Understanding Dividends and the 4% Guarantee on Life Insurance

So it's very confusing. It's like when a client hears 4% guarantee, what do they hear? That their account is going to grow by 4% a year. And I don't blame them. Cause if you don't know what you don't know, it's like, that's, that's what I would assume. But when you actually run the numbers, it's like less than 2% internal rate of return. This is better. Well, with Caleb Williams, everybody, welcome back to another episode of the better wealth podcast. And here I have my, I guess it's my left hand, beautiful man. Caleb Williams, how you doing, man? I promise you. I did not pay him to say that I did. I do feel like I'm going to be replaced because you are one good person at an intro and podcast. It's a pleasure to be on here. And we're, we're getting a lot of people reaching out to us, scheduling meetings. What are you, what are you seeing from the field, man? Like as you're taking calls. Yeah, it's, uh, I'm glad you asked. And, uh, you know, anytime I'm back here in the studio, we would love to talk about life insurance asset. Um, and I know you guys love it as well. And so, uh, initial meetings and I've been having dialogue with clients and prospects and people in general, uh, people are, are bringing up to me that is 4% guarantee, 4% guaranteed has been a conversation that's came up multiple times that they said they've had a conversation with a different agent, a different company. They said, Hey, this isn't what you're telling me right now. Isn't necessarily what the guy down the street is telling me. They're telling me that I'm able to get 4% guaranteed. Like why, why isn't that? And, uh, I have to go into a deep explanation around why that is and what is actually going on. I'd love to hear your two cents on what is actually happening and why people are actually saying that 4% guarantee is a thing. It's super interesting. Number one, anyone that it's a deal breaker on the rate of return doesn't understand the power of life insurance as an and asset versus an or investment. That makes sense. So where, where, where, where we're getting this 4% is in the insurance company on whole life. As of at the time of this recording, I know that there's some new changes and for future whole life, this might be changing, but the guaranteed column, this is essentially the, the, the, the every whole life carrier that gives you an illustration. You can see like the non-guaranteed column, which, which essentially says if the dividend remains this way for the rest of 20, 30, 40 years, or if it, if it, you sometimes can do a non-guaranteed column where you're giving a, a, maybe a more conservative dividend. Um, this is what you would have. And well, then what you could say is worst case scenario, you have a guaranteed column, which is saying if dividends never got paid ever again, this is what you'd have. Okay. And it's a 4% guarantee, but there's a problem Dom. When you actually run the numbers, we call this IRR internal rate of return. It's nowhere near 4%. So it's very confusing. It's like when a client hears 4% guarantee, what do they hear? That their account is going to grow by 4% a year. And I don't blame them because if you don't know what you don't know, it's like, that's, that's what I would assume. But when you actually run the numbers, it's like less than 2% internal rate of return, which by the way, could be a great thing compared to a savings account could be, you know, even a guaranteed rates long-term and a whole life insurance contract could outperform and a like asset as it relates to liquidity, but at the end of the day, we feel lied to because we're saying worst case scenario, I'm getting 4% and I'm getting nowhere near than 4%. And I want to, I want to just break down these numbers because when the insurance company, and this goes with dividends too, don't ever choose a company based on the dividend without understanding how it translates to IRR. Internal, the actual rate of return that you're getting. So if you have a 4% rule or not 4% rule, if you have 4% dividend, the company will pay you 4%, but then they're also going to take out costs of costs of insurance, mortality costs of people dying, and they're also the cost of doing business. And so with that, they take that out and, and then you get a lot less than 4%. I think the big, the big thing is the, the cool thing with whole life that this is important to you is it has a guaranteed column. And, and, and it, it should be positive. If you're, if you're guaranteed call never breaks, even give us a call. Um, so it should be, it should be positive. And also, um, a lot of these companies are getting closer to the guarantee because of interest rates, but we're still all these companies being mutual are trying to be profitable, trying to find ways, whether it's investing, whether it's being more efficient on, you know, less overhead to create a profit. And that's why we're such huge fans of mutual because you get the guaranteed plus, which essentially means you get a better internal rate of return because a dividend is in addition to what they're on the hook for. Is that, is that somewhat helpful? Yeah, no, it was extremely helpful. And, you know, we just want to be super transparent, authentic, because I think what's happening is selling a guaranteed 4% can be sexy and a 4% on top of a dividend now, you know, I mean, if you look at, uh, like a, a mass mutual dividend rate, and then you also look at the guarantee that, well, I'm getting 4% from the guaranteed. And then I get a 6%, uh, dividend. I mean, you add those together, that sounds like 10% to me. So officially we're getting 10% in whole life insurance. And so it's, it's just not, it's just not ethical because, um, that's not correct at the end of the day. Right. And so from a mathematical standpoint, I've actually looked at some of the numbers, um, which you'll actually see is more close to like a guaranteed 2% on the guaranteed side. And then the dividend, depending on, you know, expenses, all et cetera, et cetera, will be close to about another 2% as well. So that's why you see, um, an overall IRR of close to 4%, depending on the way the policy design, the efficiency, the age of the client, et cetera. So, so in other words, another way to say that is in the 4% guarantee, the actual rate of return that you're getting after all costs of insurance and all these other things is 2%. Now we've got to be careful because I think sometimes we can get over analytical and we can say 2% is bad. We're buying permanent life insurance that has a death benefit that may be increasing that, that is that could be structured to have some of the best tax advantages could literally unlock other things in the future, a 2% guaranteed rate could be phenomenal if it's an asset that unlocks other things in life. I just want to be very clear on that. And when someone's saying, oh, this dividend, this dividend, that company, that company asked for one thing. Can I have the internal rate of return? Because if you have the internal rate of return, that is very much the way that we compare company to company. But then we also have to understand that the rate of return is one of many benefits as it relates to the benefit you're getting is that, so it's like a lot of companies like to compete on dividend, but we've seen companies that have higher dividends that have worse internal rate of return because their company it's expensive to run, maybe there's more death claims, other things. And so you actually have a company that has a smaller dividend that outperforms. How is that possible? It's because dividend and guarantees are half truth and they're misleading the public. Yeah. So what I would say when you're looking at what company you want to use, I would say paying attention to the dividend rate is not necessarily that important. When I would say the dividend rate is important is if you have a policy already in force, like let's say I have a policy, you know, with master mutual and I've had it for three years, well, the following year I can see, well, if the dividend rate went down, right, if it went down a basis point or something like that, well, then I know that my overall growth will probably be a basis point less the following year than it was that year. So, uh, dividend rates are good to compare from year to year for your current policy, but looking at it from an overall perspective of which company I should choose, it's just not a very good tactic overall because there's so many other factors that come into place. Yeah. And I think, I think looking at a dividend history is good as it relates to, is this company something that I should do, but you can't say, oh, a dividends eight, eight, eight, seven, seven, six, six, five, five. And this is a, you can't then follow that on an IRR. You can assume that if that's the trend, the IRR is not going to go up, but it's not a, it's not a point for point kind of deal there. So, uh, anything else that you want to say? I mean, I, I think this is, this hopefully is helpful. I hope you understand this and what I, I think the message that I want to share is these are all great questions, but if you can't clearly, clearly articulate and understand why having life insurance, why having permanent life insurance, heaven forbid why having whole life insurance at the foundation of your life is beneficial. All these questions are, are really taking you from the core, um, real benefit of having an and asset your life. And I think all these are good, but they really, what I find is when we're asking questions like all this, sometimes we're focused on a metric that may or may not translate to an outcome that we really want. That's good. I think that's a good place to end. Thank you so much for listening to the better world podcast. It would mean the world to me. If you could hit subscribe, leave a review and share this with the people that you know and love.