Dividends vs. Interest: The Retirement Income Game Changer (Ep. 254)

"Nelson is talking about dividends here, and he did mention a little bit about death benefit. But so many people leave out the death benefit piece. You're capitalizing the first couple of years, but if you die — like I have delivered three death claims in the first two years of those policies. Nobody was upset about the amount of death benefit there. That piece of it is so important. You bought death benefit. You were either going to buy term or you're going to buy whole life or you're going to buy universal or something, but you are going to buy death benefit. So you bought death benefit. There's a cost to that. It's not free."

Hello, hello, and welcome back to the podcast. Thanks for being here. Today, we are going over how to start building your own banking system.

Starting to finally get excited. How do we do it?

Let's do it. I call this chapter the twin sister example. So if you ever hear me talk about twin sisters, this is what I'm talking about. But we are now going to talk about how to do it. Right? Kind of what the problem is. We're going to compare it to a couple of different things.

So the first thing that I have highlighted is that "No, that is not overwhelming. And it would involve such a radical change in lifestyle that it becomes practically impossible. It is much better to attack an area that is attainable in a fairly short time. Try the one about financing vehicles."

And so a lot of people say, well, I need to pay off my mortgage. And what Nelson is saying here is a little unattainable. You're going to get discouraged. And so let's use it first for something small. And let's use it to maybe buy one vehicle. And then we can add a second one, third one, whatever.

And I like that Nelson goes through and compares the different methods of financing that we're typically accustomed to and how they play out long term. So that's essentially what this chapter is really going over in detail is what if you lease a car? What if you pay cash? What if you use a bank loan? What if you use a CD? And then finally, what if you use the process of infinite banking?

So if you have your book, I would look at this chart because —

Yeah, and you should be following along anyway, but this chart makes sense.

And I even like the chart that goes in a little bit further. But method one is leasing a vehicle. He said, "It is somewhat difficult to calculate the total cost of this case, but we must resort to logic and reason and use the second method as a starting point. At the end of a four-year period on a lease, there is no equity to show for the expenditure."

And so there's really no way to say, oh, a lease is worse. Like I've tried to do it with equipment and you don't know because there's a lot of variables. And so that's why he's saying use the second method, which is the bank.

So method B is using the bank, commercial bank or finance company to do the job. So in this case, he's paying $260 for his car payment for 528 months. So that's a total of $137,280. "At the end of each four-year period, this person has a four-year-old car to use as a trade-in on the next unit. Reason tells you that this first method must be more costly than this one. Otherwise, no one would ever purchase. They would all lease."

So earlier, he's like, oh, this is a practice of what? Imagination, reason, logic. And here's how we're having to use some of that. He said one must lease from the owner who had to buy the car. If the owner is a fool, he is not going to make some money on the activity. And so if you want to be a nonprofit, you rent the car for free, right?

But think about it. Lease companies buy vehicles. And then they lease them out with risk. Well, you think they're doing that out of the goodness of their own heart? No, they're doing it because there's money in it for them to do so.

Well, it's like someone's perpetually renting from them, right?

Right. It's like the buy-tark people.

It's like renting a house.

Or renting a house. They're always happy to make the payment because they don't want to have the responsibility of the ownership. Right. I'm not going to rent my place for only what I need. I'm going to build in profit for repairs and upkeep and taxes increase and insurance increase. And so reason would tell you that buying a vehicle is going to be better than leasing a vehicle.

Method three is cash. So he says here, "The third method is to pay cash for every new car every four years."

So just a little side note. I think people say, well, maybe I have my cars for more than four years. Maybe you do. But Nelson didn't. Nelson said Mary gets a new car every four years, regardless if she wants one or not. So this is basically Nelson buying vehicles.

He said, "The person had to defer the use of the first new car for four years to achieve the result. He had to save up money for the first four years and immediately start accumulating money again in the same savings account to prepare for the next purchase. This method involves car payments just like the first two methods. It is a matter of where the payment is made to the leasing company, the commercial bank, or the savings account. This is a classical sinking fund method of financing and an ongoing need for something."

And he says here, "Also be aware, these three methods will cover 90% of the population."

I have, like, on one of my notes in this section too is in paying cash, you're capitalizing someone else's banking system. You're deferring the use of that capital for four years because you're saving up to then go pay cash. But you're capitalizing what you would call your savings account.

And so here again is kind of my issue with people that have an issue with capitalizing their policy. Why don't I get access to all my money right away? Well, if you're going to buy a car with cash, you're going to put it into a savings account to buy the car. You're going to wait four years.

So when we look at illustrations later, Nelson said put money into a policy for four years and then stop. No, you don't stop. That was just his way to illustrate if you were going to be buying a car. But you can pay premium for four years. And then will you have all your money back to buy your car? No. But your savings account is going to be depleted to zero. That's why he said this is a sinking fund, because it depletes. And then you have to start over.

I also want to add here that when you put money into a savings account — and I've already talked about this — it acts like a deposit, right? It's called a deposit. When you pay premium, it is called an expense. But they're acting very similar. And so it is a terminology thing. It is a classification, if you want to call it that, of what Nelson is talking about.

Yeah. So you're going to have that capitalization no matter what.

Exactly.

It's just, like, the environment that you put it in. That makes all the difference.

And then the fourth method, he said, "The first three methods have not addressed the need for capitalization" — which we actually did address that. So the first three methods have not addressed the need for capitalization, which we just addressed because we skipped ahead.

He said, "If the grocery store is only large enough to serve only your own needs, you won't have much of a successful business." So why wouldn't you put a little more in?

He said several years ago, business professional James Brian Quinn, Dartmouth business professional, estimates that corporations expect to take at least seven years to get back a profit on new investments.

Hmm. Interesting. Seven years.

Yes. That's like the break-even point in most of our policies, right?

And so the fourth method he talks about is a CD. I used to have to explain what a CD is, but now in today's world, people know what a CD is because CDs are paying well again.

He said, "A certificate of deposit at someone else's bank is an amount of $5,000 for a yield of 5.5%. Show me someone that will do this for seven years just to build a banking system, and I will show you someone that has conquered Parkinson's Law. He will win by default in comparison with his peers."

And that is true because people that put money in CDs, they're not also putting money in savings accounts. I mean, maybe they are, but they're good savers because they're putting it somewhere where it is a higher yield. But they have given up access to that money the whole time it's in that CD, right?

And so going forward, he's going to be comparing a CD to a life insurance policy because they're the only two that can really be compared with a return and the longevity and all that kind of stuff.

He said, "The Internal Revenue Service, IRS, they will take 30% of the earnings. The net effect is that he will earn 4% after taxes." So Nelson is saying you can put it in a CD, but you're going to have to pay taxes on that.

So then he walks through that person essentially purchasing a vehicle with the CD. So he withdraws the money from his CD account, takes it plus his trade-in car and purchases the vehicle. "He then continues to fund the monthly savings account and annually withdraws $3,030 from it to purchase a new CD each year. He's playing honest banker with himself, but he's using someone else's bank to do it. The dividends of the bank are going to the stockholders of the bank. He is earning only the interest that the bank is paying him. There are several characters in the play that must be considered."

So I really like this section because it kind of — I do better when I can kind of break things down in my brain as to, okay, what is this thing compared to this one? So this is what Nelson is doing here.

The stockholder or owner of the bank earns dividends, which in this case is not the purchaser of the CD, right? These are different people. The CD holder earns interest, great. Administrators of the bank earn salaries. And then the borrower of money, "an absolute necessity in the whole scene. Nothing happens without him. He pays for the whole works above."

Yep. So you need to have the owner of the bank. You need to have the interest. Like the CD holder earns interest, Nelson said. Then you have to have the hired help. And then you have to have the borrower. So you need the bank, the lender, the borrower, and the hired help.

So he goes further and is talking about the table. So you guys at this point need to go to page 45. He is showing on page 45 that for seven years, there is going to be a CD sister and there's an IBC sister. And he calls these the twin sisters. They both funded their respective methods, $5,000 for seven years. Okay. They each bought a car every four years using their respective methods. They each paid back the same amount over that four-year period. And then they just did it again and again and again.

The input is the same for each sister.

So it's the exact same amount of money going in. The only thing that's different is the environment.

Correct. Yep.

And as you go down that page at year 15, the infinite banking sister has more money than the CD sister. And that is because the CD sister, yes, she had to capitalize, but she didn't have to buy death benefit. Right? So she had all of her money right away. But at year 15, the IBC sister had more money. Why do you think that is?

Because they are the owner and they're receiving dividends.

Yes. And interest.

Yes. They're both getting the same interest. In this scenario, Nelson made the interest the same. The IBC sister is getting dividends.

So now Nelson goes all the way down to retirement income. And the CD sister has $245,000. And the IBC sister has $889,000. Retirement. That is significantly different. The only difference there is dividends.

Now they start withdrawing for retirement. So I believe they're both 65 at this point. So they both start drawing at retirement. And they both take $50,000 a year. One's taking it out of her CD. The other one's taking it out of her infinite banking policy.

The CD sister only has two, four, five, six years — it's actually five and a half years of income. And she's got her money is all spent. Her $245,000, $258,000, whichever line you look at there. It's done. It's the cash, right? Cash payments each. Respectless system. Yep. So $258,000 gone.

But the IBC sister had $964,000 in that same year. She's 85 years old. And she still has a million dollars and has taken $50,000 a year. So you're not running out of money as fast on the infinite banking side.

Well, it's because your money's still earning money. You're never interrupting that.

Right. Pumped interest.

Right. And I think in this scenario, Nelson actually — if I remember correctly, I would have to go back and reread this. He's actually taking withdrawals.

Yeah, he is. He's using the dividend as income.

Okay. Yes. So I think that's important. So he is actually taking out of the policy. He's not borrowing against it. This would even have more and last longer if he were borrowing against it.

So I think that this chapter, there's a lot. And I still have a lot of other stuff highlighted. But I feel like people just don't understand even how to look at that. When I ask people, oh, did you see the twin sister example? They're like, I don't know what you're talking about. This is kind of a big chapter and it can be a little bit overwhelming. But go through it and flip back and forth so you can see that.

I always like to reduce things simply. Like, what's my input versus what's my output? What am I putting in versus what am I getting out?

Basically, if you look at page 47 — I remember reading this and my jaw just, like, dropped. I'm like, why isn't everybody and their mother doing this? So he says, at year 51, there's a death benefit of $1.5 million, which has a cash value of $964,000. She can begin to withdraw dividends of $50,000 per year for life. Assuming death at age 85, she has drawn out $647,730 plus a cumulative outlay of $52,270, which is essentially the amount that she's put in. And still deliver $1.3 million to her beneficiaries. If she lives longer, the $50,000 per year of income will never run out.

People's retirement accounts aren't doing this for them.

Right. Because when they take out of their retirement account, now we're earning less on that amount.

Right. Interrupting the account.

The dividends are important. If we go back to page 43, Nelson says, "Every time a person buys a life insurance policy, he's starting a business from scratch. There is an inevitable delay in results in getting the business started. The life insurance company has nothing more than the administrator of a plan the policy owner purchased. If you have seen an executive vice president of a life insurance company and an executive vice president of a bank, they could change jobs every six months and no one would know the difference. For particular purposes, they do the same thing. It is the stockholder that makes all the difference. This is the party that puts all the capital to start the business and earns the rewards and suffers the loss."

And so yesterday I was talking about the fact that the insurance companies say, we sit at the same tables of all the other companies, all the banks, all those people. And Nelson is saying that right here. They know each other. They're doing the same things. The difference is they have to pay the profits to their stockholders.

Right. In a mutually owned company, you are part owner of that company. So you get to participate in the benefits of ownership.

Yep. And he also says, methods D and E, which is CD and life insurance, are all dependent on borrowers to make the business successful. And the market sets the rate, not Alan Greenspan. In the life insurance method, the policy owner is earning both interest and dividends. There are no stockholders, which is what you just said. The difference is what went to stockholders, the dividends.

And it says, "To make all this money, the banker had to go through the gory mess that was described on pages 19 through 20. But hardly anyone takes this into consideration. They all tend to look at the early years of the two methods and conclude life insurance is a poor place to accumulate wealth."

You know, Nelson is talking about dividends here. And he did mention a little bit about death benefit. But so many people leave out the death benefit piece. You're capitalizing the first couple of years. But if you die — like I have delivered three death claims in the first two years, three or four, in the first two years of those policies. Nobody was upset about the amount of death benefit there. You know, so we have…

I'm sure they're grateful that it was there.

Right. Yeah. So that piece of it is so important. You bought death benefit. You were either going to buy term or you're going to buy whole life or you're going to buy universal or something, but you were going to buy death benefit. So you bought death benefit. There's a cost to that. It's not free. Move on. Get over it.

It's odd to me that people think that death benefit is like a bad thing. Like it's bad to pay money for it. And it's like, do you fully insure your automobile? But like you're not going to do the same for your own life — the person that is acquiring all of this wealth and paying for all of these things. You don't think that your earning power is more financially important to your family than your automobile?

Right.

That to me is what that says. It's like, I'm going to prioritize this if event, not this when event, and not the person that is generating all of this income.

Yep. That's silly to me.

Yep. Then he says in here, let's review the characters in the play. And he's talking about Shakespeare. All the world is a stage and all the people are actors they're in. "Acknowledging this thought from him, I say, when it comes to the subject of finance, frankly, most folks don't understand the play. Worse than that, they can't get the characters in the play straight. A bank must lend money or it is not in business. So does a life insurance company. The stockholder of the bank earns dividends. So does a life policy owner. The CD holder at the bank earns interest. So does the life policy holder. The only difference in the two is how earnings are allocated. The life policy owner gets both interest and dividends."

We could just talk about it until we're blue in the face.

Oh, here is where he says it. "It takes a life insurance company about 13 years to amortize the cost of acquisition."

And then he says, "So what is a banker's reward for all of his efforts? Look at year 51 and compare the results of each method. Track $258,927 from $964,638, and you have isolated what went to the banker, if it has been compounded over that period of years. The death benefit is not a factor in this comparison. It is a bonus to the policy owner."

He goes on to explain why in this example he is projecting the dividends being taken out as income instead of a policy loan. "So you ask, why are you demonstrating dividend surrender? Simply because there are many people when they see the word loan, their brain goes into a deep freeze. Loan means something bad, something I should not do."

And then he's basically saying, you have to think about this like a banker. You are in the banking business now. So you can't just think like a consumer. You have to put on your banker hat. "To put all this in perspective, study the financial statements of a conventional bank. Deposits to a banker" — liability, something that they owe to their depositors. Because if I have to pay you 0.01%, that's a liability to me as the bank. However, loans are an asset to the bank. It is their source of income. It produces cash flow.

So that's the only reason why he illustrated it differently. But to Mary Jo's point, it would be way more impressive in the numbers if it had shown him borrowing against the policy and paying it back with a market rate of interest.

My book is so old, the addendum was not in it. So people were talking about that and I'm like, what do you — my book doesn't have that. But he had to add that because people are so caught up on stopping paying their premium. They're like, oh, when can I stop? When can I have dividends pay my premium? Never. I mean, you can, technically, right? But ideally, you never want to do that. Because why would you stop feeding the animal? It is compounding. Why would you quit putting money there? That's when I want to be able to put as much money there.

And so if you're willing to do a policy that is structured with more base, bigger base to PUA ratio, you do have a place to warehouse wealth. And so not all of my policies are structured with a massive amount of cash value up front. If I have a client that's going to be coming into a lot of money, they're going to sell a business, they're going to sell a farm, they're going to have a massive amount of inheritance, something where they're going to need to warehouse wealth, I'm going to say, you know, maybe let's make that base of that policy a little bit bigger. And let's not make everything on the bottom so skinny, because you're going to need a place to warehouse that money, and you may not be insurable later. So let's structure that policy a little bit different.

And I think that there's a lot of people even within this industry that like to get on to their podcast and scream and yell about how policies are structured. There is no one perfect way. It is what is best for the client. And if everybody's doing them the exact same way — I do a lot of mine the same way. But that's because my clients all do the same thing. But if I have a client that I'm going to need to have a conversation with them to see what is the best way to do that.

If they don't have a need to access money immediately, then we might do a policy that doesn't have any term rider on there, that has a lot of base, that's more of a 50-50 type split versus 25-75. It's all going to depend. But if I'm going to do a 50-50 split, I'm also giving up death benefit right away. Do we need that? We have to look at the full picture of it.

And I can't stand it when people are like, oh, that person's doing it wrong because… The only time I'll scream about that is if I see a 10-90 type policy where the base is so skinny that it could MEC the policy. And we've seen it happen. And I've had colleagues that it's actually happened to them. They used to do 10-90 policies. And now they're like, yeah, that MEC'd, right?

And it MEC'd because of the policy I have that went from yearly to — or from monthly to yearly. We can't do it because it's going to MEC the policy. We got it so close to that MEC that we should have been a little more conservative and kept it away a little bit.

If there's extra dividends or whatever, and some people that are doing 10-90 policies, maybe it's okay. Because they're also building in a little bit of fudge factor like I do. Other people maybe aren't building in any fudge factor. And so now we got ourselves in trouble. And so we really have to understand that piece of it too. But how we build a policy is going to meet the needs of the client. Not necessarily just every policy is done the same.

Well, I think we kind of get hung up on the wrong things. It's like, does that person have a policy? Great. But we've helped someone.

Right.

You know, like that's moving in the right direction. And like you said, everyone has different needs and, you know, what's important to them. But there's, like, no deals in the life insurance industry. So it's like, either you can fit a ton of cash in the up front, and then you're limited in the back end. Or you can not put as much in there, but you can put more as the life insurance policy goes forward. You can put more in the back end comparatively.

Yeah. Yeah. I think it's just a matter of what's a good fit. That's why when people have traditional whole life, I never say, oh, that's terrible. Get rid of that policy. It's not the fastest growing thing, but it's still guaranteed. It's still a good policy with a good company. And so keep it, you know.

And like, good for you for having coverage.

Right. You know? Right. Yep. All right. I think that's all I got on that. Do you have anything to add?

I like this last section here. "There are only two hard, fast rules in building and carrying out this concept. One, don't be afraid to capitalize the system."

So you're starting a banking business. Do you want to have a small bank or a big bank? There were horses here. Do you want to have access to cash?

I know. That horse would be six feet, maybe more than six feet under.

And then number two, "don't make policy loans without making provisions for paying them back. Stealing from your system, just as in the grocery stores. Don't steal the peas. How simple can it get?"

How simple? Common sense, man.

Common sense to Nelson. We should just start calling it uncommon sense.

This is a good point. All right. If you guys need us, you know the routine. Email maryjo@withoutthebank.com, tarisa@withoutthebank.com. Grab your book. Read it. Schedule an appointment. Get started. Because the longer you wait — why? You're not beating Parkinson's Law. Remember that podcast. If not, go back.

All right. You guys have a fantastic rest of your day. Bye.