Have you heard about the Infinite Banking Concept and want to learn more? Or maybe you’re already using Infinite Banking but would like to be able to explain it better. Today we’re unpacking the question: What is the dividend? 

https://www.youtube.com/watch?v=5yL_jW4q48E

If you’ve ever wondered how the cash value grows through dividends and how life insurance dividends differ from other types of dividends… tune in now!

Table of contentsWhat is the Dividend?Why Do I Need a Mutual Company for Infinite Banking?How Does the Dividend Grow My Policy?How Does the Dividend Relate to the Guaranteed and Non-Guaranteed Policy Cash Value?What Income and Expenses at the Life Insurance Company Determine the Dividend Rate?Why Shouldn’t I Compare Companies?How is the Dividend Applied to My Policy?Can Dividends Change in the Future?When Do I Receive Dividends?Why Are Dividends Applied Differently Amongst Policyholders?What is the Best Option for Infinite Banking?

What is the dividend?Dividends are the distribution of a mutual life insurance company's profits to its whole life insurance policyholders. Mutual companies declare their dividend rates annually.

What is the Dividend?

Dividends are the distribution of a mutual life insurance company's profits to its whole life insurance policyholders. Mutual companies declare dividends annually.

The IRS defines it as a "return of premium." This, however, is how the IRS can classify why dividends distribute tax-free.  

Why Do I Need a Mutual Company for Infinite Banking?

When you’re with a mutual company, you’re participating in the company's profitability via dividends. When the company profits, it’s going to benefit you because you're a policy owner. This means you want the company to be as profitable as possible.

To recap an earlier episode of our infinite banking series, policyholders are partial owners of mutual companies. Stock companies, on the other hand, are owned by stockholders. In the latter scenario, companies will act in the best interest of the stockholders, even if it’s not in the interest of policyholders. Choose a mutual company to get dividends and work with a company that acts in your interests. 

How Does the Dividend Grow My Policy?

Dividends are one of the major drivers of growth in a policy. The cash value increases in three ways: natural equity by paying premiums, the guaranteed interest portion, and dividends. While the latter is not guaranteed, they are highly anticipated. 

How Does the Dividend Relate to the Guaranteed and Non-Guaranteed Policy Cash Value?

On a life insurance illustration, there are columns representing your guaranteed interest growth and the non-guaranteed growth they project you will receive. So while the former is what you can expect no matter what (since it’s guaranteed), the latter is the growth you can anticipate. 

Additionally, the non-guaranteed column on an illustration will not show any dividends applied at all. Therefore, it’s a highly inaccurate way of looking at a policy illustration. Most mutual companies have paid dividends every year for the last 100 years or more. Another benefit is that once companies pay it out, it becomes guaranteed. In other words, once the floor of your policy increases, it cannot decrease. 

What this means is that life insurance illustrations become inaccurate every year. Since both the guaranteed and non-guaranteed columns adjust to represent what actually occurs, and the declared dividend changes each year, the projections inevitably shift. Yet they never decrease from the “floor” of your policy. 

What Income and Expenses at the Life Insurance Company Determine the Dividend Rate?

Dividends are profits paid to policyholders. However, they are declared and applied after other income and costs are accounted for. 

So, for example, a life insurance company has to account for payroll expenses, agent commissions, and mortality costs (how many people died).