Have you heard about the Infinite Banking Concept in Canada and want to understand it even better? Or you’re already implementing the Infinite Banking Concept and seeking a more straightforward way to explain it. In this article, we’re diving into the question: What is a dividend?

If you’ve ever wondered how cash value increases with dividends and how life insurance dividends are unique compared to other types of dividends, keep reading!

What is the Dividend?

Dividends are how mutual life insurance companies share their profits with their whole life insurance policyholders. These companies announce their dividend rates every year.

The Canada Revenue Agency (CRA) does not categorize corporation dividends as a ‘return of premium.’ Instead, dividends are payments made by a corporation to its shareholders out of its profits. For mutual whole life insurance policies, however, dividends are considered a return of overpaid premiums and are generally received tax-free by the policyholder, provided they do not exceed the total premiums paid. This specific scenario allows dividends to be distributed without additional taxation.

Benefits of a Mutual Company for Effective Infinite Banking Strategies

Joining a mutual insurance company in Canada means you share in the success through dividends. As a policyholder, you benefit directly from the company’s earnings. The more profitable the company, the better for you.

Remember, with infinite banking in Canada, you’re essentially a co-owner when you hold a policy with a mutual company. This contrasts with stock insurance companies, where the priority is to generate profits for stockholders, sometimes at the expense of policyholders. Opting for a mutual company aligns your interests with the company’s, ensuring that profits are shared with you through dividends.

Maximizing Your Policy’s Value With Infinite Banking

Dividends significantly contribute to the growth of your insurance policy’s cash value. This increase happens in three ways: the steady contributions you make through premium payments, the consistent accrual of guaranteed interest, and the addition of dividends. While dividends aren’t assured, they are a welcomed boost when distributed, enhancing the overall value of your policy.

Role of Dividends in Your Guaranteed Vs. Non-Guaranteed Policy Cash Value

When you look at a life insurance policy illustration, you’ll see two main types of cash value growth: guaranteed and non-guaranteed. The guaranteed growth is what the insurance company promises you’ll get for sure, as long as you keep paying your premiums. It’s like a baseline that you can count on.

The non-guaranteed growth is different. It’s an estimate of extra growth you might get, but it’s not promised. This part includes dividends, like a share of the company’s profits. If the company does well, they might give you dividends, but they’re not guaranteed. However, it’s worth noting that many mutual life insurance companies in Canada have a strong track record of giving out dividends year after year.

Once a company gives you a dividend, it adds to your policy’s cash value and becomes part of the guaranteed amount — it won’t go down after that. So, even though life insurance illustrations show both guaranteed and non-guaranteed values, the actual cash value of your policy can only go up from the guaranteed “floor,” never below it. This means that the illustration gets updated each year to reflect the actual dividends you received, which could make the previous projections look a bit off. Still, in a good way — your policy’s value only increases.

What Key Financial Factors Influence the Dividend Rate of a Life Insurance Company?

Dividends are a share of the profits given to policyholders. But before these dividends are handed out, the company takes care of its other financial responsibilities.

Here’s what happens: The company collects premiums from all the policyholders, which is the money coming in. Then, they must pay for things like employee salaries, money to the agents who sell the policies, and claims from policies when someone passes away. This is the money going out.

But it’s not just about money in and out. The company also tries to grow the money by investing it. They mostly put it into bonds, which are loans to the government or companies that pay back with interest. They also put a little bit into real estate and stocks. Additionally, when policyholders borrow money from their policies, the company also makes some profit there.

After all this, whatever profit is left is used to determine the amount of dividends they can give to policyholders for the next year. It’s like a bonus that policyholders get if the company does well.

Why Shouldn’t I Compare Insurance Companies?

Each life insurance company in Canada operates in its own unique way. Even though they all do similar things, the methods they use to work out dividends and grow your policy’s cash value can vary. Also, each company has its own strategy for investing money. Mutual companies usually go for safer investment options, but how much they make and spend can be different from one company to another. These differences can lead to varying dividend amounts and how they’re used in your policy.

How is the Dividend Applied to a Policy?

People often focus on the dividend rate, but what really matters is how the insurance company uses that dividend for your policy. The way dividends are used is a company secret. But sometimes, a company with a lower dividend rate might give you a better outcome. They might especially use dividends for new policies or ones that have taken out loans. It’s more important to start with a policy that suits you than to worry too much about analyzing every detail of the policy illustrations.

Can Dividends Amounts Vary Over Time?

When an insurance company sets a dividend rate for the year, that rate stays the same until the year ends. But the rate isn’t the same every year—it can go up or down. So, when you get a picture of what your policy might look like in the future, called an illustration, it’s based on the current rate. But as soon as a new rate is announced, that illustration isn’t quite right anymore. The good news is that once you get a dividend, it’s yours to keep. The company can’t take it back.

When Are Dividends Paid Out?

Dividends are announced once a year and added to your policy. Usually, life insurance companies decide on the dividend amount at the end of each year. Then, they put the dividends into your account during your policy anniversary. For example, if your policy started on May 1st, that’s the time dividend will be added to your policy every year.

Why Do Policyholders Receive Different Amounts of Dividends?

It’s natural to wonder why dividends aren’t the same for all policyholders. The growth of your policy isn’t just a straightforward addition of a set percentage to your cash value.

The way dividends are calculated is kept under wraps by the insurance company. But what you should know is that dividends are not applied uniformly. The dividends added to your regular premium payments’ cash value differ from those added to the cash value from Paid-Up Additions (PUAs). Also, the dividends for a policy for a young child will differ from those for an older adult. This is because the policy is structured to balance the cash value with the death benefit when the policyholder reaches 121 years old. If children’s policies were treated the same as adults, their cash value might skyrocket unrealistically high. So, the company adjusts the dividend application to ensure steady and sustainable growth.

What is the Ideal Option for Infinite Banking?

When it comes to receiving dividends, you have several options. For those interested in infinite banking, it’s wise to structure your policy to reinvest dividends into buying more Paid-Up Additions (PUAs).

PUAs are small chunks of life insurance that are fully paid for. Adding them to your policy not only boosts your cash value but also increases your death benefit. As a result, as your cash value grows over time, so does the potential payout upon death, enhancing the policy’s value for the future.

Conclusion

Dividends are a vital aspect of whole life insurance policies for infinite banking in Canada. Though their application and rates may vary, they can boost your policy’s cash value and death benefit. It’s essential to consult with a financial advisor to ensure your policy is aligned with your financial objectives and to make the most of the benefits offered by dividends. With the right strategy, infinite banking can be an effective tool for securing a prosperous financial future.