Why is a dividend not taxable?
1) Let’s look at an example.
2) The rate makers determine that John Doe’s policy will cost him $ 1.00 / year for the insurance he wants.
3) Now the insurance company recognizes that several factors may cause the $ 1.00 / Year estimate to be wrong such as high administrative cost, larger than expected death claims, or lower than expected earnings.
4) As a result they apply a fudge factor and bump the rate to $ 1.10 / year. This extra $ 0.10 is the capital that makes the system viable
5) After a few years the directors call the accounts in and ask “How did we do on John Doe’s policy in comparison with the assumptions made by the actuaries and the rate makers?”
6) The accounts report we have collected $ 1.10 in premium on John Doe’s policy and it has only cost us $ 0.80 to deliver the promised death benefit.
7) As a result the directors now have $ 0.30 to make a decision with.
8) Since the directors are smart people they decide to place $ 0.025 into a contingency fund and return the remaining $ 0.275 as a dividend.
9) Since the dividend is not an actual “gain” but is rather a “return of premium” the dividend is not considered a taxable event.
1 0) Unlike a dividend declared in a security which may lose its value as the stock rises or falls a dividend declared in an insurance policy can never lose any of its
value. Once a dividend is declared it is guaranteed - it can never loose its value.
1 1) If the owner will use the “dividend” to purchase additional Paid Up Insurance (No cost for acquisition or sales commission) the result is an ever increasing, tax deferred accumulation of cash values that support an ever increasing death benefit.
12) This pool of money has no real governmental strings attached as to how, when or why it may be used and can be passed on to the next generation with limited or no estate taxes.
But it seems risky
1) A point to consider about an insurance policy is that they are designed to become more efficient over time no matter what happens. How can this be?
2) Insurance policies become more efficient over time because over the life of the policy the cash value is guaranteed to reach the face amount of the policy. As a result the insurance company faces an ever decreasing “net amount of risk”.
Possible Uses of the Infinite Banking System
1) Medical Insurance – This system works well for people who are “un-insurable”.
2) Car Insurance
3) Life Insurance
4) Buy Sell Agreements
5) Pension plans for employees
6) Home Mortgages
7) Car, Boat financing
8) Equipment financing
9) Estate planning & Wealth X-fers
1 0) Charitable trust and giving
11 ) College savings plan 12)Leasing business
1 3)Retirement planning
14) Eliminates need for Social Security
1 5) Can cover multiple generations – good method of teaching and transferring wealth to successive generations.
16)Business financing 17)Others -?
How are Dividends and Interest Payments Calculated - ?
1) Usually a life insurance policy will grow the cash value in a policy account in three ways. These are:
a. Premium payments are credited to the cash value of the policy.
b. Interest Payments are made on the cash value in the policy.
c. Dividends payments are made based on the cash value of the account.
2) As a rule of thumb, a policy will have a blended internal rate of return (the rate
of return – before tax - based upon the net effect of both the interest and dividend payments to the policy holder) of approximately 6 % to 8%.
3) Interest payments are usually based upon the cash value in an account. Usually the insurance company will establish either a fixed or a minimum and
maximum interest rate that will be paid on the cash value in an account.
4) Dividends payments are once again a function of the cash value of the policy and calculated as discussed above.
5) When you borrow from your policy your dividends continues. The reason your dividend continues is because borrowing from your policy does not decrease the cash value in your policy. Rather, the cash value in your policy is used to collateralize your loan.
6) The insurance company loans the monies to you at some rate of interest they deem necessary to make the policy work. This is what you are paying for the use of the money.
7) If you decide to pay extra interest on your loan the difference between what the insurance company expects and what you pay goes straight to increasing the cash value of your account.
8) This extra money grows your dividend payment and helps to create an ever growing pool of money for your “banking system”.
9) Remember that all growth within the policy has occurred tax free and these cash values and death benefits can be passed onto the next generation with no or limited tax implications.
