Due to very low interest rates and the present stock market volatility, there has been a renewed interest in dividend-generating assets. When talking about dividends, most people think of stock dividends, but stocks are not the only asset that can generate dividends. As owners of Infinite Banking (IBC) policies, you know that your policies generate dividends, and those dividends can be used to generate more cash value by purchasing paid-up additions.
An IBC policy is a dividend-paying whole life insurance that you obtain through a mutual company, rather than a stock company. Mutual life insurance companies share their profits with participating policyowners via dividends.
The word “dividend” causes confusion because it is most often used in connection with a public company paying a stock dividend. Those dividends represent corporate earnings and are determined by the company’s board of directors. The dividends are taxable to the recipient. Life insurance dividends also represent earnings but are not taxable to the recipient since they are considered a return of premium. Mutual life insurance companies, by law, must share all profits of the company with participating policyowners. Remember, your IBC policy cash value can never lose value and it is guaranteed to grow by at least a minimum guarantee. It follows that different from stock dividends, you cannot lose reinvested life insurance dividends if the stock market tanks.
Annual announcements of dividends by mutual life insurance companies are often accompanied by the announcement of an interest rate as well. This represents the dividends as a “gross” interest rate based on the rate of return of the insurance company portfolio. The actual distribution of dividends is reduced by mortality and operating expenses. The difference between the gross rate and the net rate is approximately 2%, so if a mutual company declares a gross dividend rate of 5.65%, by the time it reaches your policy, the net rate should be close to 3.65%.
It is also important to distinguish the difference between a dividend, which is not guaranteed, and your guaranteed policy increase which grows by a guaranteed dollar figure, rather than an interest rate like a typical savings account.
Although dividends are not guaranteed because they are based on the company’s profits, the mutual life insurance companies that we use have paid dividends every year for over 170 years, including the Great Depression and two World Wars.
As mentioned before, the tax code technically classifies whole life insurance dividends as a return of premium and therefore, non-taxable. Nevertheless, dividends paid overtime can exceed the total amount of premium paid – sometimes significantly! Because life insurance companies are managed very conservatively, there is almost always a modest profit.
Be aware that if you take dividends in cash, you can owe taxes on dividends received over and above the amount of premium paid, or your cost basis. In general, it is better to use your dividends to purchase paid-up additions, so they are not taxable and substantially increase your cash value.
If you would like to learn how you can grow a substantial amount of cash that you have access to at any time without penalties, is unrelated to the stock market, and will generate income that is not included in your tax return, visit our website at http://InfiniteBankingSimplified.com/ or feel free to email us your questions at ContactUs@InfiniteBankingSimplified.com or call us toll-free at 1-844-443-8422.
Isis B. Palicio, LUTCF, MBA
Pedro A. Palicio, MBA, Ph.D.
Infinite Banking Concepts® Authorized Practitioners
We are experts in designing high cash value dividend-paying whole life policies.