In developing an insurance policy, several steps must take place. These are as follows:

• Actuaries develop a statistical model based on the lives of ten million selected people. The model predicts the number of people that will die each year within the selected population. The model covers people from the age of birth until one hundred years of age.

• After the actuaries have developed the population model, rate makers will take this information and determine what the company will have to charge in order to pay the death claim promised and make the whole system work.

• Lawyers make legal and binding contracts that are offered to the public through a sales force.

• An administrative organization made up of executives, clerks, etc., oversees and administers the whole system.

So far so good. The contract you sign is unilateral. The insurance company promises to do certain things if you meet the standards of acceptability and make your premium payments.

If you will look at your contract closely you will see that you are the owner of the contract, not the insurance company. The owner is the most important person in the play that is unfolding.

To make the insurance plan work, the owner (you) must make payments into the company (insurance company) and the insurance company must put this money to work in order to produce the benefits promised. This is usually done in conservative financial instruments such as bonds, mortgages, etc. Sometimes an insurance company will invest in speculative investments such as real estate or joint ventures, but this is usually a small part of the investment portfolio.

Now since you are the owner of the policy and not the insurance company, you outrank every potential borrower who wishes to use the money in your policy that is available to be lent.

Since you are the owner of the policy and you out rank every other borrower, you have absolute control over the equity (cash value) that has accrued in your account.

In essence, the insurance company can only lend the equity (cash value) in your policy to other places if the policy owner (you) does not exercise his option to use the money at the interest rate agreed.

By investing the premiums paid, the insurance company creates an ever increasing pool of money to service the policy.

Now at the end of the year, the directors call in the accounts and ask “How did we do on John Doe’s policy in comparison with the assumptions made by the actuaries and the rate makers?”

Based upon this comparison, a dividend may be declared.