How Whole Life Insurance Dividends & Returns Actually Work (IRR Explained)

Hey, what's going on Cashflow Hacker? It is Chris with Life 180. Welcome back. And one of the things that I get a lot of the time from people is talking about how the internal rate of return of whole life insurance is just not good enough. And it's not competitive. It doesn't really do anything to compete with investments. And I spend a lot of time talking about how whole life insurance is not an investment at all. It's a savings alternative. And the difference is just a function of risk. Because if whole life insurance is a guaranteed product and you can't lose money in it, well, then why are we comparing it to a volatile asset like stock market? I'm not saying one is better than the other. I'm not saying whole life is better than investments and that you shouldn't have investments or take risk in certain areas of your life. But I am saying that financial structure is vital to your success. And making sure that you have safe, liquid, accessible capital that is solving a different problem for you than your investments are solving, well, then that's an important conversation to have. That said, going into this video, what I want to do is I want to show you a look back. MassMutual did this amazing piece. And it really shows a history of how these participating mutual life insurance companies work. The other thing that's happening right now is there's a lot of IUL agents out there that want to talk about how IUL is better than whole life because of the fact that whole life insurance ultimately is like a flip phone and IUL is the iPhone and it's got all these new things that you can do with it. And it's flexible and it's got upside potential and downside protection and all these things. And if you look at the rate of returns that they're illustrating with, because of the illustration regulations, it's able to show and illustrate that IUL is going to perform way better. A, it's not going to perform the way that they're selling it. And I've done a lot of videos proving this and I've got the IUL challenge. Unless you illustrate an IUL at 5.5%, 5%, depending on the carrier, depending on the situation, the scenario, the year it was sold, but unless you really ratchet down the assumptions and expectations in an IUL, which by the way, if you do, you're just going to be just as happy, if not happier going with a whole life insurance policy. Now, if you want to ratchet down an IUL to make it look like a whole life policy, well then why not just get a whole life policy and take the risk off the table? That's really ultimately what it comes down to. So that said, MassMutual did this amazing piece and I want to take some time and I want to show it to you and go through, because I think it's a really good explanation of dividend rates, how dividend rates work, what the actual internal rate of return are, because there is also a misrepresentation out there online. I see a lot of agents that are like infinite banking people that are talking about dividends and dividends being 6, 6.5%, let's just call it 6.5%. So they'll say, well, the loan rate is 6 and the dividend is 6.5, so you can borrow at 6 and earn 6.5. That's not the way it works. And I want you to be really, really careful about falling for that word soup, the word salad, whatever it is that people are putting out there. You do not earn the dividend inside of the policy. The dividend is ultimately a gross number and that is before they back out charges, expenses, mortality experience, all these different things that go into it. And so you have to back out those charges before you get credited anything to your policy. What you get, the reason they call it a return of premium is because they say, all right, all the premiums going in, it's not your return of premium. And this is, I'm going all over the map here, but this is answering a lot of different things that people talk about online when it comes to this stuff. A lot of the Dave Ramsey people will be like, look at the definition or the Primerica people, look at the definition of whole life. It's just a return of premium. So why would you ever use that if it's just paying you back your premium? That's not how it works. That's not what they're talking about. Think about it this way. If it worked like they say it does and it were just purely a return of your premium, you'd never be able to have more cash value in the policy than you actually contributed to the policy. Think about it. Common sense goes a long ways in this situation. What return of premium means is they're assuming there's going to be a dividend and they're going based on that. Let's call it 6.5%. What's going to happen is then they have all the premiums come in and then they have all their admin fees, charges, expenses, mortality costs, all this stuff that goes along with operating an insurance company. What's left is the return in the form of a dividend. That's the simplest way that I can explain it to you. I'm maybe overly simplifying it for some people, but I think it's really important to understand that notion. What's important to understand in that is when you look at videos, when you watch people talking about how the borrowing works in whole life insurance, it's not about positive arbitrage. You can't borrow at 6% and earn 6.5% because that's what the dividend is. That's so misleading. That's what a lot of people are saying and that's just not how it works. What I am going to show you in this video though is go through this marketing material that MassMutual put together. It's actually a case study of the real internal rates of returns and they show a look back history of how this has actually worked. I'm excited to get into it with you. This is the marketing material. You can see it's a MassMutual piece, full transparency. We sell MassMutual. They're not my favorite company. They're a good company. I like them. We do a lot of business with them because they definitely are the best in certain areas. I think a lot of people put so much weight on you need to use MassMutual or Guardian, the biggest companies out there because they're the only options and the bottom line is that's just not the case at all. These big, big mutual companies, the participating mutual companies are all really great companies. That's just my caveat to put that out there. These guys happen to do this really, really amazing marketing piece. Let's take a look. The participating whole life policy is issued by MassMutual prior to 1996. These are the policies because we need to have 30-year period or more. We want to have a long runway, so 96 to 2023 and 2026 as we're making it now, but they wanted to do this over a period of time. You can see 1980 all the way to 2023. That's a 43-year window. You can see the dividend rates. The dividend rates, 8.27, 8.27, 8.27, from 80 to 83. Now, what was going on in the world right there? Remember, I always say, if you guys ever watch my content before, I always say, dividends chase interest rates. Dividends chase the fixed market. They chase the federal funds rate. If you know, in 1980, what happened was the federal funds rate went to 19%. What happened is, as the federal funds rate went to 19%, dividend rates remained low because they didn't know where things were going to go. Then after that, they trended up a little bit because then they went to 19% and then dividend rates ended up going down to like 12%. I mean, federal funds rate went down to like 12% and then it just kept dropping slowly from 1984 to 2009 where it hit zero ultimately. That's what happened. At the same time though, these rates stayed pretty flat, but then when they leveled out, whole life rates got higher. In 1991, what happened was dividend rates wound up exceeding what the federal funds rate was. That's the cool part, is that as interest rates go down, dividend rates chase the interest rates. As interest rates go up, then dividend rates are going to chase it up as well. When we look at this, you could see the history of it. We are at lowest rates that we've had in 43 years. That's because in 2009, it doesn't take a rocket science to understand 2009 rates hit zero. We went into this long-term between 2009 and 2021. We went into this long-term low interest rate environment and it created a lot of stress for life insurance companies. To illustrate what I was talking to you about here, when we look at mass mutual here, right here, it's this green line. Look at this. Look at the rates. When you look at it compared to the Moody's seasonal AAA corporate bond yield, the 10-year treasury annual rate and the one-year treasury annual rate, this is one of the reasons Tom Wall, who wrote the book, Permission to Spend, always says, whole life is simply a better bond. If you look over a 10-year period, including all fees, costs, charges, then every 10-year period, then bonds are going to beat whole life. Anything outside of that, pretty much whole life is going to beat bonds. Even in that 10-year window, what we're looking at is we have a situation where the death benefit comes into play, the living benefits, and what you don't have for cash, you're going to have in other benefits. That's the benefit of life insurance. Plus, you have a zero standard deviation. You know you're going to make money. You know you can't lose with whole life. With bond markets, you have that risk of loss. What I was saying before, though, is that you notice in 81, you could see these spikes, and then down, and then spikes, and they're all over the place. As rates go up and down, life insurance companies are slow. You see spike up, spike up, spike up, spike up, and up, up more drastically for the one-year treasury yield, drastic. By the one-year treasury yield, these are what impact high-yield savings accounts. Those rates can spike and fluctuate. The last couple of years that we've been seeing high-yield savings accounts rates be four, five, five and a quarter, now they're dropping down. It's because these rates spike, and then they come down. This rate spiked up to probably here, and then it's going back down again. These rates spiked up in the early 80s, and whole life rates stayed flat, and then they got up. Then from there forward, as every rate trended downward, the whole life trended downward, but it's more flat. Now, I want to show this what's happened. Since then, I'm going to do this. It's gone down here. By the way, this is ballpark. This is obviously not completely accurate. I'm just trying to show an example here. Dividend rates dropped like that. We're down in the six, and now we're up to 6.6 range in this scenario. But then let me change to a different color here. What color do we have? The blue. The one-year yield. That went up, and that's like this. That's what happened. What happens is, now if this were to continue going up, what would happen is whole life insurance would follow it, right? It would be the inverse. It would be less than the one-year treasury yield. As interest rates go up, whole life will follow, and what you can see here is there's these inflection points in different markets. Here's the inflection point was like 1986, where from 1986 to ultimately 2023, whole life insurance was better then. Now, what we have to look at is we have to realize that anytime we're doing this fixed asset type investing, we're looking at long-term expectations. We're looking at the fact that we want to solve long-term problems. If we're looking at it, I always say whole life insurance is the versatile asset in the world because it's the only asset in the world that will grow with you as you get older, right? You have your needs that change, right? When you're young, let's just call it 20s and 30s, what's your greatest need? Your greatest need is to save money. Save, protect your family. You want to save money. You want to protect your family. You want to build an emergency fund, right? Then your 30s and 40s, you want to start creating wealth, right? This is where if you haven't started already, and this can happen in your 20s and early 30s as well, but I'm just going based on numbers and who I normally am talking to here. 30s and 40s is when you start to create wealth. What does that mean? We want to start building our opportunity fund. The cool part about whole life insurance, if you understand cashflow hacking and being able to leverage it and borrow against it, the emergency fund, if you keep funding it, becomes an opportunity fund. You could borrow against it. You can leverage it. You can start a business. You could do private money lending. You can invest in real estate. You could do all these different things, right? All the while, if you do it the right way, even though mass mutuals living benefits are not the best, I would use other companies if living benefits are important to you. When you hit your 40s, unfortunately for some people, they're not healthy. 50s, 60s, that's where the living benefits come into play, right? This is also where maybe college comes into play for kids. You start having a fun college and think about what am I going to do for that? Then when you hit your 60s and up until graduation day when we leave this earth, you're talking about the fact that you're going to need retirement income, right? What we talk about is a volatility buffer. We're going to have to have this volatility buffer in place. What it does is it takes away sequence or mitigates. I shouldn't say it takes it away, but mitigates sequence of return risk, which is the greatest risk or second greatest risk. Longevity risk is the greatest risk of retirement. Why? Because it amplifies all the other risks. The longer you live in retirement and need your money to last without earning money, that is one of the greatest risks that nobody's talking about. The fact is people are living longer and they're not necessarily living healthier. We need to address that risk. Whole Life Insurance is the only asset that I know that will solve all these different problems for you as you go through your life. In your 20s and 30s, you're going to solve the problem. You're going to be able to save, build your emergency fund, protect your family. In your 30s and 40s, you're going to be able to stack on top of that and stack these assets and keep saving, building an opportunity fund, preparing for wealth creation through real estate, through business, through private money lending, through any kind of alternative thing. In your 30s, you built your emergency fund. Well, now stop. You've got your foundation built, go and invest in other things if that's you. That opportunity fund isn't necessarily for everybody, but just build up your emergency fund and keep it in your whole life policy. That's it. You always need safe, rainy day money. That's just the way it is. That's part of financial structure. Understand your unique investor DNA and go accordingly and structure your life according to your unique investor DNA. If you're not aware of what your investor DNA is, go in the link in the description below and go check out your investor DNA assessment. I will put the link below and you can go down and check that out. You can fill out and complete your investor DNA assessment. It will tell you what your investor DNA is and it will actually give at least a rough plan on how to structure your money to be in alignment with your investor DNA. It's huge. It's like one of the coolest assessments and tools that I know out there right now. It's really amazing. But once you get your kids to college, you can have funding, and then when you hit your 60s, it will be a volatility buffer. It literally is the most flexible and dynamic asset that will solve different problems for you at different stages of your life. If you want to learn more about this, if you want to figure out how you could utilize whole life insurance as a foundational asset in your life, I would say just reach out. Or if you have any comments, comment in the comment section below. I would also invite you, we have our second annual Aligned Wealth Experience coming up April 29th through May 2nd. It's going to be in Tempe, Arizona. If you are not with Life 180 already, I got a special offer for you. I want to invite you. I want to get you there so you can experience what we have going on, experience our culture, experience our teachings. It's a three-day event. It's going to be just full of value. You're going to be surrounded by an amazing community. I would invite you there to come and just learn and educate. If you have any questions on that, you can email me directly, chris, C-H-R-I-S, at life180.com. That's it for now. Until next time, have a blessed inspirational day. We'll talk soon. Thank you.