RPF0132-Q_and_A_on_life_insurance_and_72t
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00:00:27.200 | ♪
00:00:30.800 | Q&A show today, and I've got six unique, interesting, and varied questions lined up.
00:00:38.720 | Gonna respond to Sean's question about how to approach life insurance planning for his kids.
00:00:43.520 | Clear up some stuff for Chris on 72(t) withdrawals for early retirees.
00:00:47.680 | Basically, how do I pump a bunch of money into my 401(k) accounts and then retire at 50?
00:00:52.800 | Does 72(t) work for that?
00:00:54.960 | Melissa has some questions about the much-vaunted mortgage acceleration program,
00:00:59.680 | which is the idea where you use a home equity line of credit to pay off your principal mortgage
00:01:04.320 | in order to pay it off faster.
00:01:06.640 | Robert has some questions about his wife's non-qualified deferred comp pension plan
00:01:11.440 | at her publicly traded Fortune 500 company. He wants to know how safe that is.
00:01:15.840 | Mary wants to know whether to set up a corporation in California or Wyoming,
00:01:19.840 | and how to set up a corporation for her 16-year-old son.
00:01:23.440 | And then, Bonica has some questions about how to approach asset allocation
00:01:28.240 | and diversification from a Sri Lankan perspective.
00:01:31.520 | ♪
00:01:47.600 | Welcome to the Radical Personal Finance podcast.
00:01:49.760 | My name is Joshua Sheets. Today is Monday, January 12, 2015.
00:01:55.280 | This is the show where I hustle every day to try to clear up all of your questions
00:02:00.880 | and give you a little bit of a guiding light on your path to financial independence.
00:02:06.320 | A couple days late with today's Q&A show, but it's going to be worth it.
00:02:09.120 | I expect it to be long, but worth it.
00:02:12.000 | ♪
00:02:20.080 | It's been an interesting week last week and an interesting day even today.
00:02:23.760 | As I record this right now, it's about 8.30 as I sit down and hit start.
00:02:27.120 | I do expect this show to be fairly lengthy, but it is going to be packed.
00:02:30.400 | So, feel free to split it up into multiple set listening sessions if you need to.
00:02:35.360 | But it's been a busy week around the Sheets household.
00:02:38.480 | After getting back from the break, and by the way,
00:02:40.080 | if you want to skip straight to the questions,
00:02:42.000 | just check for the timestamp and you can go straight to question one.
00:02:44.320 | But getting back from the break was an interesting experience this year.
00:02:50.560 | I had lined up the shows to release while I was out of town over Christmas vacation.
00:02:55.280 | And I was fortunate prior to Christmas vacation,
00:02:58.640 | I'd built up a backlog of about six shows in advance.
00:03:03.120 | And those shows were helpful to me as they allowed me to...
00:03:09.440 | Well, it was useful to be ahead a little bit during the normal course of the week.
00:03:15.360 | But getting back from vacation, I just got overwhelmed with digging out from email.
00:03:19.600 | And then to compound it, I wound up getting sick.
00:03:22.320 | So, last week I had released a show on Tuesday and on Wednesday.
00:03:26.320 | And I had shows planned for Thursday and Friday.
00:03:28.320 | But man, Thursday and Friday, I was flat on my back on...
00:03:32.640 | Yeah, I was sick and I wasn't able to get the shows done.
00:03:35.440 | That was a little bit disappointing to me.
00:03:37.840 | It kind of broke my streak.
00:03:39.200 | That was the fewest shows released in a week ever, actually, since I started doing the show.
00:03:45.520 | But good things, good things all around.
00:03:47.120 | What I was reminded of, even today, as I record this later in the evening today,
00:03:52.800 | it's been a neat day with my family.
00:03:54.320 | And even just last week, even though it was a busy week and it was a week of being sick,
00:03:58.720 | I was reminded about the benefits of entrepreneurship
00:04:01.680 | and being able to have a little bit of autonomy over my schedule.
00:04:06.080 | I haven't shared on the news yet, but on this show,
00:04:09.760 | so I'll go ahead and make the announcement right here.
00:04:12.240 | But there have been a lot of challenges in my family over the last few months.
00:04:18.640 | And they've been really great things.
00:04:20.880 | My wife and I are expecting a baby.
00:04:22.800 | And so, that has been super exciting for us.
00:04:26.880 | It'll be here, hopefully, about summer of 2015.
00:04:30.160 | And so, that kind of gives me a neat kind of bracketing to my year,
00:04:35.440 | as far as to expect a baby in the summer.
00:04:37.360 | But the last few months have been very challenging around the household.
00:04:40.640 | She's had to work through some of the morning sickness for the last few months.
00:04:44.800 | And she's hardly been able to cook anything for the last few months.
00:04:48.720 | So, I've been doing most of the cooking.
00:04:51.440 | And she's been pretty sick, actually, this time around.
00:04:54.480 | So, that brings a lot of extra challenges to the household.
00:04:58.400 | But it also brings a lot of the blessings.
00:05:00.960 | And I've appreciated, even over the last few months,
00:05:03.440 | how simply due to being able to work from home on a flexible schedule,
00:05:08.400 | how I can mix up my working schedule in such a way
00:05:14.160 | that it actually works with my family's schedule.
00:05:17.040 | So, I do a lot of work early in the morning before they're up,
00:05:20.240 | later in the evening after they're in bed,
00:05:21.680 | and then a lot of times during nap times, things like that.
00:05:25.840 | So, it's just a real blessing.
00:05:26.880 | And even today, as I was working on it last week,
00:05:30.720 | in addition to my being sick, her being sick,
00:05:33.520 | the dogs also needed some veterinary care.
00:05:37.040 | And we're in the process of interviewing different midwives
00:05:40.560 | and trying to figure out who we're going to work with this baby.
00:05:44.480 | And even this morning, I had to flip the whole schedule upside down
00:05:48.800 | to have some morning appointments.
00:05:50.320 | And it was just a cool experience for me to be able to get up
00:05:54.400 | and actually took my family out for breakfast.
00:05:56.640 | It was neat. It was a beautiful day.
00:05:57.920 | And so, we went for breakfast in Stewart prior to some appointments
00:06:02.240 | and just being able to gain control of the day.
00:06:06.320 | And an encouragement to all of you who may feel frustrated,
00:06:10.240 | as I often used to feel,
00:06:12.240 | is that it wasn't that I didn't want to work.
00:06:13.760 | It was that I wanted a little bit of control over just my daily schedule
00:06:18.800 | and my ability to be with my family when they needed me
00:06:22.480 | and the ability to get my work done, but do it on a flexible schedule.
00:06:26.960 | And then I have days where you get sick
00:06:28.880 | and sometimes you just can't get the work done,
00:06:31.280 | at least when you desire to.
00:06:33.760 | But to me, it seems, as I've said many times on the show,
00:06:37.840 | it seems that many of the benefits that many of us desire
00:06:40.800 | from being financially independent can be achieved in a shorter time frame
00:06:46.320 | just simply by building up our own business
00:06:50.080 | or building up some sort of remote work agreement,
00:06:53.120 | just essentially regaining control of our schedules.
00:06:55.920 | And certainly many of us have occupations
00:06:58.560 | for which that's not going to be possible.
00:07:01.360 | If you are on call and you are an emergency room physician,
00:07:06.240 | you need to be there on the hours that you're there
00:07:08.000 | because the emergency room needs to be staffed.
00:07:09.760 | And all of us will have our own unique occupations.
00:07:13.760 | But at least for me, I'm grateful to be able to shut the show down
00:07:19.120 | for a day or two when I'm sick just to be able to recover,
00:07:21.520 | focus on my health and just try to get better.
00:07:24.720 | I'm grateful to be able to love and serve my family
00:07:28.240 | and to just simply discharge the responsibilities
00:07:31.840 | in a way that I'm able to do so.
00:07:33.360 | It's a real benefit and a real blessing.
00:07:35.200 | Thank you to all of you who are listening
00:07:36.960 | and who are helping this personal business get going.
00:07:40.960 | So just a little bit of appreciation.
00:07:44.160 | It was a neat day and I've been excited about today's show.
00:07:48.160 | I've put a lot of effort into just creating my thoughts
00:07:51.040 | and hopefully it'll be compelling to you.
00:07:53.760 | But I just want to share that with you.
00:07:55.280 | A, to announce our news.
00:07:56.400 | We finally were able to announce it to our family over Christmas,
00:07:58.960 | so that was exciting.
00:08:00.480 | And I wanted to share it with all of you.
00:08:02.800 | It's going to be a neat experience for the year.
00:08:04.960 | So take heart, keep working strong.
00:08:08.320 | Those of you who have a desire to run your own business
00:08:10.880 | or be involved and get more control over your schedule
00:08:13.600 | and to be able to have more facets of your life fully integrated,
00:08:17.040 | which is my desire.
00:08:18.560 | I don't want my life to be siloed
00:08:20.160 | like it seems to be in our modern culture.
00:08:22.880 | It so easily is.
00:08:23.840 | I desire for my life to be more integrated
00:08:26.560 | and not a millionaire yet,
00:08:29.200 | but I'm able to enjoy the benefits of having an integrated life.
00:08:33.360 | My wife was remarking, even this afternoon as we were driving home,
00:08:36.320 | she was talking about how nice it was
00:08:39.920 | not to have to schedule an appointment at a certain time
00:08:42.480 | and rush out from an employer and have to be back in 90 minutes
00:08:46.880 | and feel all stressed and frantic about just things changing
00:08:50.640 | and things being mixed up.
00:08:53.200 | It's just nice to have a little bit of control over your schedule.
00:08:56.160 | So I hope that's encouraging to some of you.
00:08:58.720 | I'm doing my best to get back in the swing of things,
00:09:02.000 | get on the routine here.
00:09:03.200 | I didn't realize how much it hurt not to have interviews in the can,
00:09:05.760 | so I'm going to try to build those up as much as possible
00:09:08.240 | and get back into the swing of things here.
00:09:09.920 | But let's get to the questions now.
00:09:11.680 | And we're actually going to start with a question from Sean.
00:09:15.680 | - Hey, Joshua.
00:09:17.680 | My name is Sean.
00:09:18.640 | I listen to your show quite a bit.
00:09:20.960 | I just was listening to one of your shows
00:09:23.840 | where you were talking about the program
00:09:25.280 | that you were going to set up regarding for do-it-yourselfers.
00:09:29.280 | And funny enough, I've been having this question on my mind for a while.
00:09:35.280 | I have two kids.
00:09:38.000 | One was just recently born and another one is two and a half
00:09:41.920 | and interested in buying life insurance.
00:09:45.040 | And I consider myself a do-it-yourselfer.
00:09:48.320 | At the same time, I would love some kind of program
00:09:53.120 | to be able to get an introduction to life insurance
00:09:55.760 | because I'm going to start that process to go acquire it.
00:10:02.560 | And I'm not sure if you have anything in your program that's beta regarding that topic,
00:10:08.560 | but if you're looking for someone to kind of test it out on,
00:10:12.160 | I'd be very interested in the program that you're putting together for that.
00:10:17.040 | And you could use me as a beta.
00:10:20.640 | The process I'd be willing to pay as well.
00:10:22.560 | But I really want to get educated on what is life insurance
00:10:27.440 | and be educated when I do go to purchase it
00:10:32.320 | that I'm well suited to make a good decision.
00:10:35.600 | Anyway, I love your show and thanks so much.
00:10:39.600 | Talk to you soon.
00:10:40.720 | It's a great question, Sean, and I thank you for calling it in.
00:10:43.440 | I don't know when I'll be able to actually get the program
00:10:47.520 | or get the educational materials that I mentioned established.
00:10:51.120 | So I'm good at giving information away for free
00:10:53.760 | and not so great at actually making money on it yet.
00:10:58.080 | So I'll go and give you a little bit of insight for free.
00:11:01.200 | Hopefully that'll help you to make some good decisions
00:11:03.120 | and then join the Irregulars Membership Program.
00:11:06.560 | That'll be the most helpful.
00:11:07.600 | So real quick on life insurance.
00:11:10.800 | Life insurance is actually one of those things
00:11:12.160 | where it's very difficult to be a DIYer.
00:11:14.480 | And the reason is that to the best of my knowledge,
00:11:17.360 | I have never found any company
00:11:19.600 | that sells insurance products without commissions.
00:11:23.040 | So regardless of what choice you make
00:11:26.240 | with life insurance products,
00:11:29.040 | there is going to be a commission involved,
00:11:31.120 | which means you're gonna be working
00:11:32.080 | with a life insurance agent.
00:11:33.680 | Even if you call one of the people that advertise on TV,
00:11:36.400 | they're selling exactly the same product
00:11:38.160 | that a local life insurance salesperson is selling
00:11:41.440 | at exactly the same rates.
00:11:43.280 | And they're just simply receiving the commission
00:11:46.080 | based upon their TV advertisement
00:11:47.840 | instead of working with a local agent.
00:11:49.600 | So I think life insurance is one of those things
00:11:51.840 | where you're well served by finding a local agent.
00:11:54.880 | Now, I do think you're well equipped.
00:11:56.720 | It's important to be well equipped
00:11:59.600 | in advance of that conversation to understand a little bit
00:12:02.160 | and that'll help you to make good decisions.
00:12:04.240 | But it's one of those areas where it's difficult
00:12:07.040 | to be a DIYer.
00:12:08.640 | There are no insurance companies
00:12:11.680 | that sell direct to the consumer
00:12:13.280 | without an agency structure,
00:12:16.240 | at least that I've ever found or that I'm aware of.
00:12:18.720 | And the ones that do,
00:12:20.400 | I should caveat that a little bit.
00:12:23.680 | There are a couple of companies that write themselves,
00:12:26.400 | put it this way,
00:12:27.680 | there are no competitive companies with products
00:12:29.520 | that I've reviewed so far
00:12:30.880 | that I would actually perceive to be market-leading products
00:12:34.640 | that sell directly to the consumer.
00:12:36.720 | And I think a life insurance agent
00:12:37.840 | can be valuable.
00:12:38.480 | Let me give you some ideas.
00:12:39.440 | So life insurance for kids,
00:12:41.280 | and to be specific,
00:12:43.040 | we're not talking about you and your wife
00:12:45.920 | having life insurance policies on your life
00:12:48.240 | to protect them for which they would be the beneficiary.
00:12:51.120 | We're talking about life insurance policies
00:12:53.760 | on your kids' lives.
00:12:55.200 | And this is actually one of the more controversial subjects
00:12:59.440 | in financial planning.
00:13:00.880 | You can read scathing essays on all sides of this issue,
00:13:05.520 | giving all kinds of advice.
00:13:07.520 | So I'll tell you how I parse the advice out,
00:13:10.960 | and I'll add my opinion to it.
00:13:12.960 | It is important to recognize at the beginning
00:13:15.680 | that this is actually a challenging area to plan in
00:13:19.520 | because it's so emotional for many people.
00:13:22.560 | Many people have a very difficult time talking about it,
00:13:28.400 | thinking about it,
00:13:29.200 | thinking about their child dying,
00:13:30.800 | thinking about what they would do if their child died.
00:13:33.600 | It's just a tough, tough,
00:13:35.680 | intensely emotional issue for people.
00:13:38.080 | And I think that's why the financial advice
00:13:40.080 | that is proffered on this subject is so varied.
00:13:43.280 | And so the rhetoric is so intense.
00:13:46.320 | It's because of the emotional intensity
00:13:50.320 | that exists for most people.
00:13:52.000 | I've actually have the privilege, I guess,
00:13:56.480 | misfortune, fortune of being able to be
00:13:59.520 | a little bit closer to the issue.
00:14:00.960 | My wife and I, we haven't lost a child,
00:14:04.080 | but I had a sister who died as an early teenager in my family.
00:14:09.040 | And I was younger than she was,
00:14:10.800 | but because of that, she had an illness
00:14:14.000 | and she died as an early teen.
00:14:16.080 | And so in working through that,
00:14:17.680 | I was able to see some of that from a close perspective
00:14:20.480 | in my family and was able to talk with my parents about it
00:14:23.760 | and learn some of what they've learned through it.
00:14:26.640 | One, I guess, just thought I would share on that
00:14:30.400 | is that it's very rare that finances
00:14:34.720 | are the major aspect of this.
00:14:38.080 | When a family loses a child, it's very rare that finance
00:14:41.920 | is at the center of the conversation.
00:14:44.160 | But I do believe that finances
00:14:47.040 | and having planned for that possibility
00:14:50.000 | can make a big difference.
00:14:52.400 | One of the most heart-wrenching statistics
00:14:54.080 | that I read sometimes is the number of families who,
00:14:59.440 | number of marriages that are broken apart
00:15:01.360 | after the death of a child.
00:15:02.480 | If you are, one of the things you need to be very aware of,
00:15:06.080 | if you and your spouse ever lose a child,
00:15:08.400 | that that is, I don't remember the statistics,
00:15:13.600 | but it is a major, major, major problem in many marriages.
00:15:19.920 | And you had better know that and start fighting for it.
00:15:24.000 | Because in dealing with the emotion
00:15:26.000 | and dealing with all of the guilt,
00:15:28.480 | everything that's associated with that, plan for that.
00:15:32.160 | That's been the number one piece of advice I've had
00:15:34.640 | when talking to people who have gone through that
00:15:37.120 | is you need to immediately focus on your marriage,
00:15:39.600 | immediately get help, immediately get counseling,
00:15:42.560 | and don't short-circuit that.
00:15:44.960 | Because you've got to emerge from that event
00:15:47.760 | with your marriage intact.
00:15:49.040 | And I do think, again, that having some financial planning
00:15:52.160 | in place can help.
00:15:54.400 | So this is an issue that's important to me
00:15:58.080 | for, I guess, three reasons.
00:15:59.360 | Number one, I have a sister who died.
00:16:01.840 | Been through it with that.
00:16:03.520 | Number two, I've had clients that I've worked with,
00:16:05.520 | and prospective clients,
00:16:07.520 | and I won't share any case details,
00:16:09.840 | but one of the most heart-wrenching scenarios in my life
00:16:13.760 | was a child that I actually wrote a life insurance policy on.
00:16:19.360 | And then the parents later discontinued the policy,
00:16:23.040 | and then the child died.
00:16:24.400 | And they needed the insurance desperately.
00:16:27.040 | And it was a very difficult responsibility to feel
00:16:34.960 | as the planner.
00:16:36.000 | And I again and again racked my brains.
00:16:38.240 | Is there something I could have done differently
00:16:40.000 | to have kept the insurance in force for them?
00:16:42.880 | It was really tough for me.
00:16:44.720 | And then it's also just important to me
00:16:46.000 | because I have kids, two kids now,
00:16:48.480 | one who's pre-born and one who's young.
00:16:52.880 | So I've done planning for my own kids,
00:16:54.640 | which I'll get to in a minute.
00:16:55.600 | So let's talk about philosophies.
00:16:57.200 | There are three major philosophies
00:16:59.280 | in mainstream personal finance
00:17:01.440 | that I have been able to identify
00:17:03.040 | when people talk about this issue.
00:17:05.440 | And those philosophies are primarily about
00:17:09.680 | the purpose and the amount of the insurance.
00:17:12.080 | The first major philosophy is actually the least common.
00:17:17.200 | And essentially it's this.
00:17:20.320 | As a parent, you invest heavily in your children.
00:17:25.440 | And financially, you invest heavily.
00:17:28.080 | You invest a lot of money in paying for their birth.
00:17:31.520 | For some people, paying for their conception
00:17:33.840 | or paying for their adoption.
00:17:35.440 | Some people, you invest heavily in their birth.
00:17:39.280 | You invest heavily in their care
00:17:41.360 | and their nurture over the years,
00:17:43.680 | whether that's from the perspective of providing
00:17:47.040 | food and housing, providing entertainment,
00:17:50.560 | providing educational opportunities.
00:17:53.600 | As parents, we invest heavily in our kids.
00:17:56.640 | And so based upon that, some people have the philosophy
00:18:00.640 | that because you've invested heavily in your child,
00:18:04.320 | you need to protect yourself
00:18:05.680 | such that your investment will pay off.
00:18:08.880 | If your child dies prematurely,
00:18:11.120 | then your investment is essentially for naught.
00:18:14.880 | So therefore, you should buy a lot of life insurance
00:18:19.120 | on their life.
00:18:19.840 | Now, this is every parent I've ever mentioned
00:18:22.800 | and given Joshua's little three philosophy speech to.
00:18:26.400 | Every parent that I've ever mentioned that to you
00:18:31.360 | is kind of in the US has looked at me and said,
00:18:33.680 | "Are you nuts?
00:18:35.280 | What's wrong with you?"
00:18:36.080 | This is a philosophy that almost no one in the US
00:18:38.960 | actually goes for.
00:18:40.240 | But that frankly, I think much of the world
00:18:43.680 | will, does naturally understand this.
00:18:46.320 | We do spend a lot of money on our kids.
00:18:49.280 | And in the United States, at least,
00:18:51.600 | maybe in Canada too, or other, I don't know,
00:18:54.880 | other societies, we've developed the idea
00:18:57.600 | that we do so and then we send them off
00:18:59.600 | and then we never rely on them.
00:19:01.120 | We develop our kids and we send them off
00:19:03.920 | and we get them out of the house at 18 years old
00:19:05.600 | and they're done, they're gone, they're on our own.
00:19:07.040 | Now we're gonna do our own thing.
00:19:08.640 | We have this very can-do spirit about us that says,
00:19:12.560 | "Yes, I do that and then I'm gonna send the kids off."
00:19:15.200 | And so we view ourselves in fact as failures if we don't.
00:19:19.280 | So in the US American culture, we would view ourselves,
00:19:23.360 | generally speaking, as a failed adult
00:19:26.800 | if we find ourselves dependent upon our children
00:19:30.320 | in our old age.
00:19:31.280 | I think it's a little foolish, frankly.
00:19:36.000 | I prefer the more integrated family cultures
00:19:39.680 | that exist in much of the world.
00:19:41.040 | And I think it's a little foolish actually
00:19:44.880 | practically in the US American context.
00:19:46.720 | The fact is that we do depend on our children financially
00:19:50.160 | and the numbers and the trends and the statistics
00:19:52.720 | indicate that even more people are going to in fact
00:19:56.320 | be depending upon their children in their old age.
00:19:59.040 | I've seen this in various trends.
00:20:02.160 | I'm interested, I mentioned on a recent show
00:20:04.880 | about the fact that some of the more home models,
00:20:09.360 | floor plan models for model homes
00:20:11.920 | from some of the large home builders,
00:20:13.920 | it's becoming quite popular to purchase a home
00:20:17.200 | with an included suite for extended family.
00:20:21.680 | So whether that's built into the house
00:20:24.240 | or whether that's an attached garage
00:20:26.320 | or an attached apartment, something like that,
00:20:28.400 | that's become a growing trend in the home building industry.
00:20:31.840 | If you just look at the statistics
00:20:33.120 | on the amount of money that the average US American
00:20:35.760 | actually has and the amount of money
00:20:38.720 | upon which the average US American
00:20:41.200 | is actually going to retire,
00:20:43.200 | it's clear that it's not possible
00:20:45.360 | to live on that amount of money.
00:20:46.720 | And then as going forward
00:20:49.520 | as the US entitlement programs constrict,
00:20:52.960 | as Social Security and Medicare,
00:20:56.160 | especially and Medicaid as well,
00:20:58.320 | but that's less applicable necessarily to older people,
00:21:00.880 | but as Social Security and Medicare over time,
00:21:03.680 | demographically and just from the sheer force of numbers,
00:21:08.400 | especially demographic numbers,
00:21:10.320 | as those programs constrict,
00:21:12.560 | it's not possible for the average retiree
00:21:17.360 | to be able to retire.
00:21:18.880 | And so this trend is gonna continue.
00:21:21.040 | So I actually prefer the Asian model
00:21:22.800 | or that's where I've seen it the most,
00:21:24.640 | but who knows, maybe it's also Latin American.
00:21:26.640 | I don't know what culture is all.
00:21:28.400 | It seems like every culture that I've been in
00:21:30.320 | except the US American culture.
00:21:32.240 | But I like the idea of invest in your kids
00:21:36.640 | and then have your kids support you in your old age.
00:21:40.080 | Frankly, I can't figure out why 70-year-old parents
00:21:43.680 | don't wanna live with their kids.
00:21:45.040 | Now, maybe I'll feel that way when I'm 70 myself
00:21:47.840 | and I'm like, "I don't wanna ever wanna see my kids again.
00:21:49.760 | "I'll go see them once a year in the motor home,"
00:21:52.080 | type of thing.
00:21:53.200 | But I personally have a,
00:21:54.560 | I think it's ideal for families to live together.
00:21:56.560 | But getting off of that,
00:22:00.880 | I mean, the point is that I've never found a US American,
00:22:04.720 | really, who's willing to purchase
00:22:07.040 | a big life insurance policies on their kids' lives.
00:22:09.120 | Because of the fact that they've invested $150,000
00:22:11.760 | in raising a child and the fact that
00:22:14.240 | they're gonna need to be cared for
00:22:16.480 | if their child dies prematurely.
00:22:21.520 | Now, I think it's a perfectly rational
00:22:23.360 | economic model myself.
00:22:24.640 | And I think it makes a lot of sense,
00:22:27.440 | but I've never gotten many people to buy that.
00:22:31.520 | So I'll cover exactly how to fund these models in a minute.
00:22:35.280 | But that is the first one that I've seen.
00:22:37.520 | The second primary philosophy that I've seen
00:22:40.400 | espoused in financial literature
00:22:42.320 | is the idea that you need to have
00:22:44.960 | some small or minimal amount of life insurance,
00:22:47.680 | which is adequate to cover funeral costs.
00:22:51.120 | This is what you read primarily
00:22:52.480 | in mainstream financial publications.
00:22:54.960 | And this one is interesting to me
00:22:58.400 | because although I think it's logical
00:23:02.320 | and I think it's well-meaning,
00:23:05.760 | I think it's mostly irrelevant for most people.
00:23:10.400 | It's a good example of where general advice
00:23:13.680 | just doesn't cut it, in my opinion.
00:23:15.360 | Because if you're wealthy,
00:23:17.680 | to define wealthy, let's just say
00:23:21.120 | middle-class, mass affluent, or up.
00:23:23.200 | If you're wealthy, you can simply afford
00:23:26.400 | to pay for the funeral if your child dies.
00:23:29.760 | Funerals are not that expensive
00:23:31.600 | unless you go all out with it.
00:23:33.040 | And even if you do go all out,
00:23:36.080 | you can certainly finance it.
00:23:37.520 | You can certainly have emergency funds
00:23:39.200 | and cash reserves.
00:23:40.080 | You can pool the money from other places
00:23:42.240 | and you can cash flow it over
00:23:44.000 | just a series of payments over time.
00:23:46.320 | So if the idea is purchase a minimal amount
00:23:50.720 | of life insurance, which is sufficient
00:23:52.080 | to cover the funeral cost,
00:23:53.360 | well, in this case, given the low probability
00:23:56.960 | of it happening, I don't think it's a big deal
00:24:00.000 | for wealthy people because if it does happen,
00:24:01.840 | you can just self-insure it easily.
00:24:03.920 | Remember our little model of insurance
00:24:05.600 | which we've talked about in the past?
00:24:07.200 | It was actually episode 91 where I gave you
00:24:11.600 | a model of figuring out do I actually need insurance?
00:24:14.160 | So you can find that show
00:24:15.200 | at radicalpersonalfinance.com/91.
00:24:17.600 | So in this model that I gave you,
00:24:20.640 | where I said we look at risk factors
00:24:23.760 | on a scale of how severe is the expected loss
00:24:29.600 | and then how frequent is the expected loss.
00:24:32.640 | And for risks that have a low expected frequency
00:24:38.160 | and a low expected severity,
00:24:40.800 | we would just simply retain that risk.
00:24:42.400 | And so the risk of a child dying,
00:24:45.040 | it's very infrequent, extremely infrequent,
00:24:48.480 | statistically speaking.
00:24:50.000 | And in the case of a mass affluent
00:24:52.480 | or the middle class and above person,
00:24:55.120 | it's a relatively low severity
00:24:56.880 | from a financial planning perspective
00:24:58.320 | to pay for the funeral.
00:25:00.080 | So we would just simply retain that risk
00:25:02.160 | and self-fund it essentially
00:25:06.320 | with a general savings fund.
00:25:08.480 | Now the flip side of this is
00:25:10.160 | let's say that you're not wealthy.
00:25:11.680 | You're not in a situation
00:25:14.000 | where you're not middle class and above.
00:25:16.720 | You're poor or just getting started or struggling.
00:25:19.840 | Well, in this situation, I look at that and I say,
00:25:22.160 | is that actually going to be
00:25:23.840 | my primary bit of financial advice
00:25:25.360 | for someone who's struggling
00:25:26.400 | that they should focus on taking care
00:25:28.720 | of the risk if their child dies?
00:25:31.280 | I would probably just run,
00:25:32.320 | I would just keep that risk even so
00:25:34.640 | and deal with it if it happened
00:25:36.720 | because the expected frequency,
00:25:40.240 | the statistical potential of it is so low.
00:25:44.000 | And there are so many other things
00:25:45.840 | screaming for those dollars.
00:25:47.440 | It would seem like a not very high priority idea for me.
00:25:54.160 | So also if somebody is poor or struggling financially,
00:26:00.480 | then the question is always,
00:26:02.000 | are they going to be able to keep the policy in force?
00:26:04.480 | Are they going to be able to fund the premiums?
00:26:06.240 | And that's a real challenge.
00:26:09.760 | So this is one of those things
00:26:10.800 | where mainstream financial advice,
00:26:12.960 | I read it and I say, that's a good idea,
00:26:15.040 | but the middle class and rich don't need it
00:26:17.920 | and the lower class probably can't afford it
00:26:20.480 | and there are other priorities higher in importance.
00:26:24.080 | So it makes sense on the surface,
00:26:26.720 | but doesn't make sense to me.
00:26:27.840 | Just as an advice, that's just Joshua's opinion.
00:26:29.840 | Now on that, remember that funeral costs
00:26:34.240 | are only part of the cost
00:26:35.280 | and I'll come back to that in a minute,
00:26:37.920 | but this is what's often forgotten
00:26:39.760 | is that the actual cost of paying for a funeral
00:26:41.920 | is probably not that high,
00:26:44.320 | but that there may be other associated costs,
00:26:47.360 | especially medical bills.
00:26:49.200 | And this is one of those things that really hurts people.
00:26:51.840 | This is another reason why I say,
00:26:52.960 | can the poor middle class keep the policy in force?
00:26:56.000 | Because what often, if for example,
00:26:58.960 | if a child is sick and dies
00:27:00.960 | at the end of an extended illness,
00:27:02.640 | then in this scenario,
00:27:04.480 | a lot of times the money's been exhausted previously
00:27:08.720 | and there are many, many bills
00:27:09.920 | and that's when the insurance is most needed
00:27:11.440 | and it's hard to afford.
00:27:12.880 | So I'll come back to that in a minute.
00:27:14.000 | So that's the second one.
00:27:15.520 | So philosophy one was you invest heavily in your kids,
00:27:17.760 | buy a lot of life insurance on them.
00:27:19.360 | Philosophy two is you need some insurance
00:27:21.040 | just to cover funeral costs.
00:27:22.960 | Or my philosophy, my preferred philosophy
00:27:26.080 | is actually number three,
00:27:26.880 | which is essentially you probably need some life insurance
00:27:30.160 | if you can afford it.
00:27:31.280 | And the cool thing is,
00:27:32.320 | is that you can cover the life insurance now
00:27:34.480 | and more importantly,
00:27:36.160 | you can help your child with establishment in the future.
00:27:39.680 | And this is the approach that has made the most sense to me.
00:27:43.440 | It's what I've chosen to do for my son.
00:27:47.760 | And it makes sense to me
00:27:51.680 | because it allows me to think in a couple of ways
00:27:54.720 | and I'll explain it.
00:27:55.440 | But one of the ways,
00:27:56.480 | one of the unique things that you can do
00:27:58.240 | with insurance for kids
00:27:59.760 | is you can add a couple of options.
00:28:01.200 | And one of the more important riders
00:28:03.280 | that you would add onto an insurance policy
00:28:04.960 | is called an additional purchase benefit rider.
00:28:08.720 | And that additional purchase benefit
00:28:10.960 | allows the child to purchase additional amounts of insurance
00:28:15.040 | in the future
00:28:18.880 | with no additional underwriting requirements.
00:28:23.200 | So no medical exams.
00:28:24.800 | And this can be extremely helpful
00:28:26.880 | both from the physical perspective
00:28:30.400 | but also more importantly in my mind,
00:28:32.480 | some of the occupational things
00:28:34.000 | that can affect life insurance underwriting.
00:28:35.920 | One of the keys is when,
00:28:38.320 | so I bought my son's insurance policy for him.
00:28:42.160 | Now, granted I was a life insurance agent
00:28:44.240 | so I probably was more motivated to do this than most people.
00:28:46.240 | But I bought it for him when he was I think two weeks old
00:28:49.360 | and I think that was the requirement,
00:28:51.920 | if my memory is correct,
00:28:52.880 | something like child has to be 15 days old
00:28:54.880 | before they can qualify for the insurance policy.
00:28:56.960 | But when you buy one,
00:29:00.080 | buy a policy for a child at that age,
00:29:01.760 | hopefully the child doesn't have any health risks.
00:29:05.200 | Hopefully they haven't started smoking.
00:29:07.200 | Hopefully they haven't indulged in recreational drug use
00:29:11.840 | or something that's gonna affect their insurance
00:29:14.080 | medical underwriting.
00:29:15.920 | And hopefully they haven't started
00:29:17.200 | riding bulls for a hobby or flying airplanes yet.
00:29:21.520 | So you can purchase that insurance for them.
00:29:23.760 | And then on my son's policy
00:29:25.200 | is almost a half a million dollars of additional purchases,
00:29:27.920 | amounts that will be offered to him at regular intervals
00:29:31.040 | between the ages of 20 and 40.
00:29:33.280 | So his policy can go from a small token policy now
00:29:37.600 | to a fairly hefty life insurance policy
00:29:40.240 | over that course of time.
00:29:41.600 | And this was actually the big reason why I did it.
00:29:44.960 | Yes, I do value having the life insurance policy
00:29:49.360 | in effect for him if he dies.
00:29:52.240 | That would be important
00:29:53.920 | because if he were to die prematurely,
00:29:56.640 | then it would allow my wife and I
00:29:59.200 | some breathing room, some time just to step back
00:30:01.280 | from whatever employment or business pursuits
00:30:05.360 | that we were under to take time to heal
00:30:08.480 | and to grieve and to recover.
00:30:09.920 | But it's also just,
00:30:13.280 | yes, for my son, it's a whole life insurance policy,
00:30:16.480 | which I'll cover in just a moment
00:30:18.160 | because this is one of the other major areas of controversy
00:30:21.360 | with what type of insurance do you get for your child.
00:30:24.800 | But my son's is a whole life policy.
00:30:27.760 | And yes, the cash value, yeah,
00:30:28.960 | theoretically it might be something,
00:30:31.280 | but that wasn't the primary motivator for me in doing it.
00:30:33.760 | The big motivator was to lock in a policy
00:30:36.400 | in the insurance industry.
00:30:38.800 | We have this horrible lingo
00:30:39.920 | is called to protect your insurability,
00:30:42.560 | which nobody outside of the insurance industry
00:30:44.240 | ever says anything like that.
00:30:45.520 | But insurance agent like to spout that all the time.
00:30:47.520 | We've got to protect your insurability,
00:30:49.040 | which means we would make sure
00:30:50.640 | that you don't need to pass a medical exam in the future.
00:30:53.200 | And again, this may be super helpful.
00:30:55.920 | Let's say that he has something like asthma
00:30:58.640 | or develops autism
00:31:00.400 | or develops some other heart condition, lung condition.
00:31:04.960 | He can't get any life insurance,
00:31:06.480 | but then he starts a family and he needs life insurance.
00:31:10.160 | Well, at least with the policy that he has now,
00:31:12.480 | then he's protected
00:31:14.160 | and he's able to get additional amounts of life insurance
00:31:16.640 | to cover his financial needs and financial goals.
00:31:19.600 | And then I mentioned it already,
00:31:21.760 | but just to stress it,
00:31:23.120 | the health stuff is one side,
00:31:24.240 | but then there's also the occupation and avocation.
00:31:28.400 | So occupation, he goes and becomes
00:31:30.800 | a deep sea underwater welder on oil rigs in the North Sea,
00:31:35.280 | probably a fairly dangerous occupation.
00:31:37.520 | I'm not sure how the insurance company is going to view that.
00:31:39.840 | Or he goes and becomes a NASCAR driver.
00:31:42.400 | They're not writing life insurance policies on his life
00:31:44.960 | in that scenario,
00:31:46.320 | but he's got the policy.
00:31:47.440 | At least he can continue to get some insurance
00:31:49.440 | regardless of his occupation or hobbies.
00:31:52.400 | The day you sign up for flying lessons,
00:31:54.560 | your life insurance rates drastically increase.
00:31:57.200 | It's absurd.
00:31:58.320 | So by having that in advance, he has some protection.
00:32:01.520 | Those are the three primary categories that I think of.
00:32:06.560 | And you've got to just pick kind of what makes sense to you.
00:32:09.360 | Most people, now there are other categories.
00:32:12.560 | So other categories would be,
00:32:14.000 | are we going to set aside large amounts of money
00:32:17.440 | in cash value life insurance contracts for tax avoidance?
00:32:21.520 | Are we going to hold life insurance contracts in a trust
00:32:24.720 | as part of our trust tax planning?
00:32:27.200 | Are we going to set aside insurance contracts
00:32:29.680 | outside of an estate
00:32:30.880 | for generational estate planning purposes?
00:32:33.040 | Those are all applicable,
00:32:34.800 | but they're a bit esoteric
00:32:36.080 | and they're not really of interest to the,
00:32:38.080 | they're not applicable to the normal person.
00:32:41.040 | So let's just set them aside for a moment.
00:32:42.480 | Let's just deal with those three things.
00:32:44.160 | Those are my little three categories
00:32:46.000 | of how I think of them.
00:32:47.040 | So need lots of insurance,
00:32:51.040 | need just a little bit of insurance to cover,
00:32:53.280 | and yeah, need some insurance,
00:32:54.640 | but we're also doing it for other purposes.
00:32:56.400 | Incidentally, if you have difficulty
00:33:00.560 | with the topic of owning life insurance on your kid's life,
00:33:02.960 | or if you're a financial planner,
00:33:06.160 | talking with people about this topic,
00:33:08.560 | then one thing you might consider doing
00:33:12.560 | is think about it as a legacy fund.
00:33:15.840 | And with a legacy fund,
00:33:19.040 | personally, I'm okay with the idea of loaning life insurance,
00:33:23.280 | but lots of people aren't.
00:33:24.080 | And so if you can just think of it as,
00:33:25.760 | instead of how would I benefit
00:33:27.280 | or how would I profit from my child's death,
00:33:29.520 | think what would, if my child died prematurely,
00:33:32.080 | what would I want their legacy to be?
00:33:35.040 | And I'll give you two examples that I've heard of.
00:33:37.040 | Years ago, I heard a talk,
00:33:38.960 | it was actually a Northwestern mutual agent
00:33:40.960 | from the company I formerly represented.
00:33:44.800 | And that agent was talking about the fact
00:33:48.400 | that he'd been a life insurance agent for a while.
00:33:50.560 | And then tragically, the first life insurance contract
00:33:53.920 | that he had put in force,
00:33:57.200 | that he actually received payment from,
00:34:00.080 | was actually his own child's.
00:34:04.320 | And one of his sons,
00:34:06.000 | tragically had been on his way back to college,
00:34:07.760 | had been involved in a car accident
00:34:09.920 | and was rear-ended by a semi-truck and had died.
00:34:16.240 | And so the first death benefit,
00:34:17.760 | death claim that he ever filed for a policy he had written
00:34:20.880 | was on his own sons.
00:34:22.320 | Well, he used that money as seed money.
00:34:25.120 | And I believe he started a foundation,
00:34:27.200 | something like the Truck Safety Coalition
00:34:28.960 | or something like that,
00:34:30.160 | where they were involved in lobbying
00:34:32.400 | for greater laws and ideas and regulations
00:34:39.120 | on the over-the-road trucking association industry.
00:34:43.440 | And so he used that to establish a foundation,
00:34:48.160 | and that was in honor of his son.
00:34:51.520 | Another one I remember recently
00:34:52.880 | is I recently heard a presentation
00:34:55.520 | by the sister of a young lady named Dori Slosburg.
00:35:00.240 | And there's a foundation here in Florida
00:35:01.840 | called the Dori Slosburg Foundation
00:35:03.760 | that's also involved in traffic safety issues.
00:35:08.560 | And Dori Slosburg was a young lady.
00:35:11.040 | She died as a teenager in a traffic accident.
00:35:14.000 | And her father and her family established a foundation
00:35:19.680 | and have made a lot of progress
00:35:21.920 | in promoting their agenda of greater traffic safety ideas.
00:35:25.760 | And they did it.
00:35:26.640 | They didn't have anything to fund it with,
00:35:28.720 | but they started with just simply their own money.
00:35:30.960 | My point is sometimes if things like that happen,
00:35:33.360 | wouldn't it be a blessing
00:35:35.040 | if there were a life insurance policy
00:35:37.040 | that could actually pay out money for...
00:35:39.600 | that could actually pay out money to help in that scenario?
00:35:43.840 | Hopefully that's helpful to you.
00:35:46.720 | Now, how do you actually buy the policy?
00:35:48.880 | Now, this is another one of those things
00:35:51.040 | where the tough part is the advice
00:35:52.400 | doesn't seem to match up to real life.
00:35:54.160 | One of the best examples of this
00:35:56.480 | is advice on buying term life insurance.
00:35:59.760 | I've read several essays from people,
00:36:02.240 | very well-meaning,
00:36:03.920 | and their advice was
00:36:06.000 | buy level term life insurance policy for your minor child
00:36:09.680 | and buy a large life insurance policy.
00:36:13.200 | Now, I've looked and I've looked and I've looked.
00:36:14.960 | I've never been able to find a life insurance company
00:36:17.040 | that will actually sell a standalone term life insurance policy
00:36:21.120 | for a minor child under the age of 18.
00:36:23.040 | If you know of one, let me know.
00:36:25.360 | Comment on today's show notes,
00:36:26.880 | radicalpersonalfinance.com/132 for today's show.
00:36:31.040 | I would love to know about them,
00:36:32.160 | but I've never been able to find one.
00:36:34.160 | And I do actually understand
00:36:36.800 | from the insurance company's perspective
00:36:38.880 | why they wouldn't desire to offer one.
00:36:41.760 | But it's funny, I've read that advice in written essays
00:36:45.360 | and I've never been able to find a company
00:36:48.000 | that would offer that kind of policy.
00:36:49.360 | Term life insurance is generally not sold to minors.
00:36:55.120 | If you want, if your child is 18 and over,
00:36:57.280 | it's simple, I've done this for some parents actually
00:37:01.920 | who when their child is going to college,
00:37:04.240 | they're getting ready to write a very large check
00:37:06.160 | for college tuition.
00:37:07.280 | And they go ahead and put a larger term life insurance policy
00:37:11.920 | in force on their child's life.
00:37:13.840 | And if you're gonna write a check for $50,000 a year
00:37:17.520 | of private school tuition,
00:37:19.040 | buy a life insurance policy for $250,000
00:37:22.320 | a term life insurance for an 18 year old
00:37:25.200 | would be under 20 bucks a month.
00:37:27.680 | So buy a term life insurance policy
00:37:30.880 | and cover yourself and cover them.
00:37:34.320 | If your child is under 18, make sure,
00:37:37.840 | or excuse me, over 18 on that scenario,
00:37:40.080 | make sure it's an annual renewable
00:37:42.080 | term life insurance policy.
00:37:43.440 | Pay for it for a few years and then transfer it to them
00:37:46.000 | if they want it or drop it if you don't need it anymore.
00:37:48.320 | But make sure it's annual renewable term
00:37:50.000 | instead of level term
00:37:50.960 | so you have more flexibility.
00:37:52.880 | If your child's under 18 then
00:37:54.720 | and you need a lot of life insurance policy on their,
00:37:57.120 | a lot of life insurance coverage on their life,
00:37:59.200 | you're not gonna be able to do it with term life.
00:38:02.400 | The closest that I've been able to figure out
00:38:04.560 | that you can get to it would be to do some sort
00:38:07.440 | of stripped out universal life insurance policy.
00:38:10.160 | So you could take a universal life policy,
00:38:12.480 | fund it minimally so that you're essentially
00:38:14.880 | buying term protection with very little cash accumulation
00:38:18.160 | and the policy will expire at an earlier age.
00:38:20.880 | That can get you pretty close
00:38:22.720 | and you might be able to get one of those in force.
00:38:25.680 | Or if you have the cash flow,
00:38:27.200 | you can go and set up a traditional
00:38:29.760 | whole life policy of some kind.
00:38:31.360 | I personally have a bias toward being conservative here.
00:38:35.440 | Me as an agent, I will usually lean in the direction
00:38:41.600 | of a more conservative approach,
00:38:43.280 | a whole life policy, a life paid up at 65,
00:38:46.800 | something like that.
00:38:47.760 | Where there's plenty of cash to keep the policy going.
00:38:50.160 | And I would look with hard, I'd be slow.
00:38:55.200 | If you're struggling with the cash flow,
00:38:58.640 | it's probably not the right fit for you in my opinion.
00:39:03.360 | It's just probably not.
00:39:05.840 | So I tend to be conservative
00:39:08.000 | 'cause I don't want the policy to fall apart
00:39:09.600 | at an inopportune time.
00:39:11.280 | So do your aggressive investing
00:39:13.840 | with another financial instrument
00:39:15.520 | and stick to, I like to be conservative with insurance
00:39:17.920 | is my bias.
00:39:18.560 | Shop carefully.
00:39:20.320 | You don't wanna make a mistake here.
00:39:21.680 | You wanna make sure that you have a policy
00:39:23.760 | that your child will love owning in a few decades time
00:39:26.240 | when you transfer it to them.
00:39:27.680 | Not something they're gonna wake up owning at 30
00:39:29.680 | and just be ticked off that mom and dad
00:39:33.120 | threw their money away
00:39:34.080 | into a poorly designed insurance contract for many years.
00:39:37.280 | So make sure the policy is well designed.
00:39:39.520 | Make sure that the fees are low, the expenses are low.
00:39:44.160 | I'm personally, I'm biased in favor
00:39:46.640 | of a mutual insurance company
00:39:49.200 | instead of a stock insurance company
00:39:50.560 | to remove the percentage of returns
00:39:53.440 | that goes to the owners of the company
00:39:55.120 | and get it back into the insurance contract.
00:39:57.120 | So I'm also, again, biased in favor
00:40:00.480 | of a conservative policy
00:40:01.840 | instead of an aggressive equity-based approach.
00:40:04.320 | Although I could actually argue for those as well.
00:40:06.160 | And then also if you're gonna get big insurance policies
00:40:09.120 | for yourself, excuse me, for your kids,
00:40:10.960 | you better have big insurance policies on yourself.
00:40:13.520 | So if you're wondering,
00:40:15.520 | you can't go and buy a million dollar life insurance policy
00:40:18.400 | on your 10 year old son or daughter's life
00:40:21.120 | if you don't have 10 or $20 million of coverage
00:40:23.760 | in force on you.
00:40:26.240 | And it's all done based upon the ratio.
00:40:28.080 | So that would be how I would handle it for number one,
00:40:32.000 | if you're trying to get a big insurance policy
00:40:34.800 | to protect your, essentially your investment in your child.
00:40:37.600 | Number two, if you're just trying to cover yourself
00:40:40.960 | for a burial policy
00:40:42.400 | and you just want something that's the minimum,
00:40:44.640 | here are the best route is just to simply get a term rider.
00:40:48.400 | And you can get this in a few different ways.
00:40:51.280 | I've never been able to find, like I said,
00:40:52.720 | a standalone term product,
00:40:54.400 | but you can easily get a term rider
00:40:56.160 | in a number of different ways.
00:40:57.440 | Start with your group benefits at work.
00:40:59.360 | That's usually gonna be the cheapest way
00:41:01.040 | and the simplest way.
00:41:02.160 | So you add on 5,000 bucks for each of your kids
00:41:04.800 | and it costs you 72 cents a month.
00:41:06.400 | Start with that.
00:41:08.400 | Number two is look,
00:41:11.760 | if you don't have anything, your group benefits,
00:41:14.240 | look for things like your auto coverage,
00:41:16.400 | your property and casualty.
00:41:18.880 | Maybe there might be some benefit that's available to you
00:41:21.280 | as a simple add on there.
00:41:22.960 | Banks sometimes offer this thing.
00:41:25.200 | I've seen advertisements for it.
00:41:26.800 | And then look at your personal term insurance.
00:41:28.640 | If you have life insurance, term life insurance yourself,
00:41:32.400 | look to see if your company offers a rider.
00:41:34.640 | Some do, some don't.
00:41:35.680 | Some policies do, some policies don't.
00:41:38.320 | You have to look at each individual situation,
00:41:41.840 | but a lot of the companies that do,
00:41:43.200 | I don't like them 'cause they're kind of gimmicky about it.
00:41:45.200 | They try to do the family coverage thing
00:41:46.800 | to sell more insurance.
00:41:47.840 | But maybe you're already in that situation
00:41:51.440 | and you have that option.
00:41:53.120 | Number three, a balanced approach.
00:41:54.720 | It's like, again, this is what I've done for my son.
00:41:57.040 | It's a relatively small whole life policy.
00:41:59.040 | For him, it's 25,000 bucks of whole life insurance.
00:42:02.640 | It's well-designed, carefully designed with low expenses
00:42:05.520 | and high cash and credit.
00:42:06.800 | And high cash accumulation.
00:42:08.080 | So that way, I just want it to always be around.
00:42:11.920 | It's possible that this policy could just simply be
00:42:15.360 | his permanent burial policy that he always keeps around
00:42:18.320 | for the rest of his life.
00:42:19.600 | And it's just purely intended to provide
00:42:21.520 | some cash liquidity at death.
00:42:23.200 | I'm not saying, by the way, one of the needs that I learned
00:42:28.160 | that I never appreciated until I actually went through it
00:42:30.640 | with a client was the value of having
00:42:33.360 | some sort of life insurance policy available.
00:42:36.720 | At death.
00:42:37.600 | Even if you don't necessarily need it,
00:42:39.440 | because you can afford to die and you can afford
00:42:41.200 | to pay for your funeral.
00:42:42.320 | I had a unique experience with a client who was retired.
00:42:48.160 | They were in their 80s.
00:42:52.160 | And they were retired.
00:42:53.840 | They were multimillionaires.
00:42:56.400 | Not multi-multi, but multiple millions.
00:42:58.560 | And my client, the wife, died unexpectedly.
00:43:04.640 | And it was very interesting to go through,
00:43:07.680 | because at this time in their financial life,
00:43:12.320 | they had several homes that they were trying to sell
00:43:14.880 | that were on the market, but with a slow--
00:43:17.600 | this was a couple of years ago--
00:43:18.800 | with slow-moving real estate market.
00:43:21.200 | They weren't selling quickly.
00:43:22.560 | And they had some assets locked up in a trust
00:43:26.320 | and some illiquid trust assets.
00:43:28.240 | So the interesting thing was, even though this client
00:43:31.840 | was a multimillionaire, it was stressful
00:43:34.960 | to them to handle the final expenses.
00:43:39.040 | And as I remember, it was something--
00:43:42.000 | somewhere between $50,000 and $100,000
00:43:44.720 | of life insurance that was there.
00:43:48.320 | And it was such a blessing to this client to get that check.
00:43:51.360 | It was about $80,000.
00:43:53.760 | And it was such a blessing for this client
00:43:55.120 | to receive the check for $80,000,
00:43:57.440 | because what it allowed him--
00:43:58.560 | knowing that that was in force--
00:44:00.160 | it allowed him to provide for the type of funeral
00:44:02.640 | that he wanted to provide for his wife.
00:44:04.640 | Without being concerned about the expense up front.
00:44:07.920 | And so it was interesting.
00:44:09.600 | I never imagined that a multimillionaire would--
00:44:12.160 | I'd always been generally in disfavor of the idea
00:44:16.240 | of having burial policies that are whole life policies
00:44:19.280 | that are going to be around as burial policies.
00:44:22.000 | Never made sense to me.
00:44:22.880 | I thought, if you've got money, just take some money
00:44:24.720 | from stock and move it.
00:44:26.000 | But it really opened my eyes to something
00:44:27.920 | that I had been previously blind to.
00:44:30.400 | So for my son, maybe it'll just be around
00:44:32.560 | for his own burial down the road.
00:44:36.080 | I don't know.
00:44:36.720 | At an old age, I'll transfer it to him at some point.
00:44:40.000 | The policy will probably quick pay in his 20s,
00:44:43.040 | depending on interest rates.
00:44:44.800 | So quick pay, meaning that I won't
00:44:46.880 | have to pay any more premiums on it
00:44:48.720 | from when it's in his 20s.
00:44:49.920 | It won't have a ton of money, because I don't put much money
00:44:52.560 | into it.
00:44:52.880 | I think it's less than $20 a month that I put into it.
00:44:55.440 | And for me, the insurance is simply nice to have, in my mind.
00:45:00.560 | If he died, I'd arrange for cheap burial arrangements
00:45:03.120 | and pay cash.
00:45:04.400 | And I have the insurance, but I don't need it for that.
00:45:07.760 | Just pay cash for the funeral or finance it.
00:45:10.720 | I don't know, get a 0% credit card or something.
00:45:12.720 | But also, the big reason I like having it
00:45:16.880 | is from the perspective of if there were things
00:45:19.680 | like medical costs.
00:45:20.640 | These can be very substantial.
00:45:24.320 | I've seen this with a few different people
00:45:26.000 | that are close to me.
00:45:26.800 | Also, the key benefit I mentioned
00:45:29.440 | is that APB and the waiver of premium.
00:45:31.680 | And so since I've watched people close to me
00:45:36.160 | go through things like muscular disease--
00:45:39.520 | I had a friend who died from muscular dystrophy.
00:45:41.920 | And watching a family go through that process
00:45:46.160 | and the child eventually dying, but then
00:45:49.120 | knowing the medical costs outstanding,
00:45:52.320 | really would have been a benefit.
00:45:54.240 | And I have always liked to put on life insurance
00:45:58.080 | policies for children.
00:45:59.840 | The APB option, the additional purchase benefit option
00:46:02.880 | I explained, and also a waiver of premium option,
00:46:05.840 | which is the scenario where if he were to become disabled,
00:46:13.280 | then the insurance company pays the premiums.
00:46:15.360 | And what's beneficial formally with the company
00:46:17.920 | that his insurance is with is if he were disabled,
00:46:23.920 | they would still--
00:46:24.640 | the insurance company would still exercise
00:46:26.480 | all of those additional purchases.
00:46:28.160 | And they would pay for the additional increases
00:46:33.840 | in the policy.
00:46:35.040 | And that can be a substantial amount of money.
00:46:37.040 | Personally, I have little need of the policy
00:46:39.040 | from an investing perspective.
00:46:40.240 | It's too small to be substantial.
00:46:41.680 | And then the growth in whole life insurance policies
00:46:45.600 | for kids is just simply too slow up front
00:46:48.000 | to really matter in their life.
00:46:49.840 | I've never been able to make one work at all,
00:46:52.960 | the numbers to work at all, for any kind
00:46:54.800 | of short-term financial needs.
00:46:56.000 | Too conservative to make any big difference.
00:46:58.320 | And my tax rate at the moment is too low for me to need it
00:47:02.000 | to protect from kiddie tax or any of that stuff.
00:47:04.240 | I don't have it in a trust.
00:47:05.120 | So it's pure savings and protection.
00:47:06.880 | I'll focus on other investing ideas.
00:47:08.800 | Then I'll come back.
00:47:09.600 | And maybe later on down the road, I'll think about buying
00:47:11.760 | more life insurance.
00:47:12.480 | But it's certainly not something that's needed right now.
00:47:14.400 | So those are my thoughts on life insurance for kids.
00:47:18.080 | Sean, I hope that's helpful for you as kind of an intro.
00:47:21.040 | Probably told you some terms there
00:47:24.320 | that might not have made sense.
00:47:26.960 | But hopefully that helped you.
00:47:30.240 | So I've just made a split-second decision.
00:47:35.120 | I'm going to change the course of today's show.
00:47:38.080 | It's-- we're at 47 minutes into the episode,
00:47:40.080 | and I've answered one question.
00:47:41.200 | So I need to get a little bit of room
00:47:45.120 | to catch up this week.
00:47:46.240 | So what I'm going to do is I'm ready to answer
00:47:48.320 | these next five questions on my list.
00:47:51.040 | I'm going to answer the next one now in today's show.
00:47:53.840 | And then I'm going to split this out.
00:47:54.960 | And we're going to do a Q&A show each day this week.
00:47:58.080 | And that will help me to get ahead a little bit
00:48:00.240 | with the content.
00:48:01.840 | I've got some pretty big shows that I've been--
00:48:04.480 | was working last week on getting out.
00:48:06.640 | I've got a big-- some big shows planned on 529s,
00:48:09.600 | some stuff on investing, health savings accounts.
00:48:13.840 | So I need to put some prep time into those.
00:48:16.320 | So I'm going to do these Q&A shows.
00:48:17.600 | We're going to split this out into five shows.
00:48:19.920 | And then episodes may be a little bit shorter,
00:48:22.080 | but that will help me.
00:48:23.280 | So let's just take one more question here today.
00:48:25.280 | And then we will wrap up for the day.
00:48:27.040 | And so this next question comes from Chris.
00:48:29.600 | And here we go.
00:48:30.800 | Hi, Joshua.
00:48:31.520 | This is Chris.
00:48:32.240 | This is a long way off for me.
00:48:34.880 | But if I turn 50 and my wife and I have a few million dollars
00:48:40.160 | tied up in retirement accounts, can we
00:48:42.560 | start withdrawals on a 72(t) basis at that point
00:48:49.280 | and then cancel them or otherwise change it
00:48:53.440 | when we hit 59 and 1/2?
00:48:55.120 | I'm pretty sure that we can, but I
00:48:57.840 | can't seem to find a lot of details about that.
00:48:59.840 | Anyway, I freaking love your podcast.
00:49:03.760 | It's awesome.
00:49:04.480 | It's informative.
00:49:05.200 | It's just-- it's kick ass.
00:49:07.920 | Anyway, thanks a lot.
00:49:10.480 | Bye.
00:49:10.980 | Chris, thanks so much.
00:49:12.720 | And so this one's going to be my shortest answer of the--
00:49:15.280 | well, it's going to be the night.
00:49:17.760 | Now it's going to be the week.
00:49:19.600 | Yes, you can do that.
00:49:21.680 | And that can work fine.
00:49:23.440 | For the early retirement space, if you've got loads of money
00:49:28.960 | and you can retire at 50, this can work great.
00:49:33.280 | So the reason I poo-poo the strategy for most people
00:49:36.000 | is most people don't have enough money that they can survive
00:49:40.240 | on the relatively low rates of withdrawal
00:49:42.480 | that you can get under a 72(t).
00:49:45.840 | So let me explain.
00:49:48.000 | This is essentially the rule where you can pull money out
00:49:53.120 | of an account early.
00:49:54.160 | And as long as you take it out in a series of substantially
00:49:56.960 | equal periodic payments, then you can avoid the 10% early
00:50:03.280 | withdrawal tax.
00:50:04.320 | So Chris, in your numbers, let's just say I put in somebody
00:50:07.680 | that is an account balance of $3 million in retirement
00:50:11.360 | accounts.
00:50:12.240 | And you're going to retire at the age of 50
00:50:16.160 | with a 45-year-old beneficiary.
00:50:18.160 | I tossed this into a 72(t) calculator.
00:50:20.560 | I'm using the Dinkytown one here.
00:50:22.640 | And the reasonable interest rate is 2.1%
00:50:24.640 | under those assessments.
00:50:27.040 | Then you can see that the amounts of money that you would
00:50:29.760 | be getting out, let's just say at 2.1%,
00:50:33.920 | the required minimum distribution would be $88,000
00:50:37.520 | for the required minimum distribution method.
00:50:40.880 | The fixed amortization method would be $123,838 per month.
00:50:46.000 | So you'd be in good shape.
00:50:47.840 | And that would work fine for you.
00:50:49.600 | Now, the secret, as you mentioned, is that when you start
00:50:53.440 | a series of equal periodic payments withdrawal strategy,
00:50:58.400 | you must continue it for at least five years
00:51:05.280 | or until the age of 59 and 1/2, whichever of those is longer.
00:51:10.320 | So if you started at 50, as you asked in your question,
00:51:14.320 | yes, you can go from 50 to 59 and 1/2.
00:51:17.520 | And because that's been at least five years,
00:51:20.480 | and because you're older than 59 and 1/2,
00:51:24.560 | at that point in time, you can indeed change
00:51:26.640 | your distribution strategy.
00:51:28.240 | So it can work fine.
00:51:29.680 | And it's a great strategy for some people to think about
00:51:33.920 | and to plan on it.
00:51:34.880 | It very well could solve that question of how do you
00:51:39.920 | get the money out.
00:51:40.720 | What it doesn't work well for is it doesn't work
00:51:43.680 | for most of the mainstream financial planning clients
00:51:46.640 | that a financial planner will often encounter,
00:51:49.120 | who are from often two schools of thought.
00:51:52.240 | Number one is, Joshua, I don't have enough money
00:51:54.720 | for retirement.
00:51:55.520 | Well, in this case-- and it's early, so can I get money out?
00:51:59.360 | Well, in this case, the amount of money coming out
00:52:00.960 | of the account is insufficient to live on.
00:52:03.120 | It's useful to have as a backup tool,
00:52:05.600 | but it's not a primary tool because there's not
00:52:08.000 | enough money to live on.
00:52:09.280 | Or this flip side is most people that save $3 million
00:52:13.360 | are not going to be content with $120,000 a year lifestyle.
00:52:17.680 | You have to remember that many people, their goal is to say,
00:52:21.920 | how much can I take out?
00:52:23.760 | So it's not a matter of what's the safe withdrawal rate,
00:52:27.600 | what's the 4%, which would be $120,000 or $3 million.
00:52:31.360 | The question is, how can I push this as aggressively
00:52:34.960 | as possible?
00:52:35.520 | And they want to get out more money out front oftentimes.
00:52:38.480 | So the numbers have to work for this to be effective.
00:52:43.760 | So it's a useful tool to have, but I've--
00:52:46.640 | I don't know.
00:52:47.200 | At least I've not been a planner forever,
00:52:49.200 | but in the six years I was doing it professionally,
00:52:51.760 | I never found the scenario of the client
00:52:54.400 | that it actually worked for.
00:52:57.120 | So that's the answer to your question.
00:52:58.480 | And with that, I think we will skip for today's show.
00:53:03.200 | I'm sorry.
00:53:03.760 | I hope you don't feel bamboozled in the intro
00:53:06.800 | of my telling you we were going to do content
00:53:10.000 | that we didn't get to.
00:53:10.960 | So tune in tomorrow, and I will answer a question--
00:53:14.960 | you know what?
00:53:15.440 | I'm going to stop the music.
00:53:16.480 | And here's the question that we're going to answer tomorrow.
00:53:18.960 | We're going to have this beautiful question from Melissa
00:53:21.920 | on a very interesting strategy.
00:53:23.520 | - Hi, Joshua.
00:53:23.520 | It's Melissa from Pennsylvania, and I have a question for you.
00:53:26.160 | I keep a money journal where I just jot down ideas and books
00:53:30.560 | and different things as I come across them.
00:53:33.200 | And I was reading through a page that I had jotted down a note
00:53:37.840 | from a year or two ago about paying your house off
00:53:41.040 | with a HELOC loan.
00:53:42.000 | Essentially, it was-- from what I understand,
00:53:45.200 | it was you deposit-- you create a HELOC.
00:53:48.800 | You deposit your checks into it and pay all your bills
00:53:51.680 | out of the HELOC, almost using it as a savings account,
00:53:54.400 | and in turn, paying off more of your principal
00:53:56.720 | and decreasing the length of your loan.
00:54:01.040 | Basically, I come to you for advice on if that is a legitimate idea,
00:54:05.600 | and also if you have any knowledge of that.
00:54:08.320 | Also, in the page I jotted down, it must be associated
00:54:11.520 | with a book called Master Your Debt
00:54:13.360 | and a website, truthinequity.com.
00:54:17.280 | Any advice you have would be great.
00:54:19.440 | Thanks a lot.
00:54:20.000 | - So there's my teaser for tomorrow's show.
00:54:22.560 | Some of you are scratching your head and saying, "Huh?"
00:54:24.480 | And others of you say, "Ah, I know what that is."
00:54:27.360 | It is quite fun.
00:54:29.120 | Tomorrow, tune in and I will share that information with you.
00:54:33.120 | It's going to be a good one.
00:54:34.080 | I got the book and I read it, and I will explain it to you
00:54:38.160 | in words you can understand, and I'll tell you my thoughts on it.
00:54:40.880 | So tune in tomorrow.
00:54:42.160 | Thank you all so much for being here.
00:54:43.600 | I appreciate each one of you that is listening.
00:54:46.400 | I really do.
00:54:47.040 | I appreciate each one of you who supports the show.
00:54:49.680 | If you would like to support the show,
00:54:50.800 | if you gain value out of today's show,
00:54:53.040 | I hope it was specific and helpful.
00:54:56.000 | I would love it if you'd consider joining the membership program.
00:54:58.880 | That is the Irregulars.
00:55:00.320 | You can find all the details on that at radicalpersonalfinance.com/membership
00:55:04.880 | are all the details.
00:55:06.640 | But basically, it's you pay me money,
00:55:08.320 | and I am able to afford to keep doing the show
00:55:11.040 | with the depth that I try to do it with.
00:55:13.040 | That's essentially the deal.
00:55:14.160 | I think as we go out here,
00:55:19.600 | that I will read you one review very quickly here.
00:55:27.840 | In the time that I have.
00:55:28.880 | And Michael says, "Finance geek.
00:55:41.760 | Excellent outlook on achieving financial independence
00:55:43.680 | and getting out of the rat race."
00:55:44.880 | Thank you, Michael, for that review on iTunes.
00:55:47.520 | I appreciate that.
00:55:48.800 | And also, Illiterate, what an interesting name,
00:55:55.920 | says, "Sheets does a fantastic job of removing his personal opinions
00:55:58.960 | and proscriptions from the meat of his show
00:56:00.480 | and fulfills his mission statement
00:56:02.160 | of providing thought-provoking information
00:56:04.000 | and wide-ranging insights
00:56:05.600 | with examples from both mundane and extreme.
00:56:07.600 | Anybody looking to be a financial planner for themselves
00:56:09.760 | or others should give him a listen."
00:56:11.520 | Thank you to the two of you who left those reviews for me on iTunes.
00:56:15.120 | I appreciate that very much.
00:56:16.480 | Sorry that today was a little bit disjointed.
00:56:19.520 | It'll be better tomorrow, back when my brain is working a little bit more.
00:56:24.720 | We'll be with you tomorrow.
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