RPF0328-Friday_QA
00:00:00.000 | It's Friday and here at Radical Personal Finance,
00:00:02.800 | that means Q&A.
00:00:05.240 | (upbeat music)
00:00:07.820 | Welcome to the Radical Personal Finance podcast.
00:00:23.560 | My name is Joshua Sheets and I'm your host.
00:00:25.160 | Thank you for being with me.
00:00:26.440 | This is a show that's dedicated to providing you
00:00:28.440 | with the knowledge, skills, insight, and encouragement
00:00:32.400 | that you need to live a rich and meaningful life now
00:00:35.600 | while building a plan for financial freedom
00:00:37.600 | in 10 years or less.
00:00:39.300 | And today on Friday, we do Q&A.
00:00:41.460 | You ask questions, I do my best to give you good advice.
00:00:45.800 | (upbeat music)
00:00:48.380 | These Friday call-in shows are done
00:00:55.180 | as a live conference phone line.
00:00:57.400 | I show up, I ask who's there,
00:00:59.120 | and then we see what we talk about.
00:01:01.600 | And then I release them as a podcast episode.
00:01:04.040 | If you would like to have your question or comment
00:01:06.600 | featured in a show like this, feel free to call in.
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00:01:37.720 | that fit in well with the show.
00:01:39.400 | And I decided access to a Q&A call
00:01:42.080 | was one of the best solutions.
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00:01:52.520 | Welcome to the Q&A call.
00:01:53.680 | John, go ahead.
00:01:54.520 | How can I serve you today?
00:01:56.000 | - First off, thank you very much, Joshua.
00:01:58.000 | I appreciate your time.
00:01:59.840 | So the first question I wanted to throw at you
00:02:03.120 | was a question about taxable deductions.
00:02:07.660 | And in particular, the way in which we think about tax rates
00:02:12.240 | as being marginal tax rates and effective tax rates.
00:02:17.160 | But I don't think we necessarily approach tax deductions
00:02:20.920 | in the same way.
00:02:22.440 | And specifically, to put it into context,
00:02:25.040 | so married, filing, jointly,
00:02:27.160 | standard tax deduction of $12,600.
00:02:31.080 | When we talk about things
00:02:32.200 | like the home mortgage interest deduction,
00:02:34.640 | and people use the phrase as to,
00:02:38.320 | well, that's a tax deduction,
00:02:40.440 | save 25 cents on the dollar
00:02:42.720 | if you're in the 25% tax bracket.
00:02:45.040 | Albeit there is some truth to that,
00:02:48.640 | depending on how you approach it from a math standpoint.
00:02:52.600 | That $12,600 standard deduction is a big step to overcome
00:02:57.600 | in terms of really getting any effective benefit
00:03:03.480 | from further tax deductions,
00:03:05.780 | as opposed to considering it from a marginal perspective.
00:03:12.240 | So I wanted to engage you in dialogue on that.
00:03:16.720 | - Yeah, I think you're absolutely right.
00:03:20.400 | It's the home mortgage interest deduction,
00:03:22.880 | I think is one of the most oversold deductions.
00:03:26.480 | Most people who have a house and who have a mortgage on it
00:03:31.240 | are quite happy with the fact that they have a mortgage
00:03:33.480 | because they are confident they can deduct the interest.
00:03:37.100 | But in practice, I think many fewer of them
00:03:40.000 | actually deduct the interest than they think.
00:03:44.220 | I can't pull the statistics to mind
00:03:45.800 | right off the top of my head,
00:03:46.760 | but many more people even who have a mortgage
00:03:49.640 | will simply use the standard deduction
00:03:51.760 | than the itemized mortgage interest deduction.
00:03:55.040 | It would be an interesting thing,
00:03:55.960 | I haven't done this recently, I did it in the past,
00:03:58.320 | but it's good to sit down and just calculate
00:04:00.920 | how big of a mortgage and what the interest rate
00:04:04.000 | would have to be on a certain size mortgage
00:04:07.220 | in order to have simply the mortgage interest deduction
00:04:10.860 | exceed the standard deduction.
00:04:12.680 | I think for many families who are buying modest houses,
00:04:16.300 | and especially in today's
00:04:18.240 | relatively low interest rate environment,
00:04:20.360 | where the actual interest paid on mortgages
00:04:24.240 | is somewhat modest,
00:04:25.460 | and also as you move through the amortization schedule
00:04:29.440 | of a mortgage and the actual interest that you're paid
00:04:31.700 | starts to decrease, I think many people find
00:04:34.360 | that the standard deduction is often in excess
00:04:38.720 | of the mortgage interest deduction.
00:04:40.440 | So I think your point is absolutely correct.
00:04:42.860 | We should pay attention to that and say,
00:04:45.720 | is this actually, I'm not sure what words we would use,
00:04:49.400 | but what's the marginal rate of this versus not?
00:04:53.440 | So I fully agree with your point.
00:04:56.940 | - So how do you think people approaching home ownership
00:05:03.560 | should take that into account,
00:05:07.120 | and/or what mindset should they approach that with?
00:05:12.120 | - Well, I think the best thing to do
00:05:14.360 | is to calculate the total cost,
00:05:17.200 | and most people don't do that.
00:05:21.400 | Hopefully listeners of this show
00:05:22.720 | have become a little bit more sophisticated
00:05:24.700 | so that they are actually calculating the total cost.
00:05:27.160 | But for example, if you look at the average
00:05:30.360 | principal, interest, taxes, and insurance payment,
00:05:34.000 | the taxes and insurance are usually a hefty amount.
00:05:38.000 | Most people don't take those into account as a pure cost.
00:05:41.400 | Then when you move to the interest,
00:05:42.720 | that also can be a hefty amount,
00:05:44.360 | and that also has to be taken into account as a pure cost.
00:05:47.640 | Your payment is not allowing you to build equity.
00:05:50.920 | So I think the best way to handle it is to unbundle it,
00:05:53.480 | unbundle the PITI payment,
00:05:56.280 | calculate what your actual principal deductions would be
00:06:00.480 | under a certain course of action,
00:06:02.480 | calculate the interest,
00:06:03.680 | and take a guess as to whether you'll be able
00:06:05.880 | to deduct it or not,
00:06:07.160 | and then calculate the other costs in.
00:06:09.600 | That's the best I've got,
00:06:11.020 | is just to simply actually look at the real numbers
00:06:13.320 | for a specific situation,
00:06:15.200 | and then to pay attention and be aware of the fact
00:06:18.040 | that as you said,
00:06:19.080 | the standard deduction is a sizable amount,
00:06:21.080 | and most people would need substantial itemized deductions
00:06:26.080 | in order to exceed it.
00:06:27.280 | Now, it's possible you might have other itemized deductions
00:06:30.520 | that are in addition to the mortgage interest,
00:06:32.560 | so you have to look at an individual situation.
00:06:34.120 | But just by breaking the numbers out
00:06:36.040 | and taking a look at it,
00:06:36.880 | you can make an accurate assessment.
00:06:40.280 | And then taking into account
00:06:41.840 | those other itemized deductions,
00:06:43.600 | whether it be charitable gifts or state or local taxes,
00:06:48.400 | that also raises the question as to,
00:06:51.800 | well, which one are you wanting to credit
00:06:54.320 | that I'm getting that marginal rate back on?
00:06:57.960 | I'm getting that 25 cents on my dollar.
00:07:00.380 | But hopefully for many people who are making charitable gifts
00:07:07.540 | they aren't doing that out of pure motivation.
00:07:10.340 | - Right, right.
00:07:11.380 | Yeah, I don't know how we would apply a formula to it.
00:07:14.300 | Your point is a good one,
00:07:15.460 | that we often treat the actual mechanics of it
00:07:19.260 | a little bit clumsier.
00:07:20.300 | We're good at talking about marginal and effective rates,
00:07:23.560 | but when it comes to actually the deduction,
00:07:25.420 | we kind of lump it all together.
00:07:27.700 | But because it's almost a cliff,
00:07:29.620 | it's almost a cliff where until you exceed
00:07:33.160 | that amount of itemized deductions,
00:07:35.340 | you get zero benefit,
00:07:36.900 | and then you get the full benefit at the marginal rate.
00:07:39.600 | I'm not sure how to talk about it.
00:07:42.140 | I'll put that one into the back of my mind
00:07:44.580 | and invite any listeners who can come up with a better term.
00:07:46.620 | Maybe we can coin here, maybe on the show here,
00:07:49.660 | we can coin a new way to refer to it
00:07:51.300 | to demonstrate the case.
00:07:54.660 | So you have more to say on that topic, John,
00:07:57.420 | or did you have another question?
00:07:58.260 | You said that was the first thing you wanted to talk about.
00:08:00.460 | - So it's changing gears a little bit,
00:08:04.420 | but still on the topic of taxes.
00:08:07.020 | I thought you might find it interesting of the experience
00:08:09.780 | which I had over the past few months of volunteering,
00:08:13.500 | doing low-income tax preparation work
00:08:16.380 | for folks in the Washington DC area
00:08:19.900 | through a local community organization.
00:08:22.320 | It was something that I was first introduced to
00:08:27.140 | as an opportunity through an announcement at my church.
00:08:30.260 | And the person making the announcement made a note that
00:08:33.420 | in a way doing tax preparation work for low-income personnel
00:08:38.260 | was more complicated than middle-income taxes,
00:08:41.500 | which I did find to be partially true.
00:08:44.980 | Just the way the credits work,
00:08:47.740 | the complexity of filing for some of those credits.
00:08:50.780 | But it was a really rewarding opportunity
00:08:53.580 | over the February to April timeframe
00:08:56.780 | of giving up a few hours on Saturday mornings
00:08:59.940 | to go do that volunteer work.
00:09:01.860 | - What was the two questions I'd love to hear from you?
00:09:04.780 | Number one, in working with the low-income population
00:09:09.780 | that you were serving,
00:09:11.500 | what did you find to be their general knowledge
00:09:15.060 | of even just the way the taxes work?
00:09:16.940 | Did you find them to be not at all knowledgeable,
00:09:19.820 | somewhat knowledgeable, very knowledgeable?
00:09:21.420 | What were your impressions?
00:09:22.780 | - Generally, I found them to be
00:09:30.660 | not very knowledgeable,
00:09:32.620 | though some had benchmarks as to
00:09:35.540 | what they were expecting relative to their
00:09:39.180 | tax returns from last year.
00:09:40.820 | I did have one person who,
00:09:44.740 | after we worked through his taxes,
00:09:46.420 | and then me being a volunteer,
00:09:49.100 | then had a more experienced reviewer check over the taxes.
00:09:53.780 | And when, after that was complete,
00:09:56.060 | we talked about what his returns were gonna be.
00:09:58.940 | He said that that wasn't enough,
00:10:00.980 | and he didn't want us to file his taxes.
00:10:03.780 | And he was gonna go off and consult H&R Block
00:10:07.020 | to try to achieve a higher tax return.
00:10:10.860 | So there was some experience as to,
00:10:14.060 | relative to what they knew before.
00:10:16.700 | And there was also some opportunities
00:10:19.740 | for people just learning pieces of information
00:10:22.820 | and/or hearing something.
00:10:24.620 | And one of the really rewarding stories
00:10:27.020 | was an elderly woman who received a mailing.
00:10:30.500 | I think it may have been through,
00:10:33.100 | that she received a mailing in a,
00:10:35.140 | mentioned about the Washington, D.C. property tax credit.
00:10:39.180 | And she had actually paid a accountant in Georgia
00:10:43.820 | to complete her federal and state tax returns.
00:10:47.180 | So she had already filed, but she received this mailing.
00:10:50.540 | And she consulted with us as to whether or not
00:10:53.340 | she may be eligible for some additional returns.
00:10:56.900 | And through the 2014, 2015 taxes,
00:11:01.900 | filing an amended return,
00:11:04.100 | she was able to get back nearly $2,500
00:11:08.660 | over those two years, predominantly for two things.
00:11:11.860 | One was the D.C. property tax credit,
00:11:15.460 | which is a credit for low-income folks,
00:11:17.820 | whether they be homeowners paying property taxes directly,
00:11:21.500 | or even renters in a calculation that is done
00:11:24.820 | as to a portion of their rental payment
00:11:27.580 | that would be equivalent of property taxes.
00:11:30.380 | And then second, the accountant failed to take into account
00:11:33.780 | her age and having the higher standard deduction
00:11:37.940 | for being elderly.
00:11:39.860 | So that was a pretty neat story
00:11:42.540 | that she was able to get that additional refund back.
00:11:46.420 | And we were able to help her in that regard.
00:11:48.740 | - That's really encouraging.
00:11:51.140 | - Not too much broad level of knowledge,
00:11:54.540 | but just some benchmarking.
00:11:57.700 | Some people came in with their previous year's tax return,
00:12:01.700 | some which were filed there
00:12:02.980 | at that same local volunteer site.
00:12:05.980 | - That's awesome, and that's encouraging
00:12:09.780 | when you can help situations like that lady you referred to.
00:12:11.940 | I mean, $2,500 can be very impactful
00:12:15.820 | for her to be able to do certain things
00:12:18.140 | that would be important to her.
00:12:19.700 | Do you recommend this to other people
00:12:21.860 | as far as it seems like it was a fulfilling area
00:12:24.620 | of volunteer service for you?
00:12:26.100 | Do you recommend it?
00:12:26.940 | And what type of training did you receive
00:12:28.740 | or would other listeners receive
00:12:30.020 | if they were to participate in this type of program?
00:12:32.460 | - I would recommend it.
00:12:34.860 | And I know other listeners of your show
00:12:38.420 | have the same interest as I do.
00:12:40.300 | Something like the tax preparation work
00:12:42.780 | is something we just find interesting
00:12:45.980 | to spend some time doing.
00:12:47.780 | So the fact that other listeners like me
00:12:50.740 | probably spend some time ourselves
00:12:53.300 | familiarizing ourselves and doing our own work,
00:12:56.300 | the ability to take those skills
00:12:58.620 | and help others is very rewarding.
00:13:02.060 | And I also found the clients that I worked with
00:13:04.580 | to be relatively patient and also gracious
00:13:09.220 | and thankful for the work that we did.
00:13:14.260 | Even when at certain times
00:13:15.940 | it did take a little bit long to work through the process.
00:13:19.260 | As I mentioned, one of the steps was having a reviewer
00:13:22.500 | come and check over my work.
00:13:24.420 | I was impressed at how patient
00:13:29.100 | and thankful most everyone was.
00:13:32.300 | In terms of the training,
00:13:33.820 | there was a organized training
00:13:37.700 | that I went to a local class
00:13:44.060 | and had three different training sessions to go through.
00:13:48.060 | One was a sort of introduction
00:13:50.580 | and overview of the tax code
00:13:52.780 | and talking about some of the detailed nuances
00:13:56.340 | such as their earned income credit,
00:13:58.700 | child tax credit,
00:13:59.780 | understanding some of those scenarios
00:14:02.180 | that apply in that regard.
00:14:03.980 | Then the second training session
00:14:05.700 | had to do with familiarizing ourselves
00:14:09.020 | with the software that was used.
00:14:11.380 | It wasn't like what you think of
00:14:15.500 | as a online walkthrough questions type software.
00:14:19.900 | It was more interfacing with the forms directly.
00:14:23.020 | Now, numbers would carry over,
00:14:24.940 | calculations would be done,
00:14:26.700 | but sometimes you have to know where to navigate
00:14:29.380 | in order to enter the information,
00:14:31.820 | link to different forms
00:14:33.380 | and make sure things were falling into the proper places.
00:14:38.740 | So there was the course that introduced you to that.
00:14:42.340 | And then the third course was
00:14:44.060 | actually going through the IRS exam.
00:14:48.700 | So the IRS has a exam where
00:14:52.300 | few of them were like short answer situation and questions.
00:14:56.500 | And then a few were preparing notional tax returns.
00:15:00.580 | And then a few questions from the tax return
00:15:03.180 | that you prepared to answer.
00:15:08.020 | There was also a little bit of home study
00:15:10.620 | in terms of a conduct and ethics course,
00:15:14.700 | just navigate through that
00:15:16.020 | and answer a few questions at home.
00:15:18.900 | So relatively speaking, on one hand,
00:15:22.700 | it didn't seem like all that much.
00:15:24.780 | So it wasn't a very extensive time commitment,
00:15:28.340 | but then there was also some on the job training, of course.
00:15:32.180 | And that's where the more experienced folks,
00:15:34.740 | including the reviewers and the site coordinator,
00:15:37.620 | who I worked under,
00:15:39.060 | were very helpful in addressing specific situations.
00:15:43.220 | - That's awesome.
00:15:44.140 | Thanks for sharing that with us, John.
00:15:45.660 | And I encourage other listeners to check it out.
00:15:49.340 | It could be helpful to others.
00:15:51.300 | Let's go on here.
00:15:52.140 | I've got a Missouri phone number on my screen here.
00:15:54.500 | Welcome to the call.
00:15:55.540 | Introduce yourself, please.
00:15:56.420 | And let me know how I can serve you today.
00:15:58.420 | - Oh, hi, Josh, this is Kishon.
00:16:00.540 | I was just checking in to see if you,
00:16:04.300 | I know you talked about this in a prior podcast
00:16:07.340 | about the infinite banking concept.
00:16:09.540 | You know, my ultimate thing is I wanna know what to do
00:16:13.340 | with some of my emergency cash and reserves,
00:16:16.620 | you know, the three to six months of cash
00:16:19.220 | I like to keep on hand,
00:16:20.580 | just in case of job issues and things to that such.
00:16:24.420 | And the infinite banking concept was introduced to me
00:16:27.060 | by one of my friends who's a life insurance agent
00:16:29.580 | and wanted to see your thoughts.
00:16:30.980 | And if you think that's a viable option,
00:16:33.940 | or would you go with something different like a CD ladder
00:16:38.140 | or using the home equity line to store that cash now
00:16:41.620 | in this negative carry environment?
00:16:43.620 | - Yeah, I'm comfortable with it.
00:16:45.260 | I've promised it on the show in the past
00:16:47.660 | and I haven't released my reviews of the books on it.
00:16:50.940 | I still intend to do it.
00:16:54.380 | I'm just a little intimidated
00:16:55.340 | by how to give it an accurate assessment.
00:16:59.100 | There are so many nuances and caveats
00:17:01.660 | and disclaimers that in many ways,
00:17:06.020 | it's difficult to navigate.
00:17:07.860 | 'Cause I am not comfortable
00:17:09.700 | with a wholehearted endorsement of the concept,
00:17:12.700 | nor am I comfortable
00:17:14.700 | with a wholehearted denial of the concept.
00:17:17.260 | I think that either of those extremes
00:17:20.220 | is in my best present understanding, inaccurate.
00:17:25.180 | So rather than my talking in detail
00:17:27.300 | about the infinite banking concept in general,
00:17:29.740 | and for those listeners who aren't aware of it,
00:17:31.420 | to put it simply,
00:17:32.540 | the idea is by using a properly structured
00:17:36.660 | cash value rich permanent life insurance policy,
00:17:40.260 | you can avoid some taxation,
00:17:42.540 | enjoy a steady increase in the values of the contract
00:17:45.860 | and use it for various purchases
00:17:48.100 | and things that you would desire to do.
00:17:51.020 | So that's the basic of the infinite banking concept.
00:17:53.140 | Let me just stick to the question you said
00:17:54.900 | that you're asking about emergency fund cash.
00:17:58.300 | I think that a well-designed,
00:18:01.940 | properly funded whole life insurance policy
00:18:04.380 | can be a good option for some of your emergency fund cash.
00:18:08.820 | Now, I wouldn't,
00:18:10.300 | you mentioned three to six months of expenses.
00:18:13.260 | Let's say that,
00:18:14.180 | let's just stick with an example
00:18:17.140 | of a median household income.
00:18:19.380 | So around 45, 50,000 bucks.
00:18:20.860 | Let's assume that a family is spending
00:18:22.620 | about $4,000 a month,
00:18:24.460 | 48,000 a year.
00:18:25.900 | So let's say monthly expenses are $4,000 a month.
00:18:28.780 | So with three to six months of expenses,
00:18:31.500 | we're talking about somebody having a target of saving
00:18:34.620 | in this scenario, 12 to $24,000.
00:18:38.140 | I would not pursue a life insurance policy
00:18:42.180 | for the purpose of saving $12,000.
00:18:44.620 | I think there's little benefit to it.
00:18:46.300 | I think there's a lot more benefit
00:18:48.260 | to just simply having the cash at hand.
00:18:51.980 | So the way that I would do it,
00:18:53.460 | if I were saving for a median household income
00:18:57.300 | of that amount,
00:18:58.420 | I would try to save a few thousand bucks
00:19:01.100 | in physical cash in a safe place
00:19:04.460 | that I could get my hands on it.
00:19:05.780 | And then I would just have a savings account
00:19:08.620 | funded with another five, 10,000 bucks.
00:19:11.700 | So 10 or $15,000 is,
00:19:16.620 | I don't see any reason to deal with the hassle
00:19:18.840 | of a life insurance policy
00:19:20.100 | because of some of the disadvantages,
00:19:22.340 | which I'll get to in a moment.
00:19:24.300 | In the case of just a small emergency of a few thousand
00:19:27.060 | dollars, I wouldn't wanna be going
00:19:28.820 | and being forced to take that first few thousand dollars
00:19:31.820 | in a life insurance policy.
00:19:33.660 | Now, when you get beyond those basic numbers,
00:19:35.900 | and I don't have a hard and fast cutoff,
00:19:37.900 | maybe it's 10,000, maybe it's 15,000,
00:19:41.100 | maybe it's 20,000, I don't know.
00:19:43.300 | But when you get beyond that,
00:19:44.420 | that's where I would start to consider it.
00:19:46.500 | The key disadvantage of life insurance policy
00:19:50.940 | is that when you take a loan against the policy,
00:19:54.460 | which is the most cost-effective way
00:19:56.580 | to access the cash values for a short-term need,
00:19:59.660 | you need to continue making premium payments.
00:20:02.540 | So the policy is able, if it's well-funded enough,
00:20:07.540 | it's able to make its premium payments
00:20:12.300 | out of its own cash values.
00:20:13.860 | But simply due to the fact that you've got
00:20:15.660 | this continual outlay of cash there that's needed,
00:20:18.380 | I wouldn't wanna pursue it
00:20:19.740 | for a small amount of money.
00:20:21.620 | What I think is a good perspective on it
00:20:24.860 | is for some of those other kind of deeper level savings,
00:20:29.860 | that is kind of the backup emergency fund type of approach.
00:20:34.260 | The reason, the major benefit of a well-constructed,
00:20:39.060 | permanent cash value life insurance policy
00:20:41.580 | is the stability of the cash.
00:20:44.580 | It will grow steadily and slowly.
00:20:47.940 | So when people are trying to compare it,
00:20:51.740 | you gotta recognize it's gonna grow slowly.
00:20:54.700 | Perhaps your real rate of returns,
00:20:57.860 | your cash on cash rates of return
00:20:59.780 | will be somewhere in the, depending on the policy,
00:21:02.780 | two, three, four, 5% in that range.
00:21:06.100 | So that's more attractive sometimes
00:21:09.380 | than other sources of stable cash,
00:21:11.540 | but it's not as attractive as investments.
00:21:13.460 | So I don't want all of my money subjected to market risk
00:21:16.860 | or to things that are gonna fluctuate.
00:21:18.980 | So I view cash value life insurance
00:21:22.060 | as kind of a component of that deeper level of savings.
00:21:25.920 | So that's what I do
00:21:27.860 | with my permanent cash value life insurance policies.
00:21:31.060 | I have emergency funds, ready cash on hand,
00:21:34.060 | cash that could easily be accessed
00:21:39.060 | in case of car broke, et cetera, things like that.
00:21:41.700 | And then I just think of the cash value life insurance
00:21:45.000 | as some of just the deeper emergency funds.
00:21:47.660 | I wouldn't see it as one versus another.
00:21:51.940 | If you can, for example, establish
00:21:53.620 | a home equity line of credit on your house
00:21:55.520 | with no cost or minimal cost to have access to it,
00:21:59.220 | that can be really useful.
00:22:00.500 | And you can use the life insurance cash value
00:22:05.260 | as a component of what you're doing.
00:22:08.100 | Once you have the cash values in the policy,
00:22:10.980 | you can use them in a few ways.
00:22:13.500 | You can always take money out.
00:22:15.240 | You can take a loan against the policy,
00:22:16.600 | but you can also use it as collateral
00:22:18.320 | for another form of financing.
00:22:19.640 | This is one of the under discussed aspects
00:22:22.200 | of life insurance.
00:22:23.900 | If you were going to look for a source of financing
00:22:27.520 | from a bank, sometimes you can go ahead
00:22:29.720 | and keep all of the money in your life insurance policy,
00:22:32.520 | but simply pledge it as collateral for another loan,
00:22:36.560 | as for a loan from a bank at a different interest rate.
00:22:40.920 | And then you get the best of both worlds.
00:22:42.440 | The money continues to grow in the policy,
00:22:44.340 | and you are able to access cash on very favorable terms
00:22:49.200 | through the form of a loan from a bank.
00:22:51.260 | So there are some arbitrage opportunities.
00:22:53.400 | The major disadvantage of life insurance,
00:22:55.400 | and the final reason why I don't recommend it
00:22:57.240 | for the very short term savings, it just
00:22:59.040 | takes too long to get the money in there.
00:23:01.200 | So let's say that you establish a policy.
00:23:03.640 | You need to keep-- because you're
00:23:05.020 | going to be funding a policy for probably at least a decade,
00:23:08.480 | more likely a decade and a half or two,
00:23:10.360 | even for an aggressively constructed contract.
00:23:13.720 | You need to have it as a small enough portion
00:23:16.880 | of your monthly income that you can
00:23:18.880 | commit to the payments with little fear of having
00:23:21.640 | to discontinue them.
00:23:23.040 | Well, when you do that, it's going
00:23:24.560 | to take quite a while for the money
00:23:26.080 | to get built up into the policy.
00:23:28.760 | So hopefully, it's not going to take you a decade
00:23:31.960 | to save six months of expenses.
00:23:33.880 | So where I would recommend is start with just saving cash,
00:23:38.480 | building up an emergency fund.
00:23:40.240 | Once that's done, if you need life insurance,
00:23:43.600 | if you value having whole life insurance,
00:23:46.040 | don't buy life insurance just for the cash value.
00:23:48.080 | You must also value and benefit from the life insurance.
00:23:52.400 | It's always predominantly is going
00:23:53.860 | to be life insurance first.
00:23:55.800 | With the benefits of cash value attached,
00:23:59.440 | then you can start funding one.
00:24:00.760 | And it'll take a few years for it
00:24:01.880 | to be funded to the level where it's even substantial.
00:24:07.480 | Is that clear enough?
00:24:08.760 | Did I disagree with your insurance agent,
00:24:10.440 | or did I agree with them?
00:24:12.280 | Pretty much agree with them.
00:24:14.320 | Like I said, the IBC concept is sold by insurance agents.
00:24:19.480 | And they do have very aggressive structures
00:24:23.760 | for some of these IUL plans, where
00:24:26.960 | they can get you a high cash value early on if you decrease
00:24:31.120 | your death benefit and decrease some associated fees
00:24:34.160 | with the riders and things like that.
00:24:36.960 | And they use the term "riders" to kind of help
00:24:39.480 | build that early cash value.
00:24:42.040 | So I kind of went through some of the scenarios with them.
00:24:44.480 | And it does seem attractive for easy access to some cash value
00:24:49.720 | and the added death benefit.
00:24:51.200 | But like you said, it has a lot of caveats.
00:24:54.440 | And I have to investigate a little further.
00:24:57.640 | Here's where I have to let individual agents look
00:25:00.400 | at an individual situation and let individual people kind
00:25:03.640 | of deal with their own stuff.
00:25:06.360 | This is not an appropriate plan for people
00:25:08.600 | who are novices at the financial market.
00:25:10.840 | There are a lot of ways to get hurt.
00:25:12.640 | And I think it can be useful for those
00:25:15.240 | who, I guess, have some experience
00:25:18.320 | and have done some research to be able to do it.
00:25:21.200 | But there are enough ways to get hurt.
00:25:23.040 | You've got to be careful, and you've
00:25:24.540 | got to make sure you know what you're doing.
00:25:26.360 | A couple of key points on what you described.
00:25:28.800 | Yes, you can heavily fund a policy
00:25:31.440 | over a short period of time.
00:25:33.520 | In general, due to the modified endowment contract rules,
00:25:37.840 | you're almost always going to be funding a policy.
00:25:41.060 | In order to retain the advantaged taxation,
00:25:44.580 | you're going to be funding a policy for at least seven years.
00:25:47.280 | And you're going to be funding it for two reasons.
00:25:49.280 | Number one, to fit those tax benefits.
00:25:50.880 | But also, if you get the ratio of insurance to premiums out
00:25:56.440 | of whack, it's not going to work from the basis of cash
00:26:01.520 | accumulation as well as it is if you have them more in line.
00:26:05.360 | Let's say that you've got--
00:26:07.880 | keep it simple just to illustrate the concept.
00:26:09.760 | Let's say you've got a million dollars of term riders
00:26:11.960 | on there, and you're just doing that so
00:26:14.220 | that you can fund the contract.
00:26:16.360 | You're paying for all that term insurance.
00:26:18.640 | And if it's unnecessary, if you don't need or want
00:26:20.960 | the term insurance, you're letting the expenses get out
00:26:23.840 | of whack on the policy.
00:26:24.860 | So the policy should be designed appropriately.
00:26:27.820 | Now, it doesn't mean it can't be designed aggressively,
00:26:30.040 | where you're on a seven or 10-year plan
00:26:34.240 | to take it paid up, or however you're
00:26:36.240 | going to fund that individual contract.
00:26:38.760 | But it shouldn't be overly aggressive.
00:26:42.880 | Personally, when I used to design life insurance policies,
00:26:45.600 | I always liked somewhere in the 10 to 15-year period
00:26:50.400 | for accumulation.
00:26:51.520 | I feel like that's a good amount of time.
00:26:53.280 | We're not necessarily planning on a 20- or 30-year plan.
00:26:57.160 | But 10 years is a good amount of time.
00:26:58.880 | And it would often work well in the contracts.
00:27:00.920 | But that's where the individual agent
00:27:02.280 | has to look at the situation, look at the contracts,
00:27:04.440 | look at the company, and make a decision from there.
00:27:07.040 | So good question.
00:27:08.320 | All right, I got more time.
00:27:09.600 | John or Kishon, would either of you
00:27:10.640 | like to ask another question before I close the call?
00:27:14.960 | No, I'm good right now, Josh.
00:27:16.200 | Thank you.
00:27:17.120 | Great.
00:27:17.620 | John, anything to add?
00:27:19.800 | Sure, Josh.
00:27:20.760 | So I know that you've been on spring break
00:27:23.400 | over the last couple of weeks.
00:27:24.760 | Can you tell us listeners a little bit more
00:27:27.760 | about how your spring break has gone
00:27:29.360 | and what we can expect here in the near future?
00:27:33.360 | Yeah, I was just--
00:27:35.400 | I needed a break.
00:27:36.160 | And I haven't really taken a break in a while.
00:27:38.440 | And I was getting to the point where
00:27:40.440 | I was approaching where I could see burnout ahead
00:27:47.880 | if I didn't adjust something.
00:27:49.120 | So I just decided to take some time off.
00:27:51.920 | The biggest challenge for me at this stage
00:27:54.000 | of radical personal finance has been to figure out,
00:27:56.720 | what am I doing, and how am I going to get it done?
00:27:58.840 | I know what I'm doing, but the challenges of getting it done
00:28:03.520 | have been really, really challenging.
00:28:05.080 | And the business is kind of in that little dip
00:28:07.520 | where I need help, and I have to expand the help.
00:28:11.720 | But I'm the bottleneck in the process,
00:28:13.600 | my own skills and abilities.
00:28:16.040 | So I spent some time just thinking.
00:28:18.160 | And I didn't go anywhere, travel anywhere.
00:28:19.960 | I just stayed at home.
00:28:20.540 | Also worked on some home projects
00:28:21.920 | that I had been ignoring.
00:28:23.120 | But I just tried to spend some time thinking and clarifying
00:28:26.680 | what am I actually trying to do, what's the vision for it.
00:28:29.840 | A lot of that was just even considering
00:28:31.520 | the format of the show.
00:28:32.840 | If I were-- I don't quite want to go
00:28:36.080 | into all the details of it, but just
00:28:38.600 | as far as my decisions and the balance,
00:28:40.360 | I'll talk about that stuff in the future.
00:28:42.240 | But I had to give some serious thought to the way
00:28:44.320 | that I'm doing the show and what I'm actually doing it for,
00:28:47.040 | and how it's all going to work, what my monetization plans are,
00:28:50.000 | what are the products that I'm building and things,
00:28:52.080 | how am I going to get that stuff done.
00:28:53.840 | So I have definitely settled into a much better approach
00:28:58.960 | to it.
00:28:59.460 | I have a clearer vision now after the fact.
00:29:03.480 | But I have plenty of work yet to do toward it.
00:29:06.560 | So I feel good.
00:29:07.360 | I've been able to adjust the way that I was doing some things,
00:29:11.360 | get a little bit more organized.
00:29:13.560 | Launching a startup, I've never ridden a bull,
00:29:16.960 | but I've got to imagine that's kind of what it's like, where
00:29:19.160 | you're always kind of right on the edge of getting tossed off.
00:29:21.800 | And it's always a challenge, because what I often want to do
00:29:27.680 | is pull back and get organized and get efficient
00:29:31.280 | and get everything done.
00:29:32.320 | I don't like having stuff undone.
00:29:34.120 | But with most entrepreneurial endeavors, if you do that,
00:29:39.120 | you lose your momentum and you lose the inertia.
00:29:41.080 | You lose what got you here.
00:29:43.160 | So I'm making progress, but it was a good chance
00:29:47.580 | to have a little break and figure out
00:29:50.560 | what the future looks like.
00:29:52.120 | Still working on it.
00:29:53.320 | I don't have everything perfectly figured out,
00:29:55.680 | but I did settle some big questions in my mind.
00:29:58.960 | Good.
00:30:02.240 | I'm glad to hear that you had that time off
00:30:04.080 | and hope it was a rewarding time for you and your family.
00:30:06.880 | And thank you for what you continue to do for us.
00:30:09.440 | Appreciate it.
00:30:10.520 | Gentlemen, thank you for calling in.
00:30:12.280 | I appreciate hearing from you.