Why It’s Good for Life Insurance Companies to Make a Profit – Episode 250

This transcript was auto-generated and may contain errors.

[00:03] 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. Hello, listeners, and welcome to the Prosperity Podcast. Today we’re going to be talking about companies making a profit and why that’s a good thing. And we’re going to be talking about a specific type of company or should say industry that you want to be profitable so that it helps you out as well. So let’s dive into this, Kim. All right. So that specific industry is the life insurance industry and life insurance companies. And you know, to back up a little bit, it is funny how often we’ll hear about a company making profit and we might have a particular emotional reaction to that.

[01:02] And we need to back up from there a little bit because if companies don’t make profits, they don’t stay in business. So the products that you like, the things that you want to buy, the companies that you’re going to work with over time because they do something for you, they provide a service or what have you, those companies, absolutely, you will want to make a profit so that you can continue to do business with them. And it’s interesting when we look at just the word insurance. As a society, we tend to have a little bit of a roll our eyes approach to this because everybody has to spend money on various types of insurances. And we typically don’t like to do it. We don’t really want to spend money on car insurance and health insurance and

[01:47] disability insurance and liability insurance and other things, because we feel like it’s a little bit of a black hole. And of course, these are also all things that we don’t really want to spend a lot of time thinking about, because certainly not fun, nor does it contribute to our happiness on any one particular day. And yet the fact is when we look at life insurance companies, we must look at them very differently because car insurance, health insurance, all the other types of insurances are if events, if we get in a car accident, we want to make sure that we’re covered. If we have a health scare, we want to make sure that we have coverage. If our home burns down, we want to make sure that the home is

[02:33] insured so that we can put it back. But thankfully, those are all if events and their occurrences statistically are fairly rare. But when we look at the life insurance arena, unless you know something that I don’t, death is not an if event. It’s a when event. W-H-E-N. I want to be clear. I’m not using the word W-I-N. Good. But because death is a when, W-H-E-N, event, in other words, it’s when it happens, not if it happens, we want to be looking at life insurance very differently than we look at all the other types of insurances. So of course, life insurance is broken down into two main categories, and one of them is term insurance. And there’s nothing wrong with term insurance. I own term insurance.

[03:27] Most of our clients do. It’s a very effective way to have coverage. And yet it is a little bit of a disconnect because the term insurance is going to go for a term of time. And that typically is not going to include death because life insurance companies, in order to sustain themselves for literally the centuries that they need to sustain themselves, most life insurance companies are at least 100 years old. Some of them are getting up there in the almost 200 year old category. They must make a profit. And so term insurance actually helps them make a profit because you, as a buyer of that term insurance, pay premiums and pay premiums and pay premiums, and literally 99 percent of the time, kind of depending on who you

[04:19] talk to, it’s less than one percent of term insurance ever puts a death claim in the hands of the buyer. And that’s a good thing. You know, the term insurance is there. It provides a peace of mind. And yet if the insurance company was having to pay claims out all the time, clearly they wouldn’t be profitable and consequently they wouldn’t be in business. So we want our life insurance companies to sell the term insurance. We want to buy term insurance. It provides us a ton of peace of mind and the ability to know that if we happen to fall into that less than one percent category that our families are going to be taken care of. And then the other type of life insurance, of course, is the permanent life insurance.

[05:01] And by this, I’m talking about dividend paying whole life insurance, not universal life. Universal life should not be called permanent. That’s a subject for another podcast. But the whole life product should also be a profit maker for our insurance companies. But because of the ability for an insurance company to be mutual, in other words, mutually owned by the policyholders and the company itself, we get to make a profit, too. And I can’t think of a better win, win, win situation. The company wins, the buyer of the insurance wins. And of course, the beneficiary of the insurance wins because whole life insurance, when it’s done properly, absolutely positively will pay a death benefit, no matter how old the person is when they die.

[06:05] And because of that guaranteed event and then that guaranteed payout. So the event is the guaranteed death and then the payout is the guaranteed death benefit that the life insurance company is going to pay that when event comes back into our lives with a guaranteed payout. And there are so many things that can happen because of that that cause us to want to look at life insurance companies differently and make sure that they make a profit so that we get to take advantage of that guaranteed event and guaranteed payout and that we know that guaranteed payout is going to be there. You know, that’s really well said. And I think if we look at it even as instead of short term, but we look at it from the decades or centuries ahead, obviously, if we’re making the

[06:56] effort and we’re creating a strategy for our financial well-being, of course, we want them to be around in 50 years, a hundred years. If, you know, with human longevity, there’s a really good potential that we could all live very common age to be well over a hundred years old. Isn’t the new actuary age with insurance, 120, 121? It is that used to be a hundred and now it’s 121. And it’s so important that people understand that whole life insurance is designed to go that long. Whereas universal life insurance often ends at age 85 or at 90 or at age 100. And then of course, term insurance has its own ending time and that, you know, maybe you have a 30 year term and you bought it when you were 40.

[07:46] So it’s going to be age 70 or whatever it is. Maybe it’s 10 year term and you bought it when you were 50. And so it’s going to be age 60, but there are a lot of articles that are going to start to come up these days of people whose insurance has run out. And it’s because it was universal life insurance and it was bought with the understanding, but unfortunately that understanding was forgotten that the person would not have insurance if they lived past a certain age, whatever that age is 85 or a hundred whole life insurance, you can’t have that happen. As long as enough cash value is in there, the whole life death benefit stays in force and if the person is alive at age 100 for the older policies or age

[08:35] 121 for the newer policies, the cash value and the death benefit will actually pay out at that point. It’s called endowment and it’s not something that people understand very well, but endowment means that the cash value actually equals the death benefit. And so whole life insurance has a rising death benefit every single year. And the company is still able to make a profit with this. That’s so important that people understand that because again, our premise at the beginning of our talk today is that we want to work with companies that are making a profit because we know they’re going to be in business. And so when whole life insurance has cash value that grows, that causes the death benefit to grow and then it endows again at age 100 or age 121, those

[09:28] dollars are there for the use of paying out that death claim or paying out the endowment claim if the person is still living and they’ll be at a greater dollar figure than when they started. So let’s say you start a life insurance policy. It’s a million dollar death benefit. You’re 35 years old by the time you’re 121. So using today’s numbers, the death benefit could easily be two or three times that number. So like two or three million dollars or maybe even more, it’s going to depend on how long you pay the premiums and the cash value would equal larger number and pay out upon death or upon endowment, depending on whether you were still alive or not. And that’s something that people are not understanding.

[10:20] And so many places, when you look at the life insurance information, that fact of endowment is completely left out. You know, you are starting to demystify some of the most basic things that really isn’t taught. And by understanding the whole picture of this, it helps us understand where we can actually expect long term. See, most people are, again, we’ve mentioned in other episodes, they’re expecting to put their trust in their employer and in that company, 401k. And that’s not guaranteed. Whereas what you’re talking, these companies have factored out years and years and they’ve been around for some of them, hundreds of years. So you’re spot on with this information. Well, it’s interesting, you know, actuarial science is probably one of

[11:15] the oldest sciences that have been around for a long time that have been proving that a mutual company, again, owned by the policyholders versus a stock company, which are owned by stockholders, can maintain that longevity in a way that serves both the company and its ability and desire to make a profit and the policyholders that are the mutual owners of the company, plus a mutual company does not have external stockholders to pay. And you mentioned the long term look at this, you know, a lot of stock companies today, whether they’re life insurance companies or not, they’re so focused on quarterly earnings and they’re so focused on the short term. Whereas life insurance companies literally are looking at 30, 40, 50, as

[12:18] you said, possibly even 100 year increments. It’s very common to buy life insurance on a child. And somebody was telling me just the other day that in New York City, there was a billboard that said a baby born today will live to 140 years old. That’s amazing. You know, when a company is a stock company, you mentioned that they are motivated by the short term, their quarterly earnings. And if we really think about the way that they’re motivated by quarterly earnings, they’re really going to only increase those earnings in a couple of different ways. One, they can acquire more companies or two, they can increase their prices. And in order to increase the prices, typically what they do is very much like the government, they increase their inefficiencies

[13:16] so that they can bill more. Whereas in the whole life insurance and in this world, I think their objective is to become more efficient. Would you say that same? Absolutely. And that efficiency then will get passed on to the policyholders that are the owners of the company. First and foremost, I mean, there is nobody in front of them. The policyholders are getting the dividends. The company is run for the benefit of the policyholders. And one of the rules to maintain mutuality, which is again, the ownership structure of the whole life insurance companies, is that they have to pay out all of their profits. Now, of course, they’re allowed to keep some for reserves and that kind of thing, but by law, in order to maintain the mutual structure,

[14:09] these life insurance companies. And so we’re talking about like Guardian and Mass Mutual and New York Life and One America and Penn Mutual and Lafayette Life and Mutual Trust and Security Mutual. And, you know, there’s a variety of other companies, but you do have to be careful because sometimes a company will have the word mutual in their name, but they’re no longer mutual. And so we need to be careful about that. But my point was that a mutual company by law has to pay out all of its profits in order to retain that mutual company status. And then I also want to just point out in case somebody’s digging around and they find this, there is another category that’s called a mutual holding company.

[14:59] So as an example, in fact, I think Mutual Trust is and One America or America United Life. Those are examples of mutual holding companies and they still have to operate the same way that they may have a stock component, but that company is kept separate and the mutual holding company that owns the whole life policies where the dividends are paid, that block of business is kept separate. And so either mutual company status or mutual holding company status, either one is fine and will get the clients what they’re looking for, which is a company that is aligned with the clients or the buyer’s interests. In other words, if you buy a whole life insurance company from a mutual company, that whole life policy, I think I need to say from a mutual

[15:50] company, that company’s alignment is right 100% with yours. They want to make a profit. They want you to make a profit and every single whole life policy is profitable when held long term, not in the first year, probably not even in the second year, but by the time you get to the third year of a whole life policy, you’re at least making a profit on an annual basis. And while it might take seven to 10 years to make a profit on a cumulative basis, like all the years added up, we’re talking seven to 10 years amongst a 30, 40, 50, 60, 70 year timeframe because whole life is truly designed to be owned for your whole life. And if it’s bought as a child, like we were talking about earlier, you could easily be owning a whole life product for over a hundred years.

[16:46] You know, as, as we hear this and wrap up one, I hope that all of us get to be at least 140 years old. Me too. And two, it’s so comforting to know that companies have been around for over a century, in some cases, multiple centuries, and we hope that they stay around even longer. And three, I think this really comes down to a mindset, which is an abundance mindset, and we have to look at it and instead of buying into what the media says, where there’s corporate greed or whatever that may be, we have to look at it as almost a part of our family. And we want our children and our family members to prosper as much as possible. We want the best for them. And the same should be with our long-term relationship with these

[17:39] financial companies. We want them to prosper and be along for the long haul, be around to help us out. Yes. I think I just saw statistics that the typical S and P 500 companies lifespan used to be, I don’t know, 40 years, something like that, and now it’s more like 10 or 15 and just think about that in terms of our own human lifespan. So we’re talking about so many people that invest in a company that’s going to be around 10 or 15 years versus those that save with a company that’s already been around more than a hundred years and runs its business so that it can be around for the next hundred years. That’s where we want the focus of our foundational dollars, the money that make up our emergency opportunity fund where we know those dollars

[18:36] are going to be there. Yeah, that’s a great point. I think if our listeners want to dive in a little bit more and understand the arena of the life insurance world, there’s a great book that you should pick up and it’s busting the life insurance lies. And it’s a book that you wrote, Kim. And how can our listeners get that? Well, yes, it is available on Amazon as a physical book. And you can also get it as an audio book. And of course you can get it on Kindle as well. I do want to let people know there are a few charts in there. So you’re welcome to grab the audio version, but you might like to have the charts and so getting a physical or a Kindle version will be helpful. And it is a pretty in-depth book.

[19:20] This is not a quick read. It’s for those that are ready to dive in more thoroughly. I think there’s 38 life insurance lies that we talk about in there. With lots of stories and examples along the way, it was a fun book to work on. And so that is a great space to go if you’re used to the life insurance vernacular, you want to dig in and do a little bit of more research, et cetera. Again, that’s busting the life insurance lies. And if this is your first go around at learning a little bit more about whole life insurance, a better one might be live your life insurance, which I’ve also written that is also on Amazon, of course, with audio versions, et cetera, and it is a much shorter introductory book for the

[20:04] life insurance product and how to use it. Well, thanks for mentioning those. And also for our listeners, if you happen to not be so clear on what type of policy you have, maybe you have a universal policy or you’re not sure if the company that you currently have is an actual mutual company and not a stock company, feel free to reach out to Kim at hello at partnersforprosperity.com and she can answer all of those questions that you may have. So thanks again for tuning in to another episode of the prosperity podcast. Thank you for listening to the prosperity podcast to take control of your money and have it work for you. Visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.