RPF0180-2How_Life_Insurance

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00:00:32.800 | Today on the show, let's continue our life insurance series and I'm going to teach you

00:00:38.640 | today how life insurance policies actually work.

00:00:42.560 | This will be a framework that you'll be able to use in the future as you're making your

00:00:46.240 | choices and with this framework in your mind, you'll be able to look at any life insurance

00:00:52.160 | policy and understand the advantages and disadvantages of it.

00:00:57.600 | Let's go.

00:01:14.480 | Welcome to the Radical Personal Finance Podcast.

00:01:16.420 | My name is Joshua Sheets.

00:01:18.280 | Thank you for being here.

00:01:19.280 | This is episode 180 of the show and yes, we're continuing with life insurance.

00:01:25.520 | But I think you'll like it.

00:01:26.520 | This is actually take two of this show.

00:01:28.360 | Already recorded the show and wasn't happy with it.

00:01:30.880 | So we're redoing it and I think that means that it is going to be awesome.

00:01:36.360 | Or awesome at least is the goal.

00:01:48.640 | I'm going to deliver on it.

00:01:49.640 | You know what?

00:01:50.640 | None of this hedging around that I often do.

00:01:52.920 | This show is going to be awesome.

00:01:54.360 | I promise.

00:01:55.360 | It'll be awesome.

00:01:56.360 | Now, time to deliver.

00:01:57.360 | Before I get into life insurance, I thought it would be interesting.

00:02:00.360 | I'm just going to share a few minutes, just a little bit of personal background, a little

00:02:04.000 | behind the scenes stuff on the show.

00:02:06.720 | I don't do this a lot but I will this week.

00:02:09.360 | Those of you who listen to the show every day when it comes out, you'll notice that

00:02:12.320 | it's been a – I mean this is actually Friday at 4.20 PM as I'm sitting down to record

00:02:17.920 | this show.

00:02:18.920 | And this show was on the topic list to be Wednesday's show.

00:02:22.560 | This is April 17th as I record and it will be released today on April 17th unless I flub

00:02:28.120 | it and have to re-record it like I did yesterday.

00:02:31.240 | But sometimes it's very easy to feel all alone and I'm going to share a little bit

00:02:35.400 | of the challenges of my week so that you don't feel alone with whatever you're going through.

00:02:43.480 | Oftentimes especially in the world of public personality and media, the people that are

00:02:48.080 | engaged in delivering media, you often might think, "Oh, it's all easy and perfect."

00:02:52.520 | And you see finely tuned shows and you never get any behind the scenes impact.

00:02:56.960 | I'll just share a little bit of behind the scenes with you.

00:03:00.600 | So this week was tax week and I've been behind on my taxes for the last couple of

00:03:07.800 | months but there have been thing after thing after thing.

00:03:10.040 | I'm not asking for pity.

00:03:12.240 | I'm just sharing almost as just some chuckles.

00:03:14.840 | If we were friends, sharing a little bit about the entrepreneurial journey.

00:03:18.680 | But I hadn't filed my taxes earlier than April here and it's been on the list, been

00:03:25.360 | on the list.

00:03:26.360 | I've been needing to get it done, needing to get it done.

00:03:28.520 | But as with everything, as an entrepreneur, you're pretty much juggling everything and

00:03:32.920 | there's always something that's more important.

00:03:34.640 | There's always something that's more important.

00:03:36.920 | Even the last few weeks, knowing that this was coming up, I needed to get it done but

00:03:42.400 | how other projects are more important.

00:03:44.200 | I'm not generally a last minute type of guy.

00:03:46.320 | I'm pretty much – I've never filed – I don't think I've ever even filed

00:03:49.920 | in April.

00:03:50.920 | Usually it's February or March.

00:03:51.920 | You get all the paperwork together, get the accounting straightened out and get things

00:03:55.600 | done.

00:03:56.600 | So I'm not the type of person who habitually procrastinates till April 15th.

00:04:00.840 | But just in terms of running the day to day operations of Radical Personal Finance and

00:04:05.600 | my family and life, it just kept getting pushed back.

00:04:10.720 | The big challenge of the last month or so was launching the new website and that was

00:04:14.960 | on a timeline because my web developer, the person who was helping me with the actual

00:04:19.560 | programming of the site and all of that, he was – and his wife were expecting a baby

00:04:24.600 | and I knew that when their baby came, he would be out of work for a while just because taking

00:04:30.240 | home, taking care of mama and baby.

00:04:32.720 | So I needed to get that done and you never know when the baby is going to come.

00:04:36.360 | So I had to press and press.

00:04:37.920 | That was why the site was launched half finished.

00:04:39.720 | It's still half finished and thankfully – because I'm able to improve things but

00:04:44.440 | I wasn't able to handle the launch of the site.

00:04:46.800 | So I needed to get that done and that took priority over taxes and anyway, thing after

00:04:51.320 | thing.

00:04:52.320 | So finally this week, Monday, I still hadn't finished the taxes and of course I could have

00:04:57.360 | simply filed an extension and that would have been simple to do.

00:05:01.240 | I knew the basic numbers so I was able to take care of the tax payment without being

00:05:07.720 | behind and I could have filed an extension.

00:05:09.520 | But I really wanted to get things done.

00:05:10.600 | I've never filed an extension.

00:05:11.600 | I wanted to get it done.

00:05:12.800 | So Monday, I sat down to get things done.

00:05:16.960 | Now even though – the other reason I'm sharing this is even though I talk a lot about

00:05:21.840 | finance and I talk about accounting, it doesn't mean that I'm always able to keep everything

00:05:25.560 | in my life perfectly done.

00:05:28.240 | I do a pretty good job but I'm human.

00:05:30.560 | What's the old joke about the cobbler's children are the ones that run around with

00:05:33.840 | no shoes and I get behind on catching stuff up just like anybody.

00:05:38.840 | This last few months and this last year has been very challenging with closing – associated

00:05:44.960 | with my financial planning practice, I had three distinct business entities that were

00:05:48.880 | operating as part of that.

00:05:50.080 | I had to close those down, launching new business entities and my accounting system had just

00:05:54.280 | fallen behind.

00:05:55.280 | Again, how do you keep things going?

00:05:58.520 | So I knew that I had a lot of work to do and my accounting system needed to be more robust.

00:06:03.320 | I knew what needed to be done but pushed it back, pushed it back, pushed it back.

00:06:07.440 | So Monday and then Monday turned into Monday and Tuesday and then Monday and Tuesday turned

00:06:12.280 | into Monday, Tuesday and Wednesday and it took me three solid days of sitting down and

00:06:17.000 | working from morning till night to get all of my accounting properly finished and get

00:06:22.080 | my books properly wrapped up and to get things detailed because I'm a stickler for detail.

00:06:29.160 | The details are where all of your good tax planning is and I had the details.

00:06:32.400 | I had the rough outline.

00:06:33.600 | I just didn't have all the details sorted out and get all the returns taken care of

00:06:37.240 | and for the first time in my life on April 14th, at 4 o'clock, I printed out the return.

00:06:44.680 | I sat down.

00:06:45.680 | I signed it, had my wife sign it and I put it in the envelope and I walked down to the

00:06:48.560 | post office at 4 o'clock on April 15th, Wednesday afternoon.

00:06:53.200 | I couldn't believe it.

00:06:55.320 | I was so ashamed of myself because you always chuckle when you drive by.

00:06:58.920 | I personally have often chuckled in the past.

00:07:00.840 | You drive by the post office and you see the lines there on April 15th and I think, "What's

00:07:05.280 | wrong with those people?

00:07:06.280 | I thought they'd be ahead."

00:07:07.280 | It's a good dose of humility for me that here I was on April 15th at 4 p.m. trotting

00:07:14.640 | it down to the post office.

00:07:16.880 | That was the tax adventure and it was good.

00:07:20.360 | Of course, again, I could have filed the extension.

00:07:22.200 | I had that ready to go in case I needed to just simply file the extension and do it in

00:07:26.200 | the future but I wanted to get it done and I was able to get it done.

00:07:29.560 | So then Thursday, I got up and got ready to go and was getting ready to record the show

00:07:36.720 | and had some fires to put out with things that one thing turned into another, turned

00:07:41.280 | into another.

00:07:42.280 | Then I sat down and I recorded the show and I was most of the way through it and it just

00:07:46.760 | wasn't working.

00:07:47.760 | It's the content I'm about to deliver to you on life insurance and the challenge is I'm

00:07:52.440 | going to describe some concepts that are very simple to grasp visually if I could draw with

00:07:57.560 | you but you're listening to audio.

00:08:00.320 | I try to keep this show very audio friendly.

00:08:02.800 | I don't want you to always feel like you have to go back to the computer and look something

00:08:05.640 | up.

00:08:06.640 | I know that if you're listening to me while you're on a treadmill or driving to work

00:08:09.240 | or doing whatever that it's better if I can describe something verbally and it just didn't

00:08:14.920 | work.

00:08:15.920 | So finally, I just scrapped it.

00:08:16.920 | It was late at night and I had friends coming over and so I didn't get the show out.

00:08:21.480 | Then today, I had planned to go ahead and I've got all the topics lined up.

00:08:26.400 | I just got behind on the recording.

00:08:29.000 | So I had planned to record two or three shows a day and go ahead and release them because

00:08:33.040 | I feel like I'm not keeping my side of the bargain of producing quality content consistently

00:08:38.760 | this week.

00:08:40.200 | And then the neighbor is pressure cleaning.

00:08:44.200 | One of the challenges that you never hear until you start recording a podcast, you never

00:08:48.680 | hear all the sounds.

00:08:49.760 | I never knew there was a railroad tracks near my house until I listened to my podcast.

00:08:53.040 | I'm like, "What's that train horn in the background?"

00:08:55.240 | I never knew my dogs made so much noise until I listened to my podcast.

00:08:58.680 | I'm like, "Man, my dogs won't stop making noise."

00:09:02.320 | And you never know that there's yard guys in your neighborhood until you start recording

00:09:06.000 | a podcast.

00:09:07.000 | One of the challenges I have with my production is every Wednesday, the yard guys come and

00:09:11.840 | the same set of guys do the houses on all sides of me, my neighbors on either side and

00:09:17.960 | my three neighbors across the street.

00:09:20.280 | And so the entire day, they go from one house to the next to the next to the next to the

00:09:24.800 | next and they got the blower blowing and blowing and blowing and blowing.

00:09:29.600 | And the noise is amazing.

00:09:31.660 | So I have to be careful with my Wednesday schedules and recognize that and not be planning

00:09:36.120 | to record a show during the time of the yard guys.

00:09:38.880 | Well then today, there is the pressure cleaning and the guy is doing pressure cleaning my

00:09:43.160 | neighbor's pool deck.

00:09:44.880 | And so I look and I look, "Okay, he's making good progress."

00:09:48.440 | And so finally, I hear it shut down.

00:09:50.040 | So I sit down to record the show and I hit record and I launch into my intro.

00:09:55.080 | And then all of a sudden, it fires up again next door and he starts doing the driveway.

00:10:01.680 | So here it is at 4.30 in the afternoon for the first time.

00:10:04.360 | It's been quiet enough for me to sit down and record the show.

00:10:09.600 | And that's the situation we're in.

00:10:11.680 | So it's 4.30 on Friday and I'm recording the first show for this week.

00:10:15.960 | So I hope you can laugh with me.

00:10:18.040 | Joshua is learning.

00:10:19.040 | Now, I'm in that classic stage of my entrepreneurial journey where everything is just kind of slightly

00:10:24.840 | out of control constantly.

00:10:29.800 | I've learned to be mentally okay with that.

00:10:31.720 | I'm a bit of a perfectionist to try to control everything but I've noticed that perfectionists

00:10:35.960 | rarely make good business people.

00:10:38.280 | And most of the excellent business people that I've known just seem to get comfortable

00:10:42.780 | with some level of chaos.

00:10:44.320 | And that's been a challenging lesson for me to learn is to be comfortable with some level

00:10:48.680 | of chaos.

00:10:50.320 | But it's been good for me.

00:10:51.480 | But I'm also in that stage where it's just been a challenging few weeks and I had to

00:10:56.880 | sit down and say, "What's been working?

00:10:58.440 | What's not been working?

00:10:59.440 | And my time management has not been effective the last few weeks and that's all right.

00:11:03.520 | I'm learning."

00:11:04.520 | So I just share these thoughts with you to encourage you that please don't ever think

00:11:08.240 | that when I come and share the thoughts I share with you, please don't think that I'm

00:11:12.520 | anything but exactly like you.

00:11:14.520 | We're all about the same.

00:11:16.240 | And sometimes my life gets away from me and things get behind and I keep getting the show

00:11:24.160 | where I want it to be and everything's ahead and then all of a sudden life happens and

00:11:29.640 | things change.

00:11:30.640 | So I'm building out the systems and I'm building out my own personal habits and learning as

00:11:35.680 | I go and I'm excited that you're here sharing the journey with me and I hope you can just

00:11:41.640 | consider this little chat among friends.

00:11:44.760 | Thank you all for listening.

00:11:45.760 | I love sitting down and creating these shows for you and I hate it when I get behind but

00:11:50.640 | you know what?

00:11:51.640 | Sometimes life happens and I don't think that it's not possible to do – it's simply

00:11:57.520 | not possible to do everything.

00:11:59.040 | There's always enough time to do the most important things.

00:12:01.760 | There's never enough time to do everything.

00:12:04.120 | So prioritization, this is actually my Achilles heel.

00:12:07.080 | Sometimes I don't prioritize effectively and I know the priorities I probably should

00:12:11.080 | have but then I don't follow through and so I'm learning.

00:12:16.400 | So that's what's behind the show and so here we go.

00:12:20.560 | Let's get into the content.

00:12:21.560 | Let's talk about life insurance and I've been systematically building these shows about

00:12:27.760 | life insurance in a way that I hope will give you the background that you need to feel confident

00:12:33.280 | in your own personal decisions.

00:12:36.360 | And the last show that I did on life insurance, we talked about how to decide how much life

00:12:40.480 | insurance you need and that's the very first place to start.

00:12:43.800 | Do I need life insurance and how much?

00:12:45.720 | Now once you know how much life insurance you need and then you're going to quickly

00:12:48.840 | need to go and be able to sit down and figure out, "Well, what do I buy and then where

00:12:54.800 | do I buy it?"

00:12:55.800 | which is a whole other challenging question.

00:12:57.520 | But what do I buy?

00:12:59.960 | And the challenge that we face is that very few people in our society actually know anything

00:13:04.860 | about life insurance.

00:13:07.320 | And it's tough to – life insurance is extremely complicated in many ways and so

00:13:13.880 | it's really, really challenging.

00:13:14.880 | So what I want to give you today is not going to be a practical recommendation on what to

00:13:18.280 | buy.

00:13:19.280 | This is not what to do.

00:13:20.280 | This is a little bit of a theory behind how life insurance policies work.

00:13:24.200 | And I believe if you understand this theory, you'll be able to get a little bit closer

00:13:28.440 | to being able to look at a specific type of policy and understand what it is, how it works,

00:13:34.280 | and the advantages and disadvantages of it.

00:13:36.560 | And then I will – in future shows, I will give specific recommendations on what to do

00:13:42.120 | but you need this as background.

00:13:43.120 | So let's talk a little bit about the history of life insurance.

00:13:45.640 | I want to tell you how life insurance policy design came to be, how the modern world that

00:13:52.760 | we have came to be over the years.

00:13:57.040 | Insurance as a concept has been around for a very long time.

00:14:01.520 | Historians have been able to date it back to at least insurance, not specifically life

00:14:05.960 | insurance but to at least 2000 BC in China and then back to ancient Babylon about 1750

00:14:12.880 | BC as far as the concept of insurance with traders and merchants basically providing

00:14:19.680 | protection for themselves.

00:14:22.080 | Life insurance goes back to the 1700s, the early 1700s.

00:14:26.920 | The first company that was actually formed to offer life insurance was established in

00:14:31.920 | London in 1706 and it was called the Amicable Society for a Perpetual Assurance Office.

00:14:38.680 | And then ultimately that came over – the concept came over to the United States and

00:14:43.320 | it was developed of course internationally but I'm most familiar with the history here

00:14:47.640 | in the United States.

00:14:50.000 | In its simplest form, the entire concept of insurance and specifically life insurance

00:14:55.760 | rests on the idea of risk pooling.

00:15:00.680 | The idea is we all share – with life insurance, we all share the risk of dying prematurely.

00:15:06.240 | We all share the guarantee of dying but we all share the risk of dying prematurely.

00:15:13.560 | And so the idea is if you can work together and share that risk among a company of people,

00:15:20.760 | then you'll be able to mitigate the effect on any individual family.

00:15:25.320 | So that's the entire concept behind insurance.

00:15:29.680 | The initial most – the concept of insurance really applied were originally primarily worked

00:15:36.460 | out in fraternal societies and workers' guilds where people came together and said,

00:15:42.840 | "OK.

00:15:43.840 | If one of our member of our society dies, then the rest of us will go ahead and support

00:15:48.720 | their family with a certain amount of money."

00:15:51.360 | And the first types of insurance policies were what's known as assessment insurance.

00:15:56.440 | Assessment insurance is – the closest example we have to this in the modern world would

00:16:00.240 | be those of you who live in condominiums or places where you have homeowner's insurance

00:16:06.320 | and you from time to time might be assessed for a group cost.

00:16:12.120 | Hurricane comes in, blows off the roof and you got to replace the roof on the condo.

00:16:16.480 | The condo has insurance that covers some of it but then they send you a bill and each

00:16:19.960 | of you that are residents of the condo owns – owes $1,000 to the association.

00:16:27.120 | So you're assessed a cost.

00:16:28.880 | This was how life insurance originally was – in its most basic form was run, that a

00:16:34.720 | group of people would come together and they would say, "Well, we've got – there are

00:16:38.600 | 300 of us in our fraternal society and if one of us dies, then all of us will kick in

00:16:44.280 | a dollar and we'll split that dollar out and we'll send that to the person who dies

00:16:48.480 | to their family."

00:16:50.200 | That was the original basics and that was a – originally was what's known as a flat

00:16:53.960 | assessment, meaning everybody contributed the same amount.

00:16:57.360 | Over time, they started to collect these a little bit in advance so they would go ahead

00:17:01.120 | and collect the dollar from everybody in advance so that the next time somebody died, then

00:17:05.360 | the money was available and they didn't have to go and ask everybody for money at

00:17:09.040 | that point in time.

00:17:10.680 | But quickly it came – became apparent that the flat fee, the flat assessment model didn't

00:17:17.200 | work quite as well because obviously the older people were dying at a quicker rate than the

00:17:23.720 | younger people and so the younger workers would find themselves putting in a lot more

00:17:28.920 | money than the older people did and the older people were benefiting from it.

00:17:32.820 | So over time, that led to the concept of changing it to be – to graded assessments where instead

00:17:39.440 | of everybody putting in a dollar, then the younger people would put in a lesser amount

00:17:44.680 | and the older people would put in a higher amount.

00:17:47.840 | Now in its first form, this was done on an initial basis and so if you entered into the

00:17:53.440 | society or into the workers' guild at say the age of 20, perhaps your fee was 60 cents.

00:18:00.320 | But if you entered in at 40, perhaps it was a dollar and if you entered in at 50, perhaps

00:18:05.040 | it was a dollar 20.

00:18:07.020 | But then once you entered in, your assessment would be the same on an ongoing basis.

00:18:13.440 | Well, this didn't actually work out quite so well because the numbers – even what

00:18:18.200 | happens in a group of people that are pulled together, even if the average age of the population

00:18:23.800 | stays the same, the number of people that are dying continues to increase based upon

00:18:27.560 | the way that the body of – the mortality statistics work within a body of insured people.

00:18:35.920 | So that led to the concept of premiums increasing over time.

00:18:40.040 | So under this model, you would enter in let's say at the age of 20 and you would pay 60

00:18:44.400 | cents – let's just say per year, 60 cents per year.

00:18:47.320 | Then at the age of 30, you would be paying 70 cents per year and at the age of 40, you

00:18:51.440 | would be paying a dollar a year and it would go on and on.

00:18:55.320 | You get the point.

00:18:57.220 | But this type of structure leads and led to a real problem and the problem is – has

00:19:03.440 | a couple of different aspects to it.

00:19:05.480 | The first problem is it places a real – there's a real benefit for the younger people to be

00:19:11.640 | involved in the pool because their rates are really low and they have a need for it.

00:19:20.440 | But there's little incentive for the older people to be involved in the pool because

00:19:23.840 | their rates are going up and they have less of a need for it.

00:19:27.560 | This opens up the door for an insurance term that's called adverse selection.

00:19:33.440 | Usually the pool would experience adverse selection because the people who were older

00:19:40.520 | that were healthy were likely to say, "You know what?

00:19:43.840 | My premiums are going up.

00:19:45.000 | I just don't need the insurance.

00:19:46.000 | I'm a pretty healthy person.

00:19:47.640 | Why do I need the insurance?"

00:19:48.640 | They were likely to withdraw and stop paying money.

00:19:51.440 | But the people who were sick and likely to die, they're the ones who are likely to

00:19:56.040 | continue paying their premiums because they know they're sick and they need the insurance.

00:20:00.240 | That's called adverse selection.

00:20:03.240 | Adverse selection is a big deal for insurance companies.

00:20:06.120 | It's a big deal in life insurance.

00:20:07.440 | It's a big deal in every aspect of insurance.

00:20:10.000 | This incidentally is exactly the reason why with the recent changes in the United States

00:20:16.140 | with the law regarding health insurance that when – that the reason why the government

00:20:22.620 | requires and forced everyone to buy health insurance was because without that enforcement

00:20:29.280 | mechanism there was no possible way for the insurance companies to insure everybody.

00:20:35.160 | So the politicians wanted to force the insurance companies to insure everybody and to not be

00:20:40.440 | able to deny somebody based upon the state of their health.

00:20:44.240 | But from an insurance company, that creates adverse selection.

00:20:46.360 | That means that the healthy people are very unlikely to buy insurance and the unhealthy

00:20:50.320 | people are very likely to buy insurance.

00:20:52.880 | And frankly, that's the situation that we have currently as the penalties start to increase

00:20:56.920 | and the government levied fines start to increase.

00:21:01.120 | Even still, many people who are healthy might choose and say, "Well, it's cheaper for

00:21:05.680 | me just simply to be uninsured and I'll just pay the fine," whereas the people who

00:21:10.080 | are sick are likely to say, "I'll go ahead and get the insurance."

00:21:13.040 | That's adverse selection and it's in every insurance market.

00:21:16.400 | Insurance companies have to guard very carefully against it.

00:21:18.280 | It's a big deal in life insurance.

00:21:20.460 | So this was the development of how life insurance policies started to come about.

00:21:26.040 | Along the way, some advanced mathematical techniques were developed and there emerged

00:21:32.000 | the concept of actuarial science.

00:21:35.280 | And the actuarial science is essentially specifically applied to life insurance is where you're

00:21:41.040 | able to look and figure out across any given population at what rate do the people who

00:21:46.320 | are in that population die at specific ages.

00:21:49.480 | And so then you can start to predict and start to assign some actual numbers.

00:21:53.040 | Because what you find is these numbers are not consistent over time.

00:21:56.760 | It's not a linear progression.

00:21:58.720 | You don't, let's say that the risk of dying is, let's just say the cost of covering the

00:22:03.360 | risk of dying is not 30 cents at the age of 30, 40 cents at the age of 40, 50 cents at

00:22:08.520 | the age of 50, 60 at the age of 60, and so on.

00:22:11.640 | It's not a linear progression.

00:22:13.540 | It might be that the risk of dying at 30 actually costs 11 cents, but then at 40 it's 20 cents,

00:22:22.120 | and then at 50 it's 48 cents, and then at 60 it's 78 cents, et cetera.

00:22:27.400 | It goes on and on because the risk gets exponentially geometrically higher as time goes on.

00:22:31.560 | So that's the concept behind life insurance.

00:22:34.040 | They started to develop risk tables and they started to come out with new types of insurance

00:22:38.080 | that were based upon this general population and these tables of how likely different people

00:22:44.280 | were to die, which leads us to the modern world that we live in.

00:22:47.640 | Nowadays, there are published tables.

00:22:50.800 | These are known as the – what are they called?

00:22:52.040 | The commissioner standard tables.

00:22:53.360 | Those are from 1980.

00:22:54.360 | I think the next one is from 2001 is what everyone is using now.

00:22:58.000 | But these are the tables that most calculations are based on.

00:23:01.360 | For example, the social security payout tech calculations are considered basically these

00:23:05.280 | insurance tables.

00:23:06.280 | The annuity rates go back to these tables.

00:23:10.240 | These are the commissioner standard tables that are practically used.

00:23:14.160 | Each life insurance company actually has their own tables and they probably are likely to

00:23:18.000 | use their own tables in figuring out their own life insurance policies.

00:23:22.240 | But there are standard published tables that you can look at and use for various purposes.

00:23:28.360 | Once you have those tables, then now you're able to sit down and start creating policies.

00:23:33.600 | I'm going to describe to you two conceptual policies.

00:23:38.200 | You can actually buy these policies but two conceptual policies as a way of understanding

00:23:43.400 | almost two different ends of a spectrum.

00:23:46.640 | These two conceptual policies is at one extreme, yearly renewable term, and at the other extreme

00:23:53.560 | is level premium whole life insurance.

00:23:57.520 | I'm going to describe these to you so you understand the need for different types of

00:24:01.680 | life insurance products.

00:24:02.680 | Let's start with yearly renewable term.

00:24:05.080 | The concept of yearly renewable term is essentially this.

00:24:08.120 | You can buy an insurance policy from an insurance company where they guarantee that each year

00:24:13.800 | they will renew the policy for you.

00:24:15.600 | That's what yearly renewable means.

00:24:18.480 | They'll guarantee the policy, yearly renewable, it'll renew it every year, but the rates will

00:24:23.480 | adjust every year depending on your age.

00:24:26.640 | So they're guaranteed to renew it for you but the rates are going to adjust each year.

00:24:31.160 | This is in some ways actually the simplest type of insurance.

00:24:37.060 | This is a pretty good type of insurance.

00:24:39.040 | If you could just simply buy this policy and the rate's adjusting every year, then what

00:24:43.200 | happens is you're able to pay for the cost of the risk of dying at any specific year.

00:24:49.680 | So at the age of 20, that's a great – I mean it's super cheap because the odds,

00:24:54.520 | statistical odds of your dying at the age of 20 are relatively low.

00:24:58.920 | And then as your age increases over time, it becomes much more difficult to handle.

00:25:05.320 | Picture in your mind a graph and we're going to do a simple chart.

00:25:08.640 | It's going to be an X-Y axis and on the bottom picture – on the X axis, the bottom

00:25:15.840 | horizontal line, picture that going from the age of zero to the age of 100.

00:25:20.880 | And then on the Y axis, the up and down axis on the left, that's going to be the cost

00:25:25.400 | of insurance.

00:25:26.880 | And string a line directly from zero, zero to up at 100, 100 and a direct 45-degree line.

00:25:35.720 | So you can see this line increasing in your mind at a one-to-one ratio.

00:25:40.820 | For every unit of increase in age, there's a corresponding unit increase in cost.

00:25:48.060 | Can you visualize that?

00:25:50.220 | Now that's what – it would be nice in some ways if life insurance went like that,

00:25:54.700 | but that's not how life insurance works.

00:25:57.260 | Rather, life insurance is a geometric curve.

00:26:01.420 | So the way it actually works is take in your mind that diagonal line increasing from the

00:26:07.440 | bottom left to the upper right, ventrally grab it with your hand and pull it down and

00:26:13.020 | to the right.

00:26:14.600 | And that stretchy shape where it's growing very slowly at the beginning and then it's

00:26:18.580 | growing increasingly, increasingly faster, that stretchy shape is actually how life insurance

00:26:23.880 | rates work.

00:26:24.880 | So it's a geometric curve.

00:26:26.820 | Life insurance does not have that one-to-one increase.

00:26:28.860 | It doesn't correspond.

00:26:29.860 | There's not a one-to-one relationship between each year, one unit of age and the corresponding

00:26:36.380 | unit of cost.

00:26:37.380 | Rather, it's very slow in the beginning and it's much more quickly as time goes

00:26:41.500 | by.

00:26:42.500 | So you can see the problem that you face is let's say at 20, the concept of yearly renewable

00:26:47.420 | term where you're paying exactly the cost of insurance for a 20-year-old, that concept

00:26:52.540 | works great at the age of 20.

00:26:54.580 | But if you start to go on, it gets much more expensive.

00:26:57.460 | And imagine for the sake of the example at the other end of life, imagine that you're

00:27:01.900 | 99 years old and you're going to buy a $100,000 life insurance policy.

00:27:05.940 | Well, if you come to me and you say, "Josh, I want to buy a $100,000 life insurance policy

00:27:10.420 | from you, how much would I need to charge you at the age of 99 to actually be able to

00:27:16.140 | make that contract with you?

00:27:18.460 | How likely are you to live past the age of 100?"

00:27:21.740 | Well, it's possible that you're going to live past the age of 100 and so I probably

00:27:26.500 | wouldn't have to charge you $100,000 for your $100,000 policy.

00:27:31.340 | But my gut is that I'd probably need to charge you somewhere in the $90,000 range because

00:27:37.460 | if I made that deal with 10 people, it's likely that a good number of them are going

00:27:42.140 | to die between 99 and 100.

00:27:44.500 | Now we could go back and check the mortality tables and the mortality tables would tell

00:27:48.180 | us exactly what that number is.

00:27:49.660 | But it's going to be – my point is the cost for your $100,000 policy in that one

00:27:54.580 | year is going to be much closer to $100,000 than it is to be – than it is close to $1.

00:28:01.140 | It's going to be far at the end.

00:28:02.900 | And so this raises a real problem that as you age, you can no longer afford the cost

00:28:07.620 | of insurance.

00:28:09.980 | That's fundamentally the problem.

00:28:13.020 | So how do we solve that?

00:28:15.260 | Well, we could solve it if we could figure out how to charge you a higher premium in

00:28:21.340 | the beginning of your life so that we could charge you a lower premium toward the end

00:28:26.620 | of your life.

00:28:27.620 | That's where the concept of level premium life insurance comes from.

00:28:32.620 | So if you wanted to buy a $100,000 contract from me, what if I said to you, "Well,

00:28:38.380 | I can't – instead of paying just this exact same – the cost each year depending

00:28:43.740 | on your rate, so it starts at say $20 a year when you're very young and it increases

00:28:48.160 | to almost $100,000 a year when you're older, what if I just said, "Well, let's just

00:28:52.700 | level these premiums out and so I'm going to charge you $500 per year.

00:28:56.540 | Well, let's start.

00:28:57.540 | I'm going to charge you $1,000 per year from age zero to age 100 and then I'll pay

00:29:03.860 | – and you're just going to pay this level amount and I'll go ahead and give you the

00:29:06.940 | policy."

00:29:08.580 | We could do that and that was what was developed was the concept of level premium life insurance.

00:29:13.420 | This was very, very important that it was developed because without the concept of level

00:29:17.580 | premium life insurance, you wouldn't have any modern insurance product.

00:29:23.940 | Level premium life insurance allows you to bring in stability and it allows the insurance

00:29:28.780 | company to set aside and create a reserve fund.

00:29:32.060 | So let's ignore the rate of interest that we could earn on savings for a quick moment

00:29:36.380 | and let's just talk about this.

00:29:38.620 | You come at age zero or your parents come at age zero and say, "Josh, well, we'd

00:29:41.940 | like a $100,000 policy.

00:29:43.380 | So we're going to pay you $1,000 this year."

00:29:46.100 | I take that $1,000 and I set it aside on the shelf.

00:29:49.100 | Then you come in year two and you pay me $1,000 and I set that aside on the shelf and you

00:29:53.580 | come in year three and I set aside $1,000.

00:29:55.300 | Well, after 100 years of $1,000 coming in each year, I'm going to have $100,000.

00:29:59.820 | Then you die at age 100.

00:30:01.340 | I can go ahead and pay that $100,000 out to the family.

00:30:04.940 | Then ideally, because we get into the concept of risk pooling, if you die at 30, I might

00:30:11.060 | only have $30,000 but I'm going to have more money from someone else that dies at

00:30:16.020 | $110,000 and they actually pay me $110,000 and I can pull it together.

00:30:21.420 | You can immediately see my math breaks down with these round numbers because I would actually

00:30:24.620 | need to collect more than $1,000 because statistically, the entire population is not going to live

00:30:30.780 | on average to age 100.

00:30:33.340 | But hopefully you can at least just follow the verbal logic picture.

00:30:37.260 | This is fundamentally how life insurance works.

00:30:39.860 | Now if you add in another dimension, it really starts to work and that dimension is money

00:30:47.060 | that can be earned on – insurance is called the float.

00:30:50.500 | The float in an insurance company is the difference between the premium dollars that you've

00:30:54.700 | taken in and when you're going to incur the liability that you've got to pay the

00:30:58.020 | money out.

00:30:59.100 | So if I agree to insure your house from the risk of fire, you might be sending me premium

00:31:03.560 | dollars for 10 years and then finally your house burns down.

00:31:06.060 | Well, I get to use your money for 10 years and make money on it before I have to return

00:31:12.620 | to you the money.

00:31:13.620 | That's called float and it's very useful.

00:31:16.920 | Insurance is a wonderful business because you can use it to basically create money.

00:31:25.060 | People are giving you the money.

00:31:26.500 | You're taking it, investing it and you could take that float.

00:31:29.740 | This was a major part – some people, if you study one of the most famous investors,

00:31:34.220 | Warren Buffett, this was a major part of his financial strategy.

00:31:36.620 | It was buying and using insurance companies and then having access to the float, the money

00:31:42.300 | that they have where they're collecting premium payments before there's a corresponding

00:31:46.700 | liability that they have to pay the money out.

00:31:48.500 | Even still, General Rhee is a huge part of his portfolio and a huge part of Berkshire

00:31:53.060 | Hathaway and they have massive insurance interests in many different types of insurance.

00:31:59.260 | But the simple point for today is just that you can take the money and you can invest

00:32:02.820 | it.

00:32:03.820 | Now, I can figure out some rate of return.

00:32:06.300 | So let's say that in my simple example that doesn't actually work out mathematically,

00:32:10.180 | you give me $1,000 at age zero.

00:32:12.300 | I can take that and let's say I invest and I earn 5% on it.

00:32:16.300 | Now I've got $1,050 and you give me $2,000 – excuse me, you give me $1,000 in year

00:32:21.620 | two and I add that to my investment.

00:32:23.260 | Now I've got 1,100, 2,100, a little bit more on my money.

00:32:30.260 | So my money grows over time and I start to create extra money and that builds my reserve

00:32:35.340 | fund.

00:32:36.900 | So this reserve that I have to keep in case you die and the interest that I'm earning

00:32:41.540 | on it is fundamentally how an insurance company operates.

00:32:45.080 | So in a level premium life insurance policy, then you're overpaying in the beginning

00:32:50.540 | and you're putting in more money than technically the cost of insurance is.

00:32:54.360 | The insurance company is taking that money.

00:32:56.300 | You're investing it, earning interest, and they're setting aside a reserve in case

00:33:01.100 | you die.

00:33:03.780 | Depending on the amount of that reserve, then they are – that's what the – that's

00:33:11.620 | the whole business of insurance is how much is that reserve that they're managing to

00:33:15.060 | pay out and cover their liabilities that they owe.

00:33:18.020 | So this creates an interesting reality because the insurance company is never actually on

00:33:25.940 | the hook for the full $100,000 liability because in the very first year, if you've sent in

00:33:34.460 | $1,000 to start the policy, they're on the hook to pay you out $100,000 but they're

00:33:39.940 | only at risk of $99,000.

00:33:42.860 | So they're never on the hook for the full $100,000.

00:33:46.220 | This reserve is what backs up the policy.

00:33:48.180 | It's what backs up the claim for the policy.

00:33:51.700 | Now they've got to figure out and they've got to match the reserve fund to the liability

00:33:59.060 | when it's going to be paid out.

00:34:00.100 | So we're sticking with a level premium.

00:34:01.580 | Let's talk about a whole life insurance policy that historically, the number that

00:34:07.040 | used to be done with the 1980 tables and previously was that all life insurance – whole life

00:34:12.980 | insurance contracts would what we call endow at the age of 100.

00:34:18.540 | So mathematically, the insurance company would match the amount of the premiums plus the

00:34:24.660 | interest in the reserve fund to the face amount of the policy, the actual amount that the

00:34:30.620 | insurance is for at the age of 100.

00:34:32.760 | So in a simple way, they would collect premiums – in my $100,000 example, they would collect

00:34:37.780 | premiums from you every year.

00:34:39.700 | They would invest that money and mathematically, it will perfectly equal out at $100,000.

00:34:46.180 | The cash value of the policy of all whole life policies, the cash value of all whole

00:34:50.580 | life policies would exactly match the death benefit at the age of 100.

00:34:55.820 | And this is the first time we're bringing in cash value.

00:34:57.140 | We're going to come back to that in just a second.

00:34:59.140 | Now today, it's actually age 120.

00:35:01.140 | But if you ever look at a whole life insurance illustration, what you will see is that the

00:35:06.580 | cash value and the death benefit perfectly match at age of 120 or 100 depending on when

00:35:14.900 | you bought the policy.

00:35:17.380 | That's what we call the policy endowing.

00:35:20.940 | In fact, if you live to the age of 101 – my grandmother is 100 years old.

00:35:27.020 | On her 100th birthday – and I actually haven't asked her.

00:35:29.340 | I don't know if she had any whole life insurance.

00:35:31.100 | I don't think she did.

00:35:32.340 | But on her 100th birthday, if she had any older whole life insurance policies that were

00:35:38.460 | using those tables, then her whole life insurance policy would actually have sent her a check

00:35:44.700 | for whatever the amount of the life insurance policy was at the age of 100.

00:35:48.260 | Incidentally, this is why the tables have been extended to the age of 120 because this

00:35:52.460 | is a real problem if your life insurance policy pays you out while you're still alive.

00:35:56.460 | And so you don't want this to happen.

00:35:58.860 | But that's why – among other reasons, but that's why the ages are age 120 now.

00:36:04.020 | There is – there are types of life insurance more popular in the rest of the world than

00:36:07.020 | in the United States called endowment contracts where they actually pay out at a lesser age.

00:36:12.300 | And so historically, you could buy a life insurance policy that would endow at the age

00:36:16.820 | of 70 or that would endow at the age of – in 20 years and it would go ahead and pay out

00:36:21.620 | the death benefit.

00:36:22.620 | We'll come to that in a later show, a little bit at the end of today's show when I talk

00:36:25.500 | about the types of life insurance and on a later show.

00:36:28.860 | So interestingly, this is where you bring in the concept of cash value.

00:36:34.820 | And the key that people don't – often don't understand about permanent life insurance

00:36:38.940 | products is that the cash value is simply a claim on the reserve fund of the insurance

00:36:45.580 | company.

00:36:46.580 | So the idea if you arrive let's say at the age of 60 and you have a life insurance policy

00:36:51.860 | that is worth – is going to pay out at $100,000, the insurance company might have accumulated

00:36:57.140 | $60,000 in their reserves by that point in time.

00:37:00.420 | Well, that $60,000 is your cash value.

00:37:05.280 | So if you cancel the contract and you say I no longer want to own this life insurance

00:37:10.020 | contract, the insurance company will send you the cash values.

00:37:14.320 | The cash values represent the reserves of the policy that have been set aside and you'll

00:37:18.660 | get the $60,000 back.

00:37:21.260 | Now the actual amount of the cash values will vary because we got to bring in some other

00:37:25.700 | factors.

00:37:26.860 | For example, you've got – they'll vary based upon what was the rate that was used,

00:37:30.900 | the discounting rate that was used by the company.

00:37:32.780 | The company is saying we're going to invest your money at 4% versus we're going to invest

00:37:37.300 | your money at 2% versus we're going to invest your money at 6%.

00:37:41.380 | That will make a dramatic difference in the amount of reserves held by the insurance company.

00:37:46.820 | And depending on the assumptions in the policy, if the insurance company is setting it aside

00:37:51.020 | at 2% versus 6%, that will correspondingly make a dramatic difference in the amount of

00:37:55.780 | the cash values that are in the policy.

00:37:57.500 | It's also going to make a difference what are the expenses of the company and we'll

00:38:01.620 | come to these – some of these factors in just a moment.

00:38:04.780 | But there are all these factors that actually influence what's the total amount of the

00:38:08.060 | reserves and what's the total amount of the cash values in the policy.

00:38:12.100 | Now if you understand these two basic concepts of how insurance policies work, yearly renewable

00:38:17.940 | term which is a policy that is for a term of one year every single year and it goes

00:38:23.980 | up and you just pay whatever the rate is for one year's worth of insurance each year.

00:38:29.940 | So that's at the one end.

00:38:30.940 | And on the other end, you understand a life insurance policy with level premiums for your

00:38:35.820 | whole life.

00:38:37.180 | Then you can start to pull from that different types of policy designs and you can change

00:38:42.900 | various factors that are going to change the premiums.

00:38:46.820 | Now the most obvious one is how much insurance do you have.

00:38:50.220 | So twice the amount of insurance, a $200,000 policy should cost double what $100,000 policy

00:38:56.860 | does.

00:38:57.860 | And incidentally, with most insurance companies, it does.

00:38:59.860 | It's an exactly linear process with the exception of what's called a policy fee.

00:39:04.860 | So some insurance companies, most insurance companies will charge a policy fee.

00:39:08.600 | So for each insurance contract, there may be a policy fee.

00:39:11.220 | It might be $50.

00:39:12.220 | It might be $100, something like that.

00:39:13.980 | But for every contract, there's a policy fee which covers the annual mailings, things like

00:39:18.220 | that.

00:39:19.220 | And then it's exactly based upon the amount of insurance.

00:39:21.400 | So twice the amount of insurance is exactly double the premium.

00:39:25.180 | If you take that policy fee out, it's exactly double the premium for half the amount of

00:39:29.340 | insurance.

00:39:30.340 | So that's an obvious factor that will change what the premiums are.

00:39:34.260 | But the other things that will change it is how long does the insurance last.

00:39:38.300 | An insurance policy that's enforced for a very short period of time will cost much less

00:39:43.180 | than an insurance policy that's enforced for a very long period of time.

00:39:46.540 | And then another factor is how long do you pay the premiums.

00:39:49.460 | And you can start to manipulate these factors and understand different costs of different

00:39:53.700 | types of life insurance policies.

00:39:56.340 | You can have a policy that is enforced for a very short time period and you pay premiums

00:40:02.780 | for a very short amount of time, just on a one-time basis.

00:40:06.180 | The best example of this is some of you who are older should remember when there were

00:40:11.340 | actually kiosks in major US airports that – where you could actually buy life insurance

00:40:18.360 | for your forthcoming flight.

00:40:20.460 | This still exists in some parts of the world.

00:40:22.140 | I've never seen them myself in the US airports but I know they exist.

00:40:26.200 | So you could – you're getting on the airport – on an airplane in Topeka, Kansas and you're

00:40:30.060 | going to fly to Dallas, Texas.

00:40:31.940 | You could trot over to a life insurance kiosk and you could buy insurance where if your

00:40:36.400 | plane were to crash on the flight from Topeka to Dallas, then you could – then your family

00:40:41.720 | would receive money.

00:40:43.540 | Incidentally, this type of insurance is still in existence.

00:40:47.960 | You just don't buy it at a kiosk but it's part of your major credit cards.

00:40:54.140 | This is – most of us know if you buy an airplane ticket with a major credit card then

00:40:59.920 | – and you die on the airplane, then your credit card company will pay out a certain

00:41:03.800 | amount of insurance to your family.

00:41:07.460 | Usually it's something like a couple hundred thousand dollars and you might need a platinum

00:41:10.240 | card or a card with certain benefits but this is – so it still exists.

00:41:14.620 | We just don't buy it from a kiosk anymore.

00:41:16.260 | It's just buy it with your credit card when you swipe or put in your numbers for the ticket.

00:41:21.220 | That's the shortest period of time that frankly I can about imagine, a two-hour flight

00:41:26.220 | and a one-time payment and your cost of insurance is going to be pennies.

00:41:29.260 | That's why it's included for free as the – as just one of your credit card payments.

00:41:34.780 | The credit card company does have to pay an insurance company for that.

00:41:39.100 | Usually it's a reinsurance contract or they at least have to calculate it for themselves

00:41:43.080 | but the cost of an airplane going – the risk of an airplane going down is so infinitesimally

00:41:47.880 | low that it's – there's just – they don't – there's very little cost to

00:41:53.180 | it.

00:41:54.180 | Now, you could also have – so that's a short time period and a one-time payment.

00:41:58.880 | You could also have a very long time period of coverage and a one-time payment.

00:42:02.980 | There's an insurance product that you can buy that's called single premium life insurance.

00:42:07.520 | This is a single premium whole life insurance.

00:42:10.420 | The way this works is you can make a one-time premium payment and you can have a life insurance

00:42:15.220 | policy that's in force forever.

00:42:19.540 | It's an interesting product.

00:42:20.880 | There are – from a tax perspective, you need to plan carefully here and I won't

00:42:24.340 | get into the details but this is known as a modified endowment contract and it changes

00:42:29.100 | the way that the taxation works on life insurance policy.

00:42:32.900 | We'll cover taxation in depth on a different basis.

00:42:35.640 | But you can actually say, "Joshua, how much would I have to pay you today for a $100,000

00:42:41.940 | life insurance policy?"

00:42:43.220 | And there can be many excellent ways to do it.

00:42:45.540 | Incidentally, the taxation does not change for the death benefit of a life insurance

00:42:49.500 | contract like this.

00:42:51.120 | So if you buy a $100,000 policy, let's say you're 30 years old, maybe the premium for

00:42:54.880 | that is going to be something like $40,000.

00:42:57.860 | And so you write a check for $40,000 and you immediately have $100,000 of life insurance

00:43:02.600 | in force.

00:43:04.040 | If you die, that $100,000 goes income tax-free to your family under US tax law just like

00:43:09.100 | every other life insurance policy does.

00:43:11.260 | It's just that if you cancel the policy and you take the cash values out or you borrow

00:43:16.280 | the cash values out, that's where the taxation changes on a policy like that.

00:43:21.780 | But single premium life insurance is a fascinating type of insurance product.

00:43:25.520 | It had an interesting niche and has had an interesting niche in the insurance business

00:43:29.020 | the last few years, but with very low interest rates that are available in the open market,

00:43:35.640 | there have been fewer and fewer places for wealthy people to park sums of money and get

00:43:41.340 | a decent rate of return.

00:43:43.140 | Well, single premium life insurance policies, the way they work is depending on the contract

00:43:48.560 | and depending on the company, you can recoup all of your cash values guaranteed within

00:43:53.960 | a relatively short period of time, a few years.

00:43:57.420 | And then those policies are growing based upon whatever crediting rate the life insurance

00:44:02.740 | company is crediting to their single premium life insurance portfolio.

00:44:07.320 | Oftentimes these will have a different crediting rate than other types of insurance contracts

00:44:10.440 | because of the extra portfolio risk that the insurance company faces of this concentrated

00:44:15.940 | income.

00:44:16.940 | That was way too wordy.

00:44:17.940 | Ignore that if it didn't make sense to you.

00:44:19.540 | I'll cover that in a future show.

00:44:20.540 | I don't want to get into the details.

00:44:22.160 | But the point was you could buy – let's say you bought a $100,000 policy.

00:44:25.560 | It cost you $60,000 cash today.

00:44:28.560 | But you're guaranteed a $100,000 life insurance contract.

00:44:31.220 | Your immediate cash values in the policy may have been $56,000.

00:44:35.040 | That covers the agent commission and the underwriting expenses for the company.

00:44:38.420 | But after three years, you're guaranteed to have your $60,000 in your cash values.

00:44:42.840 | And now from then on, it's growing.

00:44:44.640 | Let's say the insurance company was crediting you a few years ago when I was actively working

00:44:49.640 | in the market.

00:44:50.640 | The insurance company might have been crediting you at 5 percent or 6 percent on your money

00:44:53.980 | over time.

00:44:55.620 | But you're looking around and you can't buy a CD at half a percent.

00:44:59.980 | So it was for the right sets of dollars, for the right person, the right circumstance.

00:45:05.420 | It was kind of a neat opportunity because if you could do with having the money locked

00:45:11.360 | up in a life insurance policy, it's kind of cool.

00:45:13.040 | There was no downside to it.

00:45:15.220 | And as life insurance agents, one of those nice situations where there's no potential

00:45:20.260 | downside to the customer as long as you've worked through the tax things and you know

00:45:23.740 | the taxation that you're going to incur when you take the money out and you've calculated

00:45:27.840 | it to be an alternative – what are the alternative uses of the dollar?

00:45:31.140 | It was kind of a cool situation.

00:45:32.140 | So that's called single premium life insurance.

00:45:36.140 | Very, very, very, very, very small niche.

00:45:38.140 | That's not the type of thing – it's not appropriate for life insurance coverage

00:45:41.960 | for a general family.

00:45:43.560 | But it could be a useful place for somebody to park some money within the context of life

00:45:47.420 | insurance contract.

00:45:48.940 | Now on the same hand, so that's long period of time coverage.

00:45:52.260 | That's whole life.

00:45:53.260 | It's enforced for your whole life and it has a one-time payment.

00:45:57.500 | That's single premium life.

00:45:58.500 | Now you can also have a long time period of coverage and a long period of payments.

00:46:04.380 | So traditional whole life insurance, it works exactly like at level premium whole life insurance

00:46:09.300 | that we talked about.

00:46:10.300 | In insurance lingo, this is historically called ordinary life.

00:46:14.340 | An ordinary life insurance policy is a life insurance policy that's enforced for your

00:46:18.540 | whole life and it has level premium payments that don't change throughout your lifetime.

00:46:25.340 | So you have a long period of coverage and a long period of payments, the payments you

00:46:29.820 | pay throughout your entire lifetime.

00:46:32.460 | And by manipulating these options, you can design any number of policies.

00:46:36.980 | So you can have – you can shorten up the time period and shorten up the payments and

00:46:41.140 | you can have five-year level term life insurance or what's one of the most popular life insurance

00:46:46.580 | products on the market today, a 10-year level term life insurance policy.

00:46:50.500 | You shorten your period of time up to 10 years and you shorten your period of payments up

00:46:54.060 | to 10 years.

00:46:55.500 | And if you wanted to keep the time period at 10 years but you wanted to shorten your

00:46:59.020 | period of payments, many insurance companies will allow you to pre-fund a policy.

00:47:03.780 | And essentially you open a bank account with the insurance company.

00:47:06.620 | You put in your premium payments.

00:47:07.980 | So you could almost – you usually couldn't do it as a 10 years.

00:47:11.140 | Some companies would be five years, seven years, eight years restriction on this.

00:47:14.980 | So you go ahead and just basically pre-fund 10 years' worth of premiums.

00:47:18.500 | You make a one-time premium payment and then you pre-fund the policy at 10 years.

00:47:23.140 | So you can have 10 years of coverage and a one-time payment or what's most normal with

00:47:27.900 | a 10-year level term insurance policy.

00:47:30.160 | You could have 10 years of payments and 10 years of coverage.

00:47:35.260 | You could have 20 years of payments, 20-year level term life insurance, 20 years of coverage

00:47:40.060 | and 20 years of level premium payments.

00:47:43.440 | You can have life insurance that's enforced forever, so a whole life insurance policy.

00:47:49.560 | But you can have different payment periods that – so you can fund it for 10 years.

00:47:54.200 | You could pay 10 years of premium payments and the policy would be enforced forever.

00:47:57.320 | You could pay 20 years of premium payments and the policy is enforced forever.

00:48:00.320 | You'll hear in – these are not popular in today's insurance market but you historically

00:48:05.760 | had things like what we would call – in the lingo, it's called 10-pay life.

00:48:10.320 | It's 10 payments for a whole life policy, 10-pay life or 20-pay life, 20 years of payments

00:48:19.280 | for a whole life insurance policy enforced for life.

00:48:22.080 | Or you would have life paid up at 65, which means you make the premium payments every

00:48:27.280 | year through 65.

00:48:28.400 | The insurance contract is enforced forever.

00:48:30.600 | It's enforced for your whole life and/or you have life paid up at 90.

00:48:38.840 | You had what's called extraordinary life.

00:48:40.920 | All these insurance lingos, they're all referring to different variations of how long

00:48:45.920 | is the contract enforced and how many years am I paying premiums.

00:48:50.720 | That's the – those are the variations that are changing.

00:48:54.680 | Back to the yearly renewable term, you can still buy yearly renewable term.

00:48:57.840 | I will do an entire show on this of why I prefer that young people buy yearly renewable

00:49:02.880 | term instead of level term life insurance.

00:49:04.480 | I'll do an entire show on it with numbers and as examples and all of that in the future.

00:49:09.960 | But simplistically, the way these policies work is you can have the policy through an

00:49:14.760 | age.

00:49:15.760 | So earlier when I was describing how a yearly renewable term contract work, I led you to

00:49:19.440 | believe that you could keep this through the age of 100.

00:49:22.240 | The problem is that if the insurance company offered that deal, it results in adverse selection.

00:49:27.320 | That same problem that they figured out a century ago with the assessment policies,

00:49:32.960 | if you got into a situation where you're 70 – you're 60 years old, you've got

00:49:37.920 | incredible health but you're looking here and saying, "Man, my life insurance is getting

00:49:40.800 | so expensive," then I don't want this anymore.

00:49:44.360 | I'm in great health.

00:49:45.360 | That's a problem because the only people that look down and say, "I'm 60 years

00:49:48.280 | old.

00:49:49.280 | Man, my life insurance is getting expensive but I really need to keep it," are the ones

00:49:51.240 | who are sick.

00:49:52.440 | So all yearly renewable term contracts that are commercially available with the exception

00:49:57.480 | of some variations of group policies will be based upon cutting off at an age.

00:50:03.480 | So it might be yearly renewable term insurance to the age of 60 or to the age of 70 or to

00:50:08.760 | the age of 80.

00:50:10.520 | In those later years, the premiums are going to be very, very high but you can't keep

00:50:14.120 | them in force up through the age of 80.

00:50:16.040 | You can't keep a term insurance product in force through the age of 100.

00:50:21.240 | All term insurance products are in force for a specific amount of time, a specific term.

00:50:25.560 | That's why they're called term life insurance.

00:50:28.600 | So there are ways to manipulate these variables and you can create an insurance policy by

00:50:33.820 | manipulating these variables that meets the needs of the specific financial scenario.

00:50:40.400 | I'm specifically avoiding talking about variations of universal life insurance but

00:50:45.960 | universal life insurance, I'm aware of it.

00:50:48.480 | We'll talk about it in detail another time but hybrid is basically a hybrid between term

00:50:52.480 | life insurance and whole life insurance.

00:50:54.600 | So there you can actually get even more flexible where you can – with universal life insurance,

00:50:59.700 | you can be very flexible on your premium payments.

00:51:02.360 | One of the major benefits of universal life insurance is you can – instead of having

00:51:07.100 | an inflexible, unchanging premium which is what a term insurance policy will have or

00:51:13.880 | a whole life insurance policy will have, with the universal life insurance policy, you can

00:51:17.920 | change the premium on a yearly basis.

00:51:20.640 | In some years, you can pay more premium in.

00:51:22.840 | In some years, you cannot pay a premium at all.

00:51:25.320 | This comes with a massive amount of risk and universal life insurance policies have bit

00:51:30.160 | a lot of consumers on the butt because they just simply were not – they didn't – people

00:51:35.480 | don't – universal life insurance is an incredibly complicated product and the vast

00:51:40.520 | majority of people don't understand it properly and in my opinion – I don't know the percentage.

00:51:46.520 | I don't know if it's the majority or the vast majority of policies but they're underfunded

00:51:51.440 | and there are some real conflicts of interest between the agent and the client that will

00:51:56.960 | often lead to them being underfunded.

00:51:58.960 | We'll cover that when we do a universal life insurance show.

00:52:02.360 | But it's – but universal life insurance is a very valuable product because it comes

00:52:07.020 | with a lot of flexibility on this amount of the time that the policies enforce and also

00:52:11.240 | the amount of the premiums.

00:52:12.560 | So in the right hands, in an expert's hands who understands how the contract works, it

00:52:16.320 | can be a very valuable product.

00:52:18.960 | It can be especially useful for funding because of the flexibility.

00:52:24.000 | It can be especially useful if you're using a life insurance contract to fund a deferred

00:52:28.880 | compensation plan of some kind.

00:52:31.540 | But by varying these options, then that's it.

00:52:34.960 | That's what we change.

00:52:36.700 | So how long does a policy last?

00:52:38.120 | How long do you pay premiums?

00:52:40.120 | Another factor though that changes these numbers is what happens to the amount of the insurance?

00:52:47.400 | So you can have life insurance policies where the amount of insurance is level.

00:52:52.920 | You buy a $100,000 contract.

00:52:54.560 | As long as you have the contract, it's going to pay out $100,000.

00:52:57.540 | You can have life insurance policies where the amount of money is increasing.

00:53:01.840 | You can have increasing coverage and that can be on term insurance policies.

00:53:06.240 | It can be on whole life insurance policies.

00:53:08.500 | Every year it grows by the rate of inflation for example.

00:53:10.760 | $100,000 this year, it's going to grow at 3% every year.

00:53:13.440 | You could do that.

00:53:14.480 | You can also have insurance policies where the amount of coverage is decreasing.

00:53:19.360 | The best example of coverage here is when you buy a house and you take out a mortgage

00:53:24.080 | and that mortgage is filed with the courthouse, you will quickly receive in your mailbox dozens

00:53:29.420 | and dozens of solicitation letters from various life insurance companies offering you protection

00:53:34.740 | from your mortgage to pay off your mortgage if you die.

00:53:39.840 | These are often a type of insurance that's called decreasing term life insurance where

00:53:44.960 | each year the amount of the coverage decreases as you pay off the mortgage.

00:53:50.600 | That's a perfectly valid approach.

00:53:52.840 | Usually you're going to want to shop them a little bit more than just buying them directly

00:53:56.840 | from whoever mails you.

00:53:58.720 | But if your only purpose in having an insurance policy is to satisfy a liability in case of

00:54:04.120 | your death, then if your mortgage balance has dropped from $100,000 to $90,000, you

00:54:09.640 | don't need any more than $90,000.

00:54:12.160 | So you can buy a decreasing term life insurance contract.

00:54:17.600 | Now there are some other actual assumptions that are used by the company that will affect

00:54:22.680 | the price of the policy.

00:54:25.120 | These are the assumptions that are invisible to you, the consumer, but these will affect

00:54:29.840 | if you're buying term life insurance.

00:54:31.080 | They will affect the price of the term life insurance that you pay.

00:54:34.280 | They will also affect – if you ever wonder, why don't all companies pay the same?

00:54:38.600 | It's these factors I'm just about to mention.

00:54:40.480 | But if you're buying some sort of permanent life insurance product, especially a product

00:54:44.520 | that has cash values associated with it, these will dramatically affect the amount of the

00:54:48.920 | cash values that are in the contract.

00:54:51.280 | And so these simplistically – this is basically what is the mortality rate of the risk pool.

00:54:58.320 | So in any body – let's say you have a thousand – in the insurance business, we

00:55:01.560 | call them insureds.

00:55:02.560 | You have a thousand people who are insured by the company, so a thousand insureds.

00:55:06.760 | At what rate are these people dying?

00:55:08.680 | Is this a group of triathletes who are very healthy and none of them are fat and none

00:55:13.800 | of them smoke and they're just – they go to their doctor every year and they wear

00:55:18.240 | their sunscreen so they don't get their skin cancer, if that's even true.

00:55:22.320 | And so is this a very healthy group or is this a group made up of a bunch of 400-pounders

00:55:28.640 | who are smoking three packs of cigarettes a day?

00:55:31.420 | So depending on what the actual rate of people dying is within the risk pool, that will affect

00:55:37.440 | the cost of the contract and/or the benefits of the contract.

00:55:40.880 | That's why if you smoke, your rates for your term life insurance – and here's a

00:55:45.240 | little bit of industry tidbit for you.

00:55:47.120 | If you smoke, the rates of term life insurance are usually two to three times what they are

00:55:52.300 | for a nonsmoker for term insurance, two to three times what they are for a nonsmoker.

00:55:58.080 | Interestingly, for whole life insurance or various types of permanent insurance contracts,

00:56:02.840 | it's not anywhere near – at least many of the scenarios in the past I get rusty because

00:56:08.200 | I'm no longer in this business.

00:56:09.200 | But in the past I've done this comparison.

00:56:10.920 | It's nowhere near two to three times the difference of cost and because whole life

00:56:16.560 | insurance contracts are always based upon a guarantee of paying out, whereas term life

00:56:24.120 | insurance contracts, the vast majority of term life insurance contracts never pay a

00:56:27.200 | death benefit because they run out.

00:56:30.920 | People outlive them.

00:56:32.120 | So if you smoke, that affects the price of the policy.

00:56:35.080 | If you're overweight, that's why there are different grading mechanisms.

00:56:37.680 | If you have a certain type of medical condition, you have high blood pressure, you have diabetes,

00:56:42.040 | you had a heart attack, then you're going to get graded a different amount and that's

00:56:46.120 | because you're going into a risk pool into which there's a different mortality rate

00:56:51.040 | and you've got to be charged appropriately for the insurance company to be able to handle

00:56:55.920 | that.

00:56:57.320 | Insurance companies, this is an area of competition among companies.

00:57:01.760 | Excellent underwriting or somewhat loose underwriting can lead to various companies helping – it

00:57:09.080 | can lead to long-term results.

00:57:11.000 | So this is why I feel very strongly that you're going to be best served if you can find a

00:57:15.840 | life insurance agent who is accustomed to working with many companies and especially

00:57:20.440 | someone who has access to a broad number of companies because there are some real competitive

00:57:25.520 | advantages of different companies price different types of medical conditions differently.

00:57:31.200 | Some companies – for some companies, tobacco use is a big, big deal and for some types

00:57:35.140 | of policy design.

00:57:36.380 | For other companies, you can get better rates.

00:57:38.880 | For some companies – for example, in the past, I always enjoyed smoking cigars.

00:57:43.520 | Well, some companies will give a cigar smoker a slightly higher rate.

00:57:47.880 | Some companies will give cigar smokers exactly the same rate.

00:57:51.280 | Some companies, you can smoke five or ten or 12 or 15 cigars a year.

00:57:56.840 | Some companies, you can smoke three cigars a day but as long as you're not smoking

00:57:59.700 | a cigarette, you're in good shape.

00:58:02.100 | So you need an agent who has the expertise to be able to say, "Ah, I had a client one

00:58:06.560 | time who owned a cigar shop and so this guy smokes cigars like crazy."

00:58:10.880 | Well, how much – how many cigars is he smoking every day?

00:58:15.960 | With some companies, his rates are going to be double or three times as much because he's

00:58:20.040 | going to be getting put into tobacco classifications.

00:58:22.240 | But there are a few life insurance companies that I could use where we could go in.

00:58:25.960 | You could write a term insurance policy and he's going to pay exactly the same rate

00:58:29.200 | as everyone else.

00:58:30.480 | So companies will compete with one another and some of them feel like, "You know what?

00:58:34.400 | I can accurately – I can accurately underwrite the risk of heart attack.

00:58:39.240 | So I'll go ahead and accept somebody who's had a heart attack in the past."

00:58:42.560 | But other companies say, "No, I can't accurately do that."

00:58:45.080 | Some companies develop very healthy pools of insurance and this is good if you're

00:58:50.880 | an insurance company because you've got lots of healthy people paying you money and

00:58:54.720 | so they develop that and that can be a real advantage.

00:58:56.800 | So if I've got someone who's very healthy, then in the long run, I'm going to make

00:59:00.720 | sure they're with a company where that is very valued.

00:59:03.520 | So if you kind of – I feel you need to work with somebody on life insurance who doesn't

00:59:09.680 | just work with one company.

00:59:11.680 | This is the real disadvantage that a lot of people who write life insurance for example

00:59:15.840 | had some friends who – their primary business is property and casualty insurance but then

00:59:20.080 | they write a little life insurance on the side with their one company.

00:59:22.960 | It's a real disadvantage to working with that.

00:59:24.880 | It's not that it's necessarily bad but you're better off served if you can work

00:59:28.280 | with somebody who has access to a lot of companies and you also want somebody with some expertise.

00:59:33.360 | I had one case I was extremely proud of that – one of my more proud ones was I met – was

00:59:39.120 | referred to somebody.

00:59:40.120 | I met with them and they said, "Listen, we would love to have" – this was a life

00:59:42.640 | insurance case.

00:59:43.640 | "We would love to have life insurance but we've talked to like three different agents

00:59:47.160 | and nobody can find us insurance."

00:59:49.840 | That was because the husband – I was working with the wife in this case but the husband

00:59:54.080 | was in his 50s or 60s and had a quadruple bypass surgery a number of years previously.

01:00:01.720 | I said, "Well, give me a shot."

01:00:03.440 | The way those things usually work, those types of engagements work is you enter into a process

01:00:10.160 | of medical underwriting prior to applying for insurance.

01:00:13.400 | So you get authorization from the client to release their medical records and I worked

01:00:16.640 | with a specialty broker who was a high-risk broker and this specialty broker was excellent

01:00:22.960 | at placing very difficult cases.

01:00:25.240 | So you order the medical records and then you send the medical records off to various

01:00:28.100 | underwriters at different companies.

01:00:30.400 | There's a real level of expertise in this market and you package them up and you send

01:00:34.400 | them off and we were able to get an offer on life insurance for this client who was

01:00:39.000 | just a few years out of a quadruple bypass heart surgery.

01:00:44.360 | Now the client chose not to accept it because the rates – even though we got an offer

01:00:49.380 | and everyone else hadn't even been able to get a single offer from an insurance company

01:00:53.200 | but because we were able to get an offer but even so the rates were still too high and

01:00:57.320 | it just wasn't worth the premium dollars versus the risk.

01:01:00.880 | But I was pretty proud of that.

01:01:01.880 | It makes you feel good as an insurance agent when you've had three or four other agents

01:01:04.800 | that haven't been able to find coverage and you're able to say, "Look, here I've

01:01:08.680 | been able to find – I've been able to get you an offer."

01:01:11.460 | So at least you could get some insurance coverage if you want to.

01:01:15.000 | Incidentally, this is one of the major people have asked, one of the big questions people

01:01:19.480 | are asking me to answer is, "Josh, talk about term insurance versus whole life insurance."

01:01:23.640 | You do enough work as an insurance agent and you start to work with enough people like

01:01:27.440 | that and you start to recognize that life doesn't always go as planned in the sense

01:01:33.400 | of, "Well, I'm just going to buy a 15-year level term life insurance policy and in 15

01:01:38.000 | years, I'm going to be so rich that I'm self-insured."

01:01:40.800 | Life happens and you've got – especially as an insurance agent, you've got to make

01:01:46.260 | sure that you're always keeping a couple of things forefront.

01:01:50.400 | One of them is cost and another one is flexibility.

01:01:54.640 | You need a financial plan that is very flexible because there have been a number of situations.

01:01:59.680 | Just consider this.

01:02:00.680 | You're working with a young family.

01:02:02.000 | A young family, everything is going great.

01:02:04.000 | You say, "We're going to buy this 20-year term life insurance policy."

01:02:07.680 | I've been in the situation.

01:02:08.960 | There's real, real examples.

01:02:10.320 | You're going to buy a 20-year term life insurance policy.

01:02:12.880 | That's it.

01:02:13.880 | After 20 years, you're going to be fine.

01:02:15.320 | The kids are going to be growing out of the house.

01:02:16.720 | After all, you're having two point – we're under two now.

01:02:19.800 | I think we're about two kids.

01:02:20.800 | You're going to have 1.8 children and you've got them now.

01:02:25.800 | You've got a three-year-old and a one-year-old.

01:02:27.680 | So Johnny and Sally are going to be grown and gone and out of the house and you're

01:02:31.600 | going to have all this money set aside because you're going to just pump money into the

01:02:35.160 | buy term, invest the difference sales pitch.

01:02:37.760 | You're going to have all this money set aside and the markets are going to be great.

01:02:40.560 | You're going to be super rich and you're not going to need insurance anymore because

01:02:43.160 | you're going to be a millionaire in 15 years.

01:02:45.100 | But then all of a sudden, things start to conspire and here are the things that happen.

01:02:49.400 | You find out that Johnny has got autism and it's severe autism or Johnny slips and falls

01:02:55.280 | while he's diving and now Johnny is mentally incapacitated.

01:03:00.480 | So now all of a sudden, you're planning horizon.

01:03:03.160 | Instead of being able to launch Johnny after 20 years, you're now in a situation where

01:03:08.000 | Johnny is going to need help for the rest of his life and now as a parent, you now have

01:03:14.080 | a child with special needs and not only do you have to plan for the rest of your life

01:03:18.040 | but you have to plan for the rest of Johnny's life.

01:03:22.920 | Now in addition to that, the stress of having a child with autism drives you and your spouse

01:03:31.800 | apart and you wind up divorced.

01:03:34.800 | So now because you're divorced and you're going through the turmoil and the stress there,

01:03:38.080 | I'll pick on dad.

01:03:39.080 | So dad starts eating too much.

01:03:42.120 | Dad cheats on his wife because he can't handle the stress.

01:03:44.200 | Mom's all worried about Johnny and dad just goes and finds a, how do they call it in French,

01:03:49.920 | a paramour on the side, a mistress on the side.

01:03:52.920 | That drives the relationship apart.

01:03:54.560 | The divorce destroys the finances because now you have mom and dad trying to maintain

01:03:59.200 | separate households and they're trying to take care of a child with special needs.

01:04:03.080 | It destroys the finances and then the destruction of the finances and the destruction and the

01:04:07.680 | stress of caring with a child with special needs, dad starts eating Krispy Kremes on

01:04:11.000 | the way to work every day, picks up smoking again, which he quit when the kids were born,

01:04:15.160 | but he picks up smoking again and all of a sudden dad runs into some medical issue or

01:04:19.560 | gets diabetes and now 20 years later you need life insurance and you can't get it but you're

01:04:25.480 | poor because you had a special needs child and you invested all your money in trying

01:04:28.400 | to help your child get well again and you can't get insurance anymore because you've

01:04:33.000 | got diabetes and your A1C levels are through the roof.

01:04:38.160 | Even they've done that and that's tough.

01:04:44.920 | When you're a financial planner trying to help a family in that situation, that's tough.

01:04:49.660 | So you've always got to keep these things when building financial plans and right now

01:04:52.680 | I just talked to you financial planners.

01:04:54.760 | Make sure that you are keeping flexibility forefront in your mind.

01:05:00.940 | You need to build flexibility.

01:05:03.840 | You don't just account that everything's going to go great.

01:05:06.240 | The other thing I could throw into that scenario, I meant to, I forgot, I got all excited with

01:05:10.360 | my example, but all of a sudden you go through a period of time from 2000 to 2015 and you've

01:05:17.640 | got the so-called lost decade and you faithfully put your money into the index fund every year

01:05:23.420 | and you're sitting there in 2010 with the same amount of money you had in 2000 because

01:05:28.280 | by the time you pulled out your fees and your commissions, all of a sudden now you're at

01:05:33.520 | exactly the same situation where the dividends weren't enough to make it grow.

01:05:37.200 | So this is real life.

01:05:38.560 | This is real life financial planning.

01:05:40.640 | So yes, it's good to start with an actual outline of what you're going to do, but build

01:05:44.480 | flexibility in.

01:05:46.480 | Plan for things not to work.

01:05:47.880 | There's a reason you carry a spare tire in the trunk of your car.

01:05:51.940 | There's a reason why you don't leave at the last minute.

01:05:54.480 | You leave early.

01:05:55.480 | You account for traffic and your financial plans have to account for that as well.

01:06:00.080 | So we're talking about it another day, but that's one of the reasons why I'm so passionately

01:06:04.280 | anti-level term life insurance for young people.

01:06:07.920 | Young people need to have renewable term life insurance because it builds flexibility and

01:06:13.400 | what can happen is, I mean, in essence, in 30 more seconds on this topic and I'll get

01:06:18.240 | off of it, but with yearly renewable term life insurance, you've got choices.

01:06:24.160 | You don't automatically lose your insurance in 10 years.

01:06:27.920 | So you have the choice to be able to continue your insurance for a very long period of time.

01:06:33.440 | Like all of my term life insurance is called term insurance to the age of 80.

01:06:37.920 | I've got from now through the age of 80 at which I can keep the insurance.

01:06:42.040 | Now the rates get very expensive in about your late 40s and 50s.

01:06:46.240 | I don't plan to keep the term life insurance until that time, but I'll tell you what, if

01:06:50.560 | I need it, I'm glad to have it.

01:06:54.880 | If I'm still healthy at 45 and I need life insurance, I'll just go ahead and buy a cheap

01:06:59.880 | 10-year level term life insurance policy at that point in time and then I'll get my cheaper

01:07:08.000 | deal and I'll drop the term life insurance.

01:07:10.880 | But if my wife and I have two kids and our second one is a baby girl and she's expected

01:07:16.980 | this in June, what if all of a sudden I find out in June that I have a little baby girl

01:07:23.000 | that's born with Down syndrome?

01:07:25.720 | All of a sudden my world and my financial plan gets completely changed.

01:07:31.320 | Completely changed.

01:07:32.880 | So one of the other things that's very valuable to me about my term insurance is I can convert

01:07:37.520 | it from term life insurance to various types of permanent life insurance and whole life

01:07:42.280 | insurance any time between now and the age of 60.

01:07:45.760 | So that gives me the option if I were to sit down and say, "Wow, now all of a sudden instead

01:07:49.680 | of me just planning for the financial future of my wife and me, I've got to plan for the

01:07:54.840 | financial future of a child with special needs.

01:07:58.080 | Now I've got another arrow in my quiver, so to speak.

01:08:02.320 | And if in the meantime I've gotten sick or fat, fatter, and I need to buy – I can't

01:08:08.640 | get insurance at good rates.

01:08:09.640 | I've got it all locked in while I was young and healthy and in good shape."

01:08:13.320 | So I got a little bit off on a tangent there but hopefully it's helpful.

01:08:17.000 | New financial planners, plan for flexibility.

01:08:20.600 | There's a real balance.

01:08:22.000 | You need to get a good deal on your money.

01:08:24.580 | You need to get cheap pricing.

01:08:26.960 | But you also need to have flexibility and you've got to hold these things together.

01:08:31.800 | And I don't believe myself with most things in finance that the very cheapest is the most

01:08:37.840 | important.

01:08:38.840 | I learned a lesson.

01:08:39.840 | I've got two car accidents – three.

01:08:44.120 | Somebody backed in it.

01:08:45.600 | I haven't had many car accidents in my life but I had a pretty scary one.

01:08:50.000 | It was a couple of years ago.

01:08:53.360 | My wife and I – my wife was pregnant with our first child and we were driving up 95

01:08:59.360 | in the rain and we hit it.

01:09:01.040 | There was a turn in the road and there was a massive puddle of water.

01:09:03.200 | It was a construction zone at the bottom of it and we hydroplaned and it bounced back

01:09:07.240 | and forth across the barriers at 60-something miles per hour.

01:09:11.400 | My tires were in good shape.

01:09:13.040 | But until that time, I never appreciated the importance of replacing tires at an early

01:09:19.720 | age.

01:09:20.720 | But I'm not running tires till the point where they're zero.

01:09:23.920 | Some things in life, you get to the point you say, "I'm not running my tires until

01:09:28.120 | they're bald.

01:09:29.360 | I would rather spend a little bit of extra money in tires to make sure I have good tread

01:09:33.680 | on my tires and that my family is going to be safe than take the risk of saying I've

01:09:38.160 | just got to milk this thing for all it's worth and run the risk of hydroplaning and

01:09:42.760 | instead of everyone being fine, thankfully, me killing myself or killing my wife or killing

01:09:50.560 | one of our kids.

01:09:51.560 | I mean, how do you live with yourself after that?

01:09:53.560 | It's very, very difficult.

01:09:54.560 | Very, very difficult.

01:09:55.560 | So let me get back to my outline and let's wrap this show up.

01:09:59.000 | I got a little sidetracked but I hope it was helpful for you.

01:10:01.600 | So there are some factors that are specific to the insurance company that affect the policy

01:10:05.520 | and here's where I'm at in my outline.

01:10:08.200 | The policy designs that affect the cost of a policy is how long does the policy last,

01:10:11.720 | how long do you pay premiums and then what happens to the amount of the insurance?

01:10:14.520 | Is it increasing?

01:10:15.520 | Is it decreasing?

01:10:16.520 | Then here are some of the assumptions of the company.

01:10:18.080 | I was talking about mortality rate of the risk pool.

01:10:19.920 | That was where I got off track there.

01:10:21.520 | But the second one is what are the company's expenses?

01:10:23.880 | So what are the actual internal costs of the company?

01:10:28.920 | How much do they pay their CEO?

01:10:30.480 | How much do they pay their staff?

01:10:31.800 | How much do their buildings cost them?

01:10:34.860 | This is a big deal.

01:10:36.320 | And incidentally, this is where you get into the question of how is the company organized?

01:10:41.520 | Is it a stock insurance company or is it a mutual insurance company?

01:10:44.200 | In the insurance world, this is a big deal.

01:10:46.680 | With a stock insurance company, the company is owned by the stockholders, which means

01:10:49.980 | one of the expenses of the company is the profit that's being paid to the stockholders,

01:10:56.360 | the owners of the company.

01:10:57.360 | In a mutual insurance company, there is no profit paid to the stockholders.

01:11:00.600 | Rather, everybody who owns an insurance policy owns the company.

01:11:03.600 | This is why I try to do all of my banking with – if I could, with a credit union instead

01:11:07.640 | of a bank.

01:11:09.800 | I kind of have a hybrid right now with USAA.

01:11:12.360 | I bank with USAA primarily and I also have a local credit union.

01:11:15.720 | But USAA does a great job and they're owned by – it's a mutual insurance company owned

01:11:20.000 | by their policy owners and the banking side feeds the insurance side.

01:11:23.320 | So I get that into my dividend on my car insurance every year.

01:11:26.480 | But if you're banking with a big bank, especially one of the big – what Clark Howard called

01:11:32.200 | the big monster mega banks, man, quit.

01:11:35.640 | Go find a local credit union because you can cut out.

01:11:39.040 | You might own Bank of America in your portfolio but there's a cost.

01:11:42.680 | You're always going to be paid a lower rate of interest on your deposits and you're

01:11:45.760 | always going to pay a higher rate of interest on your loans simply because you have to pay

01:11:50.300 | the stockholders of the company.

01:11:52.000 | Well, credit union, you don't have that problem.

01:11:54.380 | Same thing with insurance.

01:11:55.380 | So if I can do – I can't find a mutual insurance company from a homeowner that will

01:11:59.000 | write homeowner's insurance for me in South Florida.

01:12:01.280 | But if I could, that's a big factor.

01:12:03.000 | It's not the only factor.

01:12:04.480 | You still got to price it and you'll find anomalies in the market.

01:12:08.720 | Same thing with insurance.

01:12:09.720 | It's not automatic that you choose a mutual life insurance company instead of a stock

01:12:13.400 | life insurance company.

01:12:15.080 | But there are anomalies and your agent needs to send you in the direction of wherever you're

01:12:20.280 | best served.

01:12:22.080 | But it's a big factor.

01:12:23.080 | Then the final of the internal factors that affect an insurance company is what are the

01:12:28.760 | actual investment returns that are earned on the reserves?

01:12:33.440 | How do they invest the reserves?

01:12:35.800 | This can go in various directions.

01:12:38.280 | Maybe they invest very conservatively and that's a good thing.

01:12:42.080 | AIG, they're investing insurance company reserves.

01:12:45.560 | It didn't work out so well with them.

01:12:47.240 | I'm referring to 2008 with all the credit – the CDOs and the credit default swaps

01:12:53.200 | that they were – CMOs and then the credit default swaps that they were investing in.

01:12:58.000 | But the rate of return that they actually earn on their investments is going to dictate

01:13:01.880 | what the costs of the insurance company are.

01:13:03.960 | Incidentally, this is why one of the biggest challenges of the last five years with the

01:13:07.800 | historically low interest rates that we've been, it has had a major impact on insurance

01:13:12.920 | companies because insurance companies generally are forced to invest much more conservatively

01:13:17.840 | than many other people.

01:13:19.760 | Because they have liabilities, they have to pay out claims.

01:13:23.640 | They have to keep – they're actually legally required by law to keep their money invested

01:13:27.640 | in a much safer way, much less volatile way, usually that leads to fixed income.

01:13:31.840 | Well, with the fixed income investment rates, just in the zeros, that's very challenging

01:13:38.400 | for those who are in charge of operating an investment portfolio for an insurance company.

01:13:43.240 | So this is just the tip of the iceberg with life insurance and these are some of the reasons

01:13:47.920 | why it's so difficult to get a straight answer from someone who is an expert on insurance

01:13:52.520 | and you say, "Well, what should you do?"

01:13:55.280 | These are just some of the factors affecting life insurance policies.

01:13:59.440 | It's so difficult.

01:14:01.240 | It requires such a level of expertise to actually accurately compare insurance contracts and

01:14:05.800 | to accurately compare insurance companies.

01:14:08.480 | That's why in general with mainstream personal finance advice, basically your advice is just

01:14:16.080 | buy some cheap 10 or 20-year level term life insurance because for a good life insurance

01:14:22.280 | agent, they can understand these factors.

01:14:24.280 | They've hopefully done their homework and they can really serve the client.

01:14:27.120 | But for an unethical life insurance agent, you can take advantage of people all over

01:14:30.520 | the place and many life insurance agents have, which is why the life insurance industry has

01:14:35.640 | such a horrific reputation.

01:14:39.800 | It's very difficult to get a straight answer on these things from an expert because there's

01:14:46.560 | a lot of factors.

01:14:47.560 | I've just covered the basics.

01:14:51.160 | I'll go over policy design ideas in a different show and go over each type of life insurance.

01:14:58.280 | But there are essentially five basic types of life insurance contracts.

01:15:02.120 | There's term life insurance.

01:15:03.860 | There's whole life insurance.

01:15:05.680 | There's universal life insurance.

01:15:07.840 | Then there's what are called endowment life insurance.

01:15:10.800 | Endowment policy is not common anymore in the United States but still common elsewhere

01:15:13.860 | in the world and annuities, which are a subset of life insurance.

01:15:18.260 | They really are life insurance even though they in essence work exactly the opposite

01:15:22.600 | of life insurance.

01:15:23.600 | The purpose of life insurance policies is you take a steady stream of payments and pay

01:15:26.360 | out a lump sum at death.

01:15:27.520 | The purpose of an annuity is you take a lump sum and you pay out a steady stream of payments

01:15:30.960 | until death.

01:15:32.400 | But annuities are only possible based upon life insurance tables.

01:15:36.360 | So you take those five basic types of life insurance contracts and then you add on all

01:15:40.680 | these other words.

01:15:41.680 | Are we talking about a traditional life insurance policy, a portfolio-based policy?

01:15:46.840 | Are we talking about a variable policy?

01:15:49.840 | Variable has to do with what is the investment contract.

01:15:51.800 | You say, "Well, should I own mutual funds inside my life insurance policy?"

01:15:55.100 | That's variable life insurance policies.

01:15:57.280 | Then you get into, "Is this a fixed contract or is this an indexed contract?"

01:16:01.000 | The worst thing is, "Is this a fixed indexed contract?"

01:16:04.120 | And then you play with all of these payment options.

01:16:06.800 | You pay limited pay, pay it up at a certain age, ordinary life insurance, single pay,

01:16:10.360 | and you get to add in the modified endowment contract rules and you wind up with literally

01:16:14.480 | thousands of different various permutations of life insurance.

01:16:18.520 | That's why we have the modern life insurance world.

01:16:22.240 | There's a very simple – don't get too caught away with all of that for right now.

01:16:27.840 | Think back and don't lose track of what I explained at the beginning of today's

01:16:31.160 | show.

01:16:32.160 | Yearly renewable term, level premium, and the mathematical constant is that the risk

01:16:36.720 | that's borne by the insurance company has to be met based upon the premiums that are

01:16:43.080 | being pledged by the insured.

01:16:46.720 | All of the factors I just went over are just simple mathematical manipulations of that

01:16:53.760 | general concept.

01:16:54.760 | I hope you found this enjoyable.

01:16:56.480 | I don't know if it was an awesome show but I feel a lot better about it than yesterday.

01:17:03.040 | Yesterday when I recorded this and I erased it and did this one that you just heard, I

01:17:07.600 | was trying to go over those charts and it just didn't work.

01:17:10.760 | Hopefully this was a little bit more effective.

01:17:12.320 | I hope you're enjoying this approach.

01:17:15.320 | I've never in my life found anybody, any financial commentators who's done what I'm

01:17:22.560 | doing here.

01:17:23.560 | I'd learn all this stuff the hard way myself.

01:17:26.160 | This is the conversation I never was able to find.

01:17:29.840 | But I'm trying to – this is life insurance 101.

01:17:32.120 | This is what you learn when you go get an insurance license.

01:17:34.560 | It's not actually that complicated.

01:17:37.320 | Maybe I'm making it sound more complicated than it is.

01:17:40.400 | But hopefully this will give you a little bit of insight to start to understand the

01:17:44.760 | insurance contracts that are on the market and the different ways that you can use them

01:17:47.640 | and some of those aspects of it.

01:17:50.080 | So that's it.

01:17:51.080 | I hope you've enjoyed this show.

01:17:52.760 | Happy Friday to you all.

01:17:53.760 | I hope you have a great weekend and I will get this out here on Friday.

01:17:58.000 | We should be back next week.

01:18:00.840 | I've had different people recommend that I just stop even trying to do daily shows

01:18:08.400 | and I've thought about it.

01:18:10.160 | Maybe I should promise you three shows a week and do more and we'll see.

01:18:12.800 | I'm thinking about that.

01:18:13.800 | I think the major problems with the production show right now are just all me and on my own

01:18:18.400 | personal systems.

01:18:19.400 | I'm working it out.

01:18:20.840 | I'll share them with you and I'll share with you my solutions.

01:18:24.600 | But I just thank you for listening.

01:18:25.600 | It means the world to me that so many of you take the time to listen.

01:18:30.160 | I think I'm out of things to say.

01:18:34.240 | If you enjoyed this, if this has been helpful for you and if you are a patron of the show,

01:18:38.320 | thank you so much.

01:18:39.600 | If you're not a patron of the show, please consider becoming a patron of the show.

01:18:43.040 | We are doing well.

01:18:44.600 | We are up to 154 individual patrons of the show and $1,540 a month of monthly support.

01:18:53.000 | Those of you who were in the original regulars program, make sure you've switched over to

01:18:56.760 | Patreon so I've closed out the other PayPal-based system and moved you over to the Patreon page.

01:19:02.560 | If you're not a patron of the show, would you consider doing it?

01:19:05.200 | RadicalPersonalFinance.com/patron and you can see all of the incentives and bribes that

01:19:09.320 | I have there for you.

01:19:10.640 | That's it.

01:19:11.640 | Talk to you all soon.

01:19:12.800 | Thank you for listening to today's show.

01:19:19.600 | If you'd like to contact me personally, my email address is Joshua@RadicalPersonalFinance.com.

01:19:26.880 | You can also connect with the show on Twitter @RadicalPF and at Facebook.com/RadicalPersonalFinance.

01:19:34.240 | This show is intended to provide entertainment, education, and financial enlightenment, but

01:19:41.120 | your situation is unique and I cannot deliver any actionable advice without knowing anything

01:19:47.400 | about you.

01:19:49.040 | Please, develop a team of professional advisors who you find to be caring, competent, and

01:19:56.400 | trustworthy and consult them because they are the ones who can understand your specific

01:20:02.520 | needs, your specific goals, and provide specific answers to your questions.

01:20:09.680 | I've done my absolute best to be clear and accurate in today's show, but I'm one person

01:20:14.880 | and I make mistakes.

01:20:16.640 | If you spot a mistake in something I've said, please help me by coming to the show page

01:20:21.080 | and commenting so we can all learn together.

01:20:24.640 | Until tomorrow, thanks for being here.

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