Divorce the IRS

The Dividend Detail Your Index Strategy May Be Missing

• James Miller

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Welcome back to The Divorce the IRS Podcast.

In this episode, we build on the previous conversation about life insurance retirement plans and take a closer look at one of the most overlooked details in many index-based insurance products: dividends.

This is not an anti-IUL or anti-annuity episode. Fixed index annuities and indexed universal life policies can have a place for the right person when they are designed properly, funded properly, and fully understood. But when someone says you can “participate in the S&P 500 without market risk,” it is important to understand what that actually means.

Many indexed annuities and IUL policies are linked to the price return of an index, not the total return. That means the dividends paid by the companies inside the index may not be included. Over long periods of time, that difference can be enormous.

In this episode, we discuss:

  • The difference between S&P 500 price return and total return
  • Why reinvested dividends are one of the quiet engines of long-term wealth creation
  • How missing dividends can impact compounding over decades
  • Why indexed annuities and IULs are not the same as owning an S&P 500 index fund
  • How caps, participation rates, spreads, and crediting formulas can affect growth
  • Why tax efficiency alone does not automatically make a strategy better
  • The key question to ask before using an index-linked insurance strategy

The goal of divorcing the IRS is not just to pay less in taxes. The goal is to build efficient wealth, grow more, protect more, and understand exactly how your money is working.

Before making any decision, review your situation with a qualified tax, legal, and financial professional.

And when someone shows you a strategy tied to the S&P 500, don’t just ask about upside and downside. Ask about the dividends.


SPEAKER_00

Welcome to the Divorce the IRS Podcast, the retirement income planning podcast designed specifically for those who want to pay the least amount of taxes possible and build a retirement income that lasts. Inspired by the best-selling book, Divorce the IRS, you get to go behind the scenes with financial planner, author, and speaker Jimmy Miller. Learn how to set yourself up to pay the least amount of taxes in retirement when you'll need your money the most. And now, here's your host, Jimmy Miller.

SPEAKER_01

Welcome. Welcome back to the Divorce the IRS podcast. Today I want to build on something we just briefly touched on in the last episode about life insurance retirement plans, which is the importance of dividends in your long-term investment returns. Now, to be clear right up front, this episode is not anti-IUL, nor is it anti-annuity. These tools can have a place for the right people when they are designed properly, funded properly, and fully understood. But there is one issue I think many people miss when they attend an insurance person's free dinner seminar and hear the phrase, you can participate in the SP 500 without any market risk. That phrase sounds powerful. It sounds like you get the upside of the market and protection from the downside. But there is a little detail hidden inside many fixed index annuities and index universal life policies that can make a massive difference over time. And that detail is dividends. More specifically, in most of these products, you are not participating in the dividends of the index you think you're investing in. And over a long period of time, missing dividends is not a small issue. It is not a technical footnote either. It can be the difference between good growth and dramatically better growth. Let's break it down. See, when most people hear the SP five hundred, they think of the stock market. They think of the 500 largest companies in America. They think if the SP five hundred goes up, I go up. But there are different ways to measure the return of the SP five hundred. One is price return. That measures the change in the price of the index. The other way to measure it is total return. That includes the price, change plus dividends, assuming those dividends are reinvested. And that second part, reinvested dividends, is one of the quiet engines of long-term wealth creation. Let's think about how compounding works. If I earn interest and then I earn interest on that interest, that growth starts to accelerate, and that's compounding. Dividends work in a similar way. When companies pay dividends and those dividends are reinvested, they buy more shares. Those additional shares can then produce more dividends in the future. And over time, you have a compounding machine. It's not flashy, it's not exciting. Nobody brags at a dinner party about reinvested dividends. But long term they matter. They matter a lot actually. Let's take a look at a simple historical example. Let's say someone invested $100,000 at the beginning of 1996 and tracked the S P five hundred through the end of 2025. If that money grew by only the price return of the SP 500 without dividends, it would have grown to roughly $1.11 million. That's still a great result. Nobody would really complain about turning $100,000 into more than a million. But if that same $100,000 tracked the total return of the SP $500 with dividends reinvested, it would have grown to roughly $1.92 million. That's a difference of about $810,000. Same starting amount, same 30-year period, same broad index. The difference was just the dividends. Now let's bring this back to indexed annuities and index universal life. In a fixed index annuity or an IUL, you're typically not actually participating or investing directly in the SP 500. You're not buying the underlying companies. So you're not owning Apple, Microsoft, Johnson ⁇ Johnson, Coca-Cola, etc., or the other companies inside the index. Instead, the insurance company uses a crediting strategy that links your interest credit to the movement of the index. And that distinction matters. You're not getting the index. You're getting a formula based on the price only movement of the index. And the formulas that the insurance companies use for your growth potential are complicated. Many include caps, which will limit your upside in return for that downside protection. The formulas may include participation rates, which only give you credit for a percentage of the index price return. It may also include spreads. It may include things like one-year point-to-point crediting, monthly averaging, volatility controls, and other moving parts. In almost all cases, the formula is based on the price return of the index, not the total return. So in plain English, that means dividends may be left out. So when someone says this policy tracks the SP 500, the follow-up question should be which version of the SP 500? Is it the price index or is it the total return index? Or in other words, are dividends included or are the dividends excluded? Because if dividends are excluded, then the illustration return is not the same thing as owning the SP 500 index fund where dividends are being paid and reinvested. Now that does not automatically make a product bad. It just means we need to be honest about what it is and what it is not. A fixed index annuity may offer downside protection. An IUL may offer tax advantage cash value, a death benefit, and the ability to access values through properly structured policy loans. And all those benefits can be meaningful, but benefits always have trade-offs. And that's the point of today's episode. When we talk about divorcing the IRS, the goal is not just to avoid taxes. The goal is to build efficient wealth. Tax efficiency is powerful, but it does not automatically overcome a weaker growth formula. A tax-free or tax advantage vehicle still needs to be evaluated on the actual economics within the context of your own personal financial plan. Here's another quick way to think about it. Dividends are like the rental income of stock ownership. If you own a rental property, appreciation is one part of the return. Rent is the other part. If someone showed you a real estate deal and said, Well, you get to participate in the appreciation, but we're going to keep all the rent, you would immediately understand that you're not getting the full economics of ownership. That is similar to what happens when an index-linked insurance product excludes dividends. You may receive some participation in the appreciation of the index, but you're not receiving the dividend or the rent components. If a strategy is designed to work over decades, then every compounding variable matters. A good strategy should make sense before taxes and then become even better because of the tax treatment. It should not depend entirely on the tax treatment to justify weak economics. So as you think about divorcing the IRS, remember, tax strategy is only one piece of the puzzle. The goal is not just to pay less tax, the goal is to keep more, grow more, protect more, and understand exactly how your money is working. And sometimes the most important question is the one that nobody asks: Am I participating in the dividends? Because in long-term compounding, the quiet details can become the biggest dollars. Thanks for listening to the Divorce Areas podcast. As always, make sure you review your own situation with a qualified tax, legal, and financial professional before making decisions. And when someone shows you an index strategy tied to the SP 500, don't just ask about the upside and the downside. Ask about those dividends.

SPEAKER_00

Want even more ideas, tools, and resources on how to navigate your financial life? Check out all the resources on the Divorce the IRS website at divorce-the-IRS.com or the Bayabwealth website at bayablewealth.com and subscribe to the blog to stay up to date on issues affecting retirement income planning. Don't forget to subscribe to the podcast so you never miss an episode. Bayabub Wealth and Bayabut Wealth Abroad are DBAs of Bayabwealth LLC, a Florida registered investment advisor. This podcast is designed for general education purposes only and shouldn't be taken as legal investment or tax advice. You should seek out a qualified tax professional or licensed financial advisor to determine what is best for your personal situation.