our life insurance companies, because we want our death claims paid out there 50, 60, 70, 80 years, we want to have a company that has a really long-term viewpoint and the mutual structure enables us to get all

[14:25] of the profits and not a penny more. And I would, I guess, argue, maybe that’s a strong word, but that in an indexed policy, even though they illustrate so much better, they’re still very smart companies that the deal is structured that they never pay more than all either. Right. And so the indexed or the equity indexed universal life policies that are talked about, they have caps on them that limit the payments. They obviously still have expenses. And so they’re talked about as something for nothing. I mean, you, as a, as a buyer of a mutual structure, like a whole life policy, you get something for something every time you put a dollar in, even if it’s for expenses, you get the death claim as an example.

[15:24] I have to step in and just say that, you know, I loved selling universal life policies. They just were so easy to sell because you could say, well, the stock markets average 10 and 0.5% as a figure for the last 22 years, right? And you could illustrate these policies so much easier. And it really was not until I came in contact with Kim Butler and Todd Langford, we’ll throw a little truth concepts.com as a website. You guys got to check out, um, and actually shoved in my face that has a boring policy that just pays every single year again and again, without the indexing and the losses and the expenses and the rising insurance cost over time will outperform a universal life policy. It just, so I mean, I came to this concept kicking and screaming.

[16:26] So I’m just saying if, you know, if our listeners out there, yeah, it’s a lot prettier to look at a universal life, uh, projection, isn’t it? Absolutely. It is. That’s very well said. And that’s some of my background too. I mean, I, I too fell prey to that and we all learn and we move forward and that’s part of our mission is to share this information and make sure that our entire communities know that whole life is a another option and it’s been around a long, long time and it’s a great place to store cash that is its job. And it is very boring, but it’s also very effective. So I really encourage people if they want a little more information about that, to reach out to us. If you’ve got specific questions, we’ll take those at hello

[17:11] at partners, number four, prosperity.com. And if you’d like an ebook to read a little bit more about it, you can go to partners. Number four, prosperity.com slash ebook. There is an audio version there as well as the printed material and it’s called financial planning has failed. Super and awesome book. Recommend it to everybody. You know, like I said, there is the audio version. If you prefer to do your books that way, that’s the way I like them. And again, this is no BS. Money guy, Todd struggle for the prosperity podcast. Thanks to Kim Butler. And we’ll talk to y’all again real soon. Thank you for listening to the prosperity podcast. To take control of your money and have it work for you.

[17:51] Visit us at partners for prosperity.com. If you liked this episode, make sure you subscribe and leave a review.