Episode Transcript
[00:00:00] Speaker A: Foreign welcome to wealth on Main street, where conversations about growing your wealth are fun and entertaining. Wealth isn't just about money. It's the skills and the knowledge that we develop to pass on to future generations. Tune in each week to to grow your mindset and your net worth at the same time.
[00:00:36] Speaker B: Is this too good to be true? Why?
Life insurance carriers are the Fort Knox of finance.
[00:00:46] Speaker A: Fort Knox of finance. I like that. It's so funny. I haven't heard Fort Knox. Last time I heard Fort Knox was in a Die Hard movie. Really?
I've heard Fort Knox in so long.
[00:00:57] Speaker B: Second time is wealth on Main Street.
[00:01:00] Speaker A: I. I think it's because nobody talks about it anymore because everyone knows that the Western nations are losing all their gold reserves when they're getting bought up by other countries.
[00:01:12] Speaker B: Well, here's something to think about.
If you were to rewind history, even if you just went back to as early as, let's say, 1917.
So if you rewind to that year and then you take yourself back to today, if you were to think about all of the calamity that's happened that's caused some problem financially at a countrywide level, at a global level, we can rhyme off a few. So you've got the Spanish flu, The Great Depression, Covid, H1N1, SARS, Black Monday, Black Monday, the savings and loan crisis.
[00:02:02] Speaker A: Crash, World War I, World War II.
[00:02:05] Speaker B: Like the list just goes on and on, right? You could tally up literally dozens of issues.
And yet that all being true, life insurance companies remain the most financially solvent institutions on the planet. If you look no further than the 0809 financial crisis, just as one example, where several hundred regional banks, particularly in the United States, failed, yet not one life insurance company failed.
[00:02:41] Speaker A: But Jay, you know what someone will say right away in the comments? What about aig?
[00:02:46] Speaker B: Ah, so AIG was exposed to collateralized debt obligations that they had issued insurance, you know, contracts. We're not talking about life insurance contracts. The only reason why they were bailed out was because of the block of life insurance contracts that were in force at the time. Had that not been the case, AIG would have ceased to exist, plain and simple.
[00:03:16] Speaker A: And it's important to note that they're a stock company, right? And so stock. So at the board of directors level, they make decisions chasing quarterly profits. And so they made a bunch of bonehead decisions about getting into products they had no absolute business being in whatsoever. Yeah, that were dangerous and risky and that's the area that impacted them, which. And so what stabilized and allowed Them to survive, as you're indicating is there is the traditional lifeblock business that was.
[00:03:45] Speaker B: The saving grace because the, the discussion was around, hey, listen, what do we do with this company when the discussion I'm talking is at the government level, when they were determining what TARP was going to look like and whether or not they were even going to engage in this. And someone at the roundtable, if you watch the movie Too Big to Fail, it's explained AIG in particular, what the discussion was around, why they should have been bailed out because of this large block of life insurance. And when people say, how is it possible?
It's important to understand how these life insurance companies deal with capital and how they are regulated and how they are evaluated on a regular basis. And so we can jam on that a little bit and, and just get a little bit, you know, technical to share with people because it's important information to know. For some, it might just be trivia. It's like, look, I love the watch. I don't care how it was engineered. I don't need to know why it works so well. I just need to know that it's going to tell the correct time when I look at it. For some people like that, this episode may not be as valuable, but for people who really love that behind the curtain, look, let, let's dive into that a little bit.
[00:05:08] Speaker A: Well, and, and, and we can talk more about, you know, like, we get into a little bit of like in Canada, Assurus and Lycat ratios and those kind of things. The, the methodology or the, the acronyms would be a little bit different, you know, south of the border for the United States. But, but before we dive into that, I just want to get down to like the consumer level and looking at the contract itself. And so often when people see an illustration for the first time or they're going through a process with an advisor, they finally get a chance to review some numbers and what numbers might look like in their circumstances. Okay, Whether it's child policy, the parent, like, whatever it is that we're constructing. And often the thing that might come up is, wow, how are they even able to do this? Is this too good to be true? These are statements that are often made and it's not because the illustrations look that amazing. I mean, sometimes they really do. Even myself and be like, man, this is pretty awesome. But it's, it's, it's kind of like, okay, well, eventually these build up to some really, really substantial numbers and substantial death benefits. They're really asking like how can the insurance company actually guarantee these things? Like, how can the insurance company pay out all these benefits? Where's all the money coming from? I'm only putting in this amount over a period of time. How are they able to generate this, this amount? They're showing on the illustration and what I think is really important for people to understand, and this is specific to a whole life, a participating whole life insurance contract.
The contract has the death benefit and then it has a cash value, which is effectively the present value of a future death benefit. And because that present value has to grow and grow and grow and eventually equal whatever the death benefit is. You could think of it this way, in a roundabout way, is that the life insurance company is basically building the equivalent of a slush fund, you know, a parallel accounting mechanism that, hey, look, this is. If you want to cancel this policy earlier, we're not going to give you the death benefit. We're just going to give you this portion of what we've built up on the sidelines, the surrender value. And because they're building that and eventually this surrender value number meets the death benefit, they've basically created the capital equalization. So every single day, on day one, I pay a premium of $10,000. And just to keep things simple, let's say I have a million dollars of death benefit. You know, 500 a whole life and 500 a term. Just keep it simple. Well, if I die the next day and that contract is legally bound, and you know, there wasn't any malfeasance or insurance fraud, there's a million dollars that's going to come tax free to my family. So I only put in 10, and the insurance company is basically pledging a side account of a million dollars. Well, the reason they can do that is because they have scale and pooled. It's the rule of pooled money. Okay? But every single day that that contract is enforced, that cash value builds up and up and up and up. And so it actually is reducing the risk to the insurance company. So the longer the policy is enforced, the less risk they have because they're building up the equivalency of what they need to pay the death benefit, fundamentally speaking. So it's actually the exact opposite of what the general public usually thinks. It's not harder for them to pay the death benefit. It's actually easier. The hard point is on day one, every day thereafter, it gets a little bit easier for the life insurance company to actually meet their obligation.
[00:08:25] Speaker B: That's a good point. When you think about the construct of the company, it's a, it's a deposit taking institution as well. So the insurance company has savings and retirement programs that they make available to the consumer. The consumer pays premium for insurance products, whether it's dividend paying, whole life insurance, universal life disability, critical illness, universal life, the list goes on. In terms of the suite of products all these premiums come in. The insurance company deploys capital into assets that are primarily guaranteed and paying the insurance company a steady stream of returned income on those investments. Now the insurance company has to get that money deployed, which is why they leave very little cash on their balance sheets. So when people traditionally think about a life insurance company, they think, wow, there must be this giant reservoir of cash that's readily available to honor the contractual obligation, the promise to pay a death benefit. Think about it from this perspective. If you have hundreds of thousands of policyholders that are paying term life insurance premiums, there's a less than 2% probability that those in force policies are ever going to pay a death benefit. And the premium is ever increasing as well. It doesn't remain level for one's lifetime.
So that creates an enormous pool of money that the insurance company has to deploy. They have to deploy it in assets, no different than dividend paying, whole life insurance premium, or critical illness premium, disability premium, and so on. So when the insurance company puts all this capital to work, they cannot, they lend money to their policyholders, the, the whole life policyholders, they cannot inflate their money supply. They have to either use cash that's available on the balance sheet to lend capital to the policyholder, or they have to convert assets into cash to lend to the policyholder. And then every year these insurance companies are exposed to dynamic capital adequacy testing. In other words, their money pool is stress tested against a number of mock adverse scenarios, like more people dying than what the actuaries forecasted. Severe and prolonged economic recession, negative interest rates, a severe and prolonged stock market decline. The list goes on. In what these adverse scenarios are, which are all mock scenarios, they go back to the insurance company with an evaluation of that dynamic capital adequacy test. And then the board of directors has confidence that they can declare and pay dividends to their policyholders based on the results of this dynamic capital adequacy testing, where it's like, you know what, your money pool has weathered these stress tests extremely well. You have and are maintaining proper capital adequacy ratios, you can confidently declare and pay dividends to your policyholders. And so this behind the curtain function is what leads to these insurance companies being the most financially solvent institutions in the world. And if you know the truth that your money must reside somewhere, well, what better place to have it reside than here, given that most people have no idea. Cash value is not money.
It's cash value, meaning the only way to turn it into money. Because cash value is the net present value of the future payment of a death benefit. Well, you look at a policy statement or your online client access and you see cash value, $100,000.
That's not actual money.
The only way for you to make it actual money is to borrow against the death benefit or to forfeit the contract.
And the insurance company has to either look at the balance sheet and say, hey, do we have $100,000 in cash laying around to pay Richard for his forfeiture, or do we have to convert some of our assets into $100,000 of money to pay Richard for the forfeiture? That's.
[00:12:52] Speaker A: Or do we have to wait two days for premium payments to come in so that we.
[00:12:58] Speaker B: Or.
[00:12:59] Speaker A: Or do we have to wait three hours for premium payments to be received in the accounting department?
[00:13:03] Speaker B: Right. And so for the forfeiture, if you know that whereas conventional banks are inflating the money supply with every loan that is advanced, with every mortgage that gets created, they're creating money where no money existed before, which drives inflation up.
And the life insurance companies cannot inflate the money supply. So again, if you understand the truth that your money must reside somewhere, what better place to have it reside than here? And we're not saying have it reside there and then do nothing. That's the distinction.
Have your money reside there. Let the insurance company deploy that capital for your benefit and for everyone else who co owns the company. And then from that place you can set about investing, controlling how you finance the things you need throughout your lifetime and so on. But your money resides inside of an entity that's never failed to produce a divisible surplus, a profit because it's engineered.
[00:14:07] Speaker A: And there's a couple key things I think would be helpful references and I'll. The first one I'll make just kind of in regards to the simplicity of some term insurance. And then I'll pick up a page in Nelson's book. But what you were mentioning about term insurance, Jay, and again, there's like less than 2% of those are going to pay a death benefit. The reason that is like that sounds like a really weird statistic if people don't know why, but it's because we're looking at A period of time, 10 years, typically 10 or 20 years. Sometimes it's term for 25 or term to 65. Like there's variations that every company sells. Yeah. But in general, the most common ones are a term for 10 years or a term for 20 years.
[00:14:40] Speaker B: Right.
[00:14:40] Speaker A: Well, you're locking in a price for a period of time. It's like locking in the lease at a place that you rent to live. And, and then at the end of that time frame, now you're 10 years older or you're 20 years older, which means you're 20 years closer to death. Right. 10 years closer to death. So if they want to give you the same amount of coverage but you're older, they, they must charge you mathematically a higher amount to provide the same benefit level.
[00:15:05] Speaker B: That's right.
[00:15:05] Speaker A: So term insurance is actually the most expensive insurance you can get if you want to make sure you have coverage at the day you die. Okay.
[00:15:13] Speaker B: Which is when you need it the most.
[00:15:14] Speaker A: Which is when you need it the most. And if we look at the, the statistical average of life expectancy, you know, and I just blend men and women together, ballpark, we're sitting around an 80, 83 to 85 range, you know, at least in Canada. Yeah. So, so by the way, most term insurance, at least in Canada, even if you maintained it all the way, if you make it to 85 and you're living to 86, they won't continue the contract.
So you, if you paid all that premiums in, you have, you own nothing, you rented the entire time. And if you outlive the coverage, which gets very expensive by the way, at that stage of the game, you get nothing for it, no benefit and you don't get your money back. Right. Okay, so it's a hard cost, but for the insurance company, so that's the consumer's side. Let's look at the insurance company side. So just did a very simple, you said, okay, what if we had a hundred thousand term insurance contracts and there was a hundred thousand, you know, ballpark men in there, 40 years old, and they had, you know, let's just say it was a million dollar insurance and it was, their premium was 50amonth. Okay, roughly speaking, something like that. So a hundred thousand dollars. A hundred thousand people, I should say at $50 a month, that's $5 million in one month.
So they receive premiums of 5 million.
They're not going to pay death claims on a hundred thousand people in that month.
They're not going to play death claims on a hundred thousand people. Ever. Because only 2% of them, they're going to pay out for the entire time frame that that term exists.
So every month they're collecting $5 million. That builds capital pretty fast just for that group of people. Then there's the people that are 30 years old and 32 years old and 35 years old and the people that are 60 years old. There's all the people at their different age blocks and they have hundreds of thousands of them paying a term premium and they're collecting pools and gobs of money every day it's coming in and they have to put that money to work just like any other institution. But they're not putting it to work for the people that own term insurance. They're only putting it to work for their participating owners. If it's a mutual insurance company.
[00:17:15] Speaker B: Yeah.
[00:17:15] Speaker A: If it's a stock owned company, they're not putting that money to work for the, for the participating owners. They're putting it to work for stockholders. There's a difference. Right, okay.
[00:17:23] Speaker B: Primarily that, that's who they're primarily putting capital to work for. Absolutely.
[00:17:28] Speaker A: So, so just thinking that through logically, it's like you can start to see, wow, there's a massive amount of volume of incoming capital on a regular basis every day hitting like, I might have a premium payment on the 15th and Jason maybe has one on the 10th. So everyone has a premium payment on every day of the month. It varies. So there's literally cash flow rolling into the company at all times. So they're able to make constant deployment decisions very efficiently and effectively about capital. Okay. And so the next thing I wanted to address is on page 26 of Nelson's book. Oh yeah, Nelson's book, he has a picture of what he calls the money pool. And so to just, you know, know, for anyone who has Nelson's book as a reference, he will give you some basic understandings of this structure and how the policy owner, he says that the money is lent to any number of places and types of borrowers, including the owner of the policy, if the owner so desires. That's what a policy loan is. And he. What Nelson's trying to get people to understand is the hierarchy of who's going to receive money that must be put to work. The life company has, is getting lots of money. The life company has to put the money to work. They're putting that money to work for their owners. If the, if it's with the participating pool, it's for the participating owners in a stock company. But if it's just a mutual company. It's for the owners. And there are, there's only one owner. It's the mutual participating owners. There's no one else. Okay. And so they're putting that work for, to, to the participating, for the participating owners. And then they are the first in the, in the hierarchy of who can be lent money. So they might lend money on a major development project, you know that, you know, a lot of times you'll go to these, you know, these commercial developments and they'll have their signs with the fancy name, it's Sun Villa Vistas or you know, they'll have some kind of fancy name, you know, for the, the location and there's a little gate there and they'll have a sign but every once in a while you'll see on the bottom of that sign underneath it a life company's logo like finance Buy. You know there's one in Edmonton, in downtown Edmonton, Oliver Square. We used to have a picture of this, what we did in our, in our training sessions. Do you remember this, Jay? I, I took this picture. Yeah. And it's a really well known area in downtown Edmonton. It's near the Grammy Q in college. And there's literally on the sign it says Oliver Square and right below that is a logo for a life company. Well, that life company's probably out of that project by now. But they helped finance or participated in a joint venture and getting that constructed. I think they probably made some money in that deal.
[00:19:57] Speaker B: Right. And if you hold up that page again, I just want to point something out for anyone who has Nelson's book.
So right next to the money pool you can see dividends, expensive operation and desk claims. Those would be minuses. The premiums, loan repayments are all pluses. So if you think about this just in terms of simple plus minus, and we just told you that with term life insurance alone, less than 2% of the policies ever pay out a death benefit. And the premiums are a plus and the death claims are a minus.
It shouldn't shock anybody. It's just stop right there. It's like this is one of the fundamental reasons why they remain the most financially solvent institutions on the planet. In addition to that, they're not involved in any activity that can inflate the money supply. And so what I love most about my money residing there is that something that Nelson said to you and I years ago.
He said, I want you to think about this. If you're going to buy stock in a company and you go to a broker, you Say, hey, I've got some money, I want to buy some stock. What stock should I buy? And the broker responds with an opinion about what stock you should buy versus sitting down with an actuary and a rate maker at a life insurance company and saying, how many people have you underwritten for coverage since inception of this company?
And based on your calculations of how many people are going to die every year and compare that to the actual number of death claims that have been received every year, Nelson's logical question was, who do you think has the better.
[00:21:53] Speaker A: Data.
[00:21:56] Speaker B: The actuary or the broker?
So where do you want your money to reside?
And that clicked for me years ago. Years ago, when he said that, I was like, oh, wow, okay. And full disclosure, I own stocks in Canadian and American companies for a different purpose, for dividend reinvestment, not for riding the roller coaster of volatility. But that being true, I take care of all my investing through the implementation of the infinite banking concept, because from that place, my pool of capital, I can invest money, I can lend money, I can spend money.
And I know that I co own an entity that's never failed to produce profit, even in the most dire of circumstances over the past century. And more logically, how much of my capital do I not want flowing there? That's a question that I ask myself and I encourage everyone watching and listening. When you understand what's really going on and you know exactly what to do, well, do you want to do that fully or partially?
[00:23:08] Speaker A: Well, and you know, I think something that coincides with our conversation is in a premium differential.
So people will say, you'll hear statements like, oh, term insurance is inexpensive, or term insurance get some insurance really cheap. You'll, you'll hear kind of statements akin.
[00:23:28] Speaker B: To that which is true.
[00:23:29] Speaker A: And then you'll hear the, the, the corollary to that, which is whole life insurance is expensive. Or you pay a lot for whole life insurance. Like, well, duh, you get what you pay for. Like, you know, if you want to own a house, you have to save up and build up a down payment. You have to qualify for the financing to get the house, you have to make the mortgage payments and you have to pay for all the renovations and all the issues that come up in the house, whether you made a good decision or a bad decision. Yeah, everybody knows someone who bought a lemon and just got raked over the coals on expenses fixing their crappy house. Everybody knows someone like that. Okay. Whereas if you just want to rent a house, well, you, you, maybe, you might, maybe the rent Will be cheaper. Might, might or might not. But you don't have any ownership, so you build no equity. But if you're renting the house, someone else is going to repair the house for you if there's a problem. If you, if you rent the house, you know, you walk away with no ownership. You own nothing if you rent the house. Like so. The corollary between renting a home and owning a home is very similar to renting an insurance benefit for a period of time and owning an insurance benefit that creates and builds a powerful asset of equity that you get to use for the rest of your life and.
[00:24:44] Speaker B: Grants you co ownership of the very company that issued the contract.
[00:24:49] Speaker A: And so clearly there's going to be a difference in the quality of the thing that you get, right? And you're going to pay more for a higher quality. And one is guaranteed to pay out regardless of what age you live to, whereas one is only designed to pay out, let's say in a 10 year or a 20 year window. And at the end of that time they'll give you the option to renew it. In fact for most people it's automatic. But they're not going to renew it at the same price point, which is why most people collapse those policies and end up with no insurance. Or they have to stumble and fumble to try and get covered for some new stuff because they didn't even realize it was happening until they received a letter that gave them a 30 day notice like, oh yeah, your premium is going to go up by 600% next month.
We're just going to take that out of your bank account unless you do something right. Like so no wonder people get a jaded view of insurance companies because many people have received that notice like oh those, those dirty brat bastards, they're going to gouge me 4, 600% more premium. Like no they're not. They're going to actuarially assess value for the thing that you want, which is protecting your family tax free, right? It's your fault that you didn't do anything about it, not theirs. So just like again, having context on what you actually get, you get what you pay for and one of those things is going to build a valuable asset that you can use really, really effectively quite early on and as frequently as you want. And the other one will give you some family protection and will eventually get too expensive to keep, period, bar none, plain and simple, across the board, every time, all the time.
[00:26:26] Speaker B: You know, it takes me back to what we ask often and that is if you understand the truth that your money must reside somewhere. And there's an entity where you can contribute almost unlimited sums that give you all the attributes and contractual guarantees and provisions that we've discussed where you have ready access capital on demand, on your terms.
You trigger no tax on the daily buildup. You pay no tax on the death benefit proceeds.
You get to control how you finance all the things that you need throughout your lifetime and recapture the interest you would have otherwise paid to banks or to someone else's finance company.
Logically, how much of your capital do you not want residing there? And is there any disadvantage to having capital reside in an entity with all those attributes? And so when you work through that logic, your brain might fight you a little bit on it where it's like, okay, hold on a second. Because I'm accustomed to storing money inside of a conventional bank or many, many types of financial products and instruments which they're all, they all have their own set of characteristics. It's not that any financial instrument is good or bad. It's just important to understand what the characteristics are of each of those financial instruments and just weigh that against all the characteristics of a dividend paying whole life insurance contract or ideally a system of contracts, ideally with a mutual company where they can only be responsive to you and to everyone else who co owns the company. So this was a great episode I thought. I felt like we really kind of jumped into some things that help address, hey, how can these insurance companies make so much money and pay out so much money?
[00:28:19] Speaker A: Well, well. And we have another episode that we did like two, two and a half years ago on understanding in Canada. Assurus.
Yeah, Assurus. CA A S S U R I S and so if you go ahead and you look on the YouTube channel and you, you go onto our channel and you look at the search bar and you type in Assurus, you'll see it. I don't remember what episode number is. We can try to link it down in the description below. But that, that we, we had a similar conversation, not as detailed and deep as this, but we did talk about like the insurance company for insurance companies that exist in Canada and how regulation works a little bit more. So it would, you know, if you wanted to continue the discussion going, that would be probably a good next episode for you to watch.
[00:28:58] Speaker B: Awesome. Yeah, today was a great episode. So yeah, that's why life insurance companies are the Fort Knox of finance. Great conversation. And to everybody watching on the YouTubes, watch the next video that just showed up on the screen. Continue your journey of learning. We always say there's no such thing as having arrived in knowledge. We curated this next video recommended especially for you. Actually, it was the algorithm that did that. Thank you YouTube and just continue your journey of learning. It's a lot of fun. Thanks Rich. Great conversation.
