After earning several degrees from an Ivy-League university, teaching there, and spending twenty years in the insurance and financial services industry, nothing has had a more profound impact in my personal and financial life than reading Nelson Nash’s masterpiece “Becoming Your Own Banker – The Infinite Banking Concept”. It convinced me that most of my financial education and experience was based on faulty premises and that the only way to control my financial future was to control the banking function myself. It has provided me, my family, and my clients with financial independence and peace of mind. Some time ago, I read an excellent article by Gary Vande Linde titled “Infinite Banking ― How It Works” that summarizes extremely well Nelson Nash’s concept and I will share this article with you in five posts. Post 4 of 5: “Why Is A Dividend Not Taxable?” and “But It Seems Risky” explains how the dividend is computed, why it is not taxable, and how a dividend-paying whole life insurance becomes more efficient over time. Why Is A Dividend Not Taxable? 1) Let’s look at an example. 2) The rate makers determine that John Doe’s policy will cost him $ 1.00 / year for the insurance he wants. 3) Now the insurance company recognizes that several factors may cause the $1.00 / year estimate to be wrong such as high administrative cost, larger than expected death claims, or lower than expected earnings. 4) As a result they apply a fudge factor and bump the rate to $ 1.10 / year. This extra $0.10 is the capital that makes the system viable. 5) After a few years the directors call the accounts in and ask “How did we do on John Doe’s policy in comparison with the assumptions made by the actuaries and the rate makers?” 6) The accounts report we have collected $ 1.10 in premium on John Doe’s policy and it has only cost us $ 0.80 to deliver the promised death benefit. 7) As a result the directors now have $ 0.30 to make a decision with. 8) Since the directors are smart people they decide to place $ 0.025 into a contingency fund and return the remaining $ 0.275 as a dividend. 9) Since the dividend is not an actual “gain” but is rather a “return of premium” the dividend is not considered a taxable event. 10) Unlike a dividend declared in a security which may lose its value as the stock rises or falls a dividend declared in an insurance policy can never lose any of its value. Once a dividend is declared it is guaranteed - it can never lose its value. 11) If the owner will use the “dividend” to purchase additional Paid Up Insurance (no cost for acquisition or sales commission) the result is an ever increasing, tax deferred accumulation of cash values that support an ever increasing death benefit. 12) This pool of money has no real governmental strings attached as to how, when or why it may be used and can be passed on to the next generation with limited or no estate taxes. But It Seems Risky 1) A point to consider about an insurance policy is that they are designed to become more efficient over time no matter what happens. How can this be? 2) Insurance policies become more efficient over time because over the life of the policy the cash value is guaranteed to reach the face amount of the policy. As a result the insurance company faces an ever decreasing “net amount of risk”. (To be continued) As the only Authorized Infinite Banking Practitioner in Miami-Dade County, I am available for a complimentary no-obligation in person or virtual consultation to understand your financial goals and show you how to make them a reality. Contact me at 305-665-4508 or visit our website at BeFinanciallyIndependent.net
Posted on: Thu, 14 Nov 2013 22:54:41 +0000
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