Mutuality Works! You can count on it!

John (Jack) Bogle is one of the most respected and venerated figures in the financial world today.  His book Don’t Count On It, outlines and demonstrates that his model of “Protecting Investors Profit First” is critical.   In fact, he revolutionized the investment world when he founded Vanguard back in 1975 based on this primus. Vanguard is a mutual company that was designed to create profits for investors NOT for money managers to profit off investors. Though highly ridiculed and mocked early on, his primus has stood the test of time and remains valid today because mutuality works! And it works not only when trading equities and indexes, it works with insurance as well.

Having purchased malpractice insurance for many years while practicing as a chiropractor, it was always nice to receive a dividend payment at the end of each year from the mutual insurance company I was underwritten by.

A dividend from an insurance company is considered, by the IRS, a refund of premium paid and therefore there is NO TAXES on these dividends.  And the same is true of life insurance dividends.

There are NO TAXES on dividends paid, and the dividend can be used to build more equity in the policy which gives the policy owner greater access to capital without paying fees or penalties.

Recently, through the liberality of a client and friend, I received a personalized and signed copy of Jack Bogle’s book Don’t Count On It!  Here are a few significant insights from that tome.

  • “…managing other peoples’ money has been largely arrogated by fund managers to their own benefit, rather than to the benefit of their fund shareholders… and has cost fund shareholders dearly.”[i] Because “Not everything that counts can be counted, and not everything that can be counted counts.”[ii]   Consequently, “Our best defense against numerical illusions of certainty are the immeasurable, but nonetheless invaluable, qualities of perspective, experience, common sense, and judgment.”

And that is precisely what mutual life insurance provides each and every policy owner…the opportunity to benefit tax free, from the invaluable perspective, experience, common sense and judgment of a company that has paid policy owners dividends, decade after decade, regardless of market conditions.  All this, while providing the highest possible liquidity available without loss of gain, allowing the policy owner to advantage themselves of more of the gainful opportunities that come their way.  And of course without being obligated to pay management fees or penalties, this allows the policy owner the benefit from both…both the compound annual growth rate of the policy AND the rate of return on any investment opportunities that they take advantage of. In short, by eliminating the taxes, penalties, fees and management costs that destroy the compound annual growth rate of non-mutualized investments, the profit potential becomes much greater because of the mutual relationship between the insurance company and their policy owners.

In the final analysis, when you take away the mutuality of any investment, including life insurance products like Universal Life, Variable Universal Life and Index Universal Life policies, you are left holding more of the risk and liability because, “Some 98 percent of what we thought we would have has vanished into thin air.[iii] “Think you will earn the market’s return.  Don’t Count On It!”[iv]  And that is why Solomon stated centuries ago,

“Though one may be overpowered,
    two can defend themselves.
And a cord of three strands is not quickly broken.

Mutuality, is the superlative protection that everyone wants and needs, otherwise the volatility of the market conditions and unscrupulous money managers, whose own profits are of more concern to them than your bottom line, will destroy most if not all of your earnings.  This fact, which Jack Bogle clearly demonstrates time and time again in Don’t Count On It, is clearly evident when discerning the difference between the guaranteed values contained in a participating whole life insurance policy (a mutual policy) against any other type of investment or life insurance product.  You can count on it!

[i] Don’t Count On It,  John Bogle, introduction

[ii] Albert Einstein

[iii] Don’t Count On It,  John Bogle, page 9

[iv] Ibid

[v] Ecclesiastes 4:12