RPF0352-Friday_QA
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00:00:29.680 | It's Friday. On Fridays on Radical Personal Finance, we do live Q&A. I've got the call
00:00:33.760 | open. Let's see what comes up today.
00:00:52.280 | Welcome to the Radical Personal Finance podcast. My name is Joshua Sheets and I'm your host.
00:00:55.360 | Thank you for being with me. This is the show where we work hard on figuring out the strategies
00:00:59.660 | and tools to live a rich life now while building a plan for financial freedom in 10 years or
00:01:04.040 | less. Fridays we do a live Q&A, which is open to patrons of the show. At the moment, I know
00:01:09.400 | we're going to talk about buying property in an LLC or an S corporate. We're going to
00:01:13.360 | talk about life insurance and disability insurance.
00:01:19.360 | We'll see if anybody else jumps on the phone while we're in the middle of recording this
00:01:27.880 | show. Basically, the way it works is on Fridays I show up to a phone line. I actually record
00:01:32.440 | on the day before. On Fridays I show up to a phone line and I open the phone line up
00:01:36.080 | and I see who's there and see what we want to talk about and we just hit record and go
00:01:39.720 | from there.
00:01:40.720 | Today, we've got some interesting questions online. If you'd like to join a show like
00:01:44.760 | this in the future, this is going to be your best way. If you'd like to talk to me about
00:01:48.360 | something, it's anything that you want to talk about. I don't censor the topics. I don't
00:01:51.480 | censor the discussion. Anything you want to talk about. If you'd like to join a call like
00:01:55.200 | this, become a patron of the show. You can do that at radicalpersonalfinance.com/patron.
00:02:01.960 | You will find all those details. Then you'll get access to the call in number and the time
00:02:06.440 | that I do the call so you can call in and join the call. Let's jump right to it. Jim
00:02:10.000 | in California, welcome to the Q&A call. Let me know how I can serve you today.
00:02:14.240 | Hi, Joshua. Thank you very much for taking my call. In episode 346, you had Jules Hasson,
00:02:20.000 | a real estate attorney. He spoke about buying property in an S-Corporate LLC. I'm interested
00:02:27.080 | in your take on that from not buying rental property or other business property, but rather
00:02:34.240 | your own personal household. He mentioned trying to protect yourself from a liability
00:02:39.120 | perspective. I'm wondering about buying property in that sort of structure or just on your
00:02:45.880 | own as a private person and maybe where liability insurance will come into play with that.
00:02:52.360 | Okay. It's a good question. My answer will be – I'll tell you what I know about it
00:02:57.480 | and what I think about it. The challenge is that this will be heavily state-dependent.
00:03:02.080 | So let me answer from my perspective first. I know you're in California. It's very
00:03:05.560 | different. But here in Florida, we have an unlimited homestead exemption from the claims
00:03:13.280 | of creditors. So in Florida, in the state of Florida, if you own your own house that
00:03:18.880 | you live in, there's no dollar limit as to how much of that is protected from the
00:03:23.120 | claims of creditors for any reason. I could own a $30 million property. I could have no
00:03:28.440 | assets whatsoever. Somebody can win a judgment against me, win a lawsuit against me, and
00:03:35.280 | they can collect – it's their judgment fair and square. But I can continue to own
00:03:39.600 | that $30 million of property without any limits on it from the claims of creditors of liability
00:03:45.200 | perspective and also from the perspective of bankruptcy. So this is a really useful
00:03:50.940 | thing – feature in the state of Florida.
00:03:53.880 | Now, I believe that Florida is the only one – only state that has that unlimited exemption
00:04:01.720 | where there's no maximum dollar amount. There are about a handful of states that have
00:04:05.760 | very high limits. I don't know the states off the top of my head. I know Texas comes
00:04:10.400 | to mind. I don't know anything about your California laws. But some of them do have
00:04:14.760 | fairly high limits and then the other states kind of filter in. So for me in the state
00:04:18.800 | of Florida, I would not put my personal residence into any kind of entity because if I did,
00:04:25.400 | I would lose that very valuable protection that I've just mentioned. I would always
00:04:31.480 | want to make sure that I own my property as a homestead and that I own it in my name.
00:04:38.040 | I would also want to make sure that if I'm married, I want to make sure that my spouse
00:04:42.200 | and I own it in our names together so that we can also get the benefits of a joint tenancy
00:04:48.720 | – tenancy by the entirety I believe is the standard in Florida so we can get the benefits
00:04:53.560 | of that joint tenancy of ownership.
00:04:56.160 | That benefit to me in Florida trumps anything else. It is – that's the biggest benefit
00:05:03.360 | to owning real property as a personal homestead in the state of Florida. Now, if I were in
00:05:09.240 | another state, what I would do is I would need to check what those limits are in that
00:05:13.760 | state and you would look and you would see. Most states will protect your personal residence
00:05:20.040 | to some degree. Generally, there would be few advantages to putting a personal residence
00:05:25.400 | into an entity. So that would be what I would check.
00:05:30.280 | I don't know about California law. Do you know anything, Jim, before I go on? Do you
00:05:34.080 | know anything about California law with regard to the homestead exemptions?
00:05:36.640 | I don't. I just recently moved here in the last two years when I retired from the military
00:05:40.680 | so that's something I need to look into. But I have had rental property in the past
00:05:45.000 | in Virginia and one of my neighbors helped me unload something out of a pickup truck
00:05:50.840 | one day and came over and said that he hurt his back helping me unload it and he would
00:05:56.960 | like to make a claim against my homeowner's policy. I thought the guy was a pretty good
00:06:02.160 | guy overall and so that's what prompted me as soon as I had to rent that house out
00:06:08.440 | to make sure that I had a liability policy in place just as extra protection because
00:06:14.440 | it was no longer my primary residence. It was a rental property. So that's why I've
00:06:19.680 | kept that liability policy. Even after getting rid of the rental property, I kept the liability
00:06:23.560 | policy just as a general good measure because a million dollars of liability is so cheap
00:06:27.880 | to get these days. So I just kept that. But my wife and I are about to buy a house out
00:06:33.240 | here in California so I just thought I'd start looking into that. So great answer and
00:06:37.080 | I thank you very much.
00:06:38.080 | A couple quick ideas. I did look into the California number while you were talking and
00:06:43.080 | here is the homestead exemption amount for bankruptcy in California. In California, system
00:06:49.320 | one, single homeowners who are not disabled may exempt up to $75,000 of the equity in
00:06:54.720 | their home or other property covered by the homestead exemption. You may exempt up to
00:06:59.040 | $100,000 if you live with a family member, $175,000 if you are 65 or older or physically
00:07:05.360 | or mentally disabled, $175,000 if 55 or older, single and earn a gross annual income under
00:07:11.440 | $25,000 or are married and earn a gross annual income under $35,000 and creditors seek to
00:07:17.640 | force the sale of your home.
00:07:19.600 | So there we've got that. Now in California, you also need to remember that you are a community
00:07:25.220 | property state and so you need to – that has a little bit of a unique twist. California
00:07:31.480 | is a community property state. So that should answer the question there. I generally – beyond
00:07:39.200 | that, I don't know about liability limits. The challenge – and here's where I could
00:07:48.080 | be stepping on thin ice but as I understand the intent of the law and I welcome any of
00:07:52.560 | my listeners who are subject matter experts to come by today's show on the blog page
00:07:56.720 | and correct me if I'm wrong.
00:07:58.120 | But in general, entity selection will work well for things like rental properties because
00:08:04.360 | you're actually operating a business. So if you desire to put a piece of property into
00:08:11.360 | a trust, you're operating a business and so you can make the argument that this is
00:08:15.880 | a separate entity and it should be treated as a separate entity. But if I'm just simply
00:08:21.040 | owning a house and I'm just doing it purely from the – with the idea of a liability
00:08:26.120 | protection scheme of some kind, the problem is I don't have a real reason for that entity
00:08:32.160 | to exist.
00:08:33.560 | And so in the legal world, they call it piercing the corporate veil. Just because you have
00:08:38.520 | a business that is operating – that has a business name, but it doesn't mean that
00:08:43.720 | you're going to be exempt from the claims of creditors. Now, different states have different
00:08:48.160 | rules as to when they'll pierce that corporate veil. But they will actually go in and say,
00:08:53.040 | "Look, you're just simply you. You're operating as you. You're not operating here
00:08:56.360 | as a business."
00:08:58.400 | And my guess would be that that's the kind of thing that would apply in a personal property
00:09:03.480 | situation from the perspective of liability. The simplest thing to do if you wanted to
00:09:09.880 | disconnect yourself for some of the reasons of having an easier transfer, the simplest
00:09:13.880 | thing to do would be to set up a living trust and consider just simply buying the property
00:09:17.480 | within a living trust.
00:09:19.200 | That way, you get some of the benefits of – you get some of the benefits of easy transfer
00:09:24.040 | if you're doing this for planning, which is not just liability concerns, but also for
00:09:28.640 | planning and it's a little bit simpler.
00:09:31.120 | Beyond that, we've reached the limit of my knowledge and I invite any listeners who
00:09:34.040 | are more knowledgeable to come by and comment on the question. So, that helpful, Jim? Anything
00:09:40.000 | else?
00:09:41.000 | Yes, very helpful. No, that's it, Joshua. Thank you very much and keep having a great
00:09:44.560 | podcast.
00:09:45.560 | Great. Thank you so much. All right, Nick, you're up next. How can I serve you today?
00:09:50.040 | Hi, Joshua. I got a quote from a Northwest Mutual agent for disability insurance and
00:09:57.920 | some different options for life insurance. He came over, talked to us, took an accounting
00:10:05.000 | of our assets and did, I guess, a needs analysis. The disability insurance I'm looking through
00:10:10.200 | and it's fairly straightforward. It'll be on top of whatever I have at work. The whole
00:10:16.640 | idea was to get something external to work. But the life insurance part, I'm a little
00:10:22.520 | confused about based on some of my previous conversations with you. I understand there's
00:10:27.560 | needs analysis and we have some money saved up and we're trying to pursue financial independence
00:10:35.640 | here. But the need that came up was he gave a whole life policy and a level term 20-year
00:10:42.720 | policy option for both me and my wife, but it was only for $125,000. I remember having
00:10:49.600 | a conversation with you at some point where you said, and maybe I'm getting it mixed up,
00:10:53.840 | but basically that anything under a million dollars isn't really worth talking about or
00:10:57.480 | worth pursuing when it came to insurance. So either I'm confusing some things or my
00:11:02.360 | needs are much less than it's worth pursuing with insurance or maybe I'm just very confused
00:11:09.040 | about the whole thing.
00:11:10.040 | Yeah. So the way that – and I'm going to steer away from any specific commentary
00:11:15.840 | on product selection here just due to the nature that in a context like this, I'm
00:11:21.720 | not as a financial advisor. I'm not working as a financial advisor. I'm not licensed
00:11:25.840 | as a financial advisor. I'm not licensed to sell insurance. But I can help you with
00:11:30.080 | talking about a big picture so that in working with an actual agent that you'll be able
00:11:34.960 | to figure out what the right solution is for you.
00:11:39.160 | The way a needs analysis works, it's the best way to determine life insurance, appropriate
00:11:44.160 | life insurance coverage. What you do is you say, "Okay, if I died, what would be the
00:11:49.640 | expenses that my family has?" The software that an insurance agent will use, there are
00:11:55.320 | various software packages, but the software that the insurance agent will use, they'll
00:11:59.240 | go ahead and put in the expenses and those expenses will involve a number of things.
00:12:05.720 | They'll usually – if you've given an insurance agent the information on any debts
00:12:10.640 | that you have. So for example, you have a mortgage. You have a car payment. You have
00:12:13.600 | various debts. They'll put that information in there. They'll also put in information
00:12:17.960 | of your personal expenses.
00:12:20.320 | One of the challenges with people who are very focused, very focused on financial independence
00:12:27.040 | is that challenges – and I say this is a good thing, but challenges from the perspective
00:12:31.240 | of understanding the needs analysis is that generally, the expenses are being held under
00:12:36.160 | tight control. So let's pretend. Let's make up some numbers. It wouldn't be unusual
00:12:41.240 | to have somebody who's pursuing financial independence, working hard, working diligently.
00:12:45.600 | It wouldn't be unusual to have somebody who's earning $7,000 a month and spending
00:12:50.360 | $3,500 a month.
00:12:52.800 | Now when you put that into a software package at $3,500 a month, you're going to get a
00:12:58.920 | relatively low amount of money that's necessary. Now the next thing that plays into it is that
00:13:04.800 | the software packages will usually incorporate Social Security benefits to the maximum level.
00:13:10.760 | So that will include widow and orphan benefits and it will also include retirement benefits.
00:13:15.040 | So when you run a needs analysis out using that type of software from age – from age
00:13:20.680 | say 35 to age say 90, what you'll see is you'll see a lot of inflow and a lot of
00:13:26.160 | income coming in from Social Security both now and in retirement.
00:13:31.160 | And so with these things, when you take a high income and high income drives a high
00:13:35.160 | Social Security payment and you filter in a low expense number into the software and
00:13:41.080 | then you filter in any other existing say group insurance, things like that that you
00:13:44.580 | already have in force and then you filter in the assets, it's not unusual for somebody
00:13:50.360 | who has been working hard and saving and accumulating not to need very much insurance.
00:13:55.120 | And that's probably what came out in this context. When the life insurance agent did
00:14:00.000 | the needs analysis, did they include in their Social Security income, widow and orphan benefits
00:14:05.720 | and retirement benefits for you?
00:14:07.400 | Michael: Yes, I believe so.
00:14:09.440 | Aaron Ross Powell: Okay. So that's a million-dollar inclusion. And it's absolutely the right
00:14:14.280 | thing to do to recognize it. But now you have to look at it and you have to say, "Do I
00:14:18.880 | want these benefits to be included for the purposes of my life insurance?"
00:14:24.680 | Now also, did they run, did you tell the agent that your expenses were a low number? Did
00:14:31.320 | you give them your current expenses but as compared to your income, did you give them
00:14:36.360 | that lower number of your expenses?
00:14:37.960 | Michael: Yes, I did. And I did not, I did mention that these were our expenses as I'm
00:14:44.000 | currently working and able to work at my current job and that they would go up if we took care
00:14:52.720 | of, or they would go up if I, you know, something changed, you know, and we had to pay for healthcare
00:14:59.880 | outside of my work. But he was taking the situation as it is now. And the reason I think
00:15:06.000 | he didn't factor in the expenses with our mortgage was because part of the plan was
00:15:10.520 | paying off the mortgage if I die or my wife dies. So that was already kind of built in
00:15:14.520 | there. So I basically gave them just the expenses which were, yes, very low.
00:15:19.320 | So…
00:15:20.320 | Aaron Ross Powell: Correct. So the way those software packages work is when you're doing
00:15:25.360 | a needs analysis, you input the amount of the immediate cash flow needed to do something
00:15:30.760 | like pay off a mortgage. And then you put in there a cash flow need coming in for a
00:15:35.680 | certain period of time. So the answer to your question is if you have done a good job, you're
00:15:43.000 | aggressively pursuing early retirement, financial independence, and you've done a good job
00:15:48.320 | saving money, your need for insurance is – for life insurance is relatively low because if
00:15:57.120 | you have – let's just make up a number. Let's say you have a million dollars sitting
00:15:59.920 | in the bank. A million dollars sitting in the bank spending – you know, having – with
00:16:03.840 | a paid off house and putting in say $2,500 a month for expenses plus if you counted or
00:16:10.120 | didn't count any income for a working spouse, that's another thing that makes a big difference.
00:16:15.560 | That goes a long way. So you don't actually need that much life insurance. And so the
00:16:20.000 | $125,000 number is accurate based upon the calculations used.
00:16:26.240 | Now here's what – if I were still an insurance agent, if I were working with you, here's
00:16:29.880 | what I would do. I would question those assumptions. And if I were coming back to you in – given
00:16:36.760 | the circumstances you're describing, I would give you – I would start with the same needs
00:16:42.160 | analysis that that agent already discussed with you. But then I would explain to you
00:16:46.560 | how the numbers work and I would explain to you that I might want to do something a little
00:16:49.960 | bit different. The reality is that term life insurance is very cheap. And so I said, "Let's
00:16:55.360 | do this. Let's take out Social Security or at least take out Social Security for retirement."
00:17:00.040 | Okay? Because that's a huge deal and Nick, you're pretty young, right? You're in
00:17:04.320 | your 30s?
00:17:05.320 | Nick Loper: Correct, 36.
00:17:06.960 | Aaron Ross Powell, Ph.D.: Okay. So Social Security will not look – if Social Security
00:17:13.360 | exists when you go to collect on it, it will not look the way that it collects now. Okay?
00:17:19.280 | So I would pull Social Security retirement benefit out. I wouldn't necessarily pull
00:17:23.000 | out a widow and orphan benefit. Although I would adjust those because the widow and orphan
00:17:26.320 | benefits are pretty simple and they're based upon your current earnings record. But I would
00:17:30.040 | pull the Social Security retirement benefit out of the software and I would explain I'm
00:17:35.760 | uncomfortable with this being in here and I'm uncomfortable – I'll mention it
00:17:38.800 | again for two reasons actually.
00:17:40.120 | The first one is I'm uncomfortable about predicting it. At the very least, I would
00:17:45.200 | never show somebody in their 30s a Social Security retirement benefit under current
00:17:50.040 | assumptions. At the very least, I would drop it to 50% of the current benefit.
00:17:54.040 | Nick Loper: Yeah. I think we went to 75% of current.
00:17:57.440 | Aaron Ross Powell, Ph.D.: Good. Good. Okay. So you've got an agent who's doing a
00:18:00.960 | good job. This is good news. Okay? They're working on this. Okay? But I would – I personally
00:18:05.120 | would go to 50% but now we're hemming and hawing and I can't prove that. It's just
00:18:09.200 | – it's your guess against my guess. Who knows how to predict the future?
00:18:13.120 | The next thing that I would do, the problem with the Social Security analysis is the computer
00:18:19.100 | software in these needs analysis packages are predicting that you're going to work
00:18:23.320 | until 65. Was that the assumption that you gave him that, "Hey, if I want to see a
00:18:28.160 | retirement scenario showing that I'm going to work until 65," was that accurate?
00:18:32.280 | That's the assumption he used but we discussed how that might not be the reality. But he
00:18:38.440 | ran with that assumption under – looking more normal. And I was okay with that just
00:18:44.480 | to get the first number but we're going to have a discussion actually at 2 o'clock.
00:18:48.040 | So I want to go over some of this stuff with him and see if we can tailor it a little bit
00:18:51.520 | more for the longer needs I might have.
00:18:55.000 | Okay. So the problem with that assumption is if that's in the software as a retirement
00:18:59.760 | package and then now the same software is converting over and looking at your life insurance
00:19:04.960 | plan, what it's assuming is that you're going to keep working at your current rate
00:19:09.240 | of income with an increase based upon an inflation rate, usually 3%. And then it's taking those
00:19:16.400 | highest 30 years of earnings and it's using that to drive your primary insurance amount
00:19:21.640 | which is then also being used – which is being used throughout.
00:19:25.840 | So the point is that I think it's a high assumption and so I get a little uncomfortable
00:19:31.220 | about using the social security. To cut to the chase, if you are well on your way towards
00:19:37.420 | financial independence, if you died, you would not leave your spouse destitute. So if I were
00:19:42.080 | working as a financial advisor, what I would say is, "Listen, you don't need a lot
00:19:45.920 | of life insurance. But I'll tell you what. It's pretty cheap and you might just sleep
00:19:50.340 | better knowing that you had an extra million dollars of insurance for the next five to
00:19:53.800 | ten years. Your rate is X number of dollars a month. Will you feel better knowing that
00:20:00.560 | there's an extra million dollars of life insurance?" And a lot of times when I put
00:20:03.960 | it like that, I know it's not so precise. The reality is that that's why you're
00:20:07.880 | buying life insurance. You're buying life insurance to feel better that you know that
00:20:11.640 | at least if you're going to carry it for the next decade or so, you've got plenty
00:20:15.800 | of extra money. Do you technically need it? No. And the needs analysis will demonstrate
00:20:20.640 | exactly precisely how much you need. That is the trustworthy figure. But it's only
00:20:27.120 | as good as the assumptions that you put into it. And so the assumption of saying, "We're
00:20:31.480 | always going to live on this lower amount of money," might not be accurate. Maybe
00:20:34.220 | in the future you might want to spend more. The assumption about Social Security might
00:20:37.220 | or might not be accurate. Maybe in the future it will be less. Maybe it will be more. All
00:20:40.480 | these assumptions, the assumption about paying off the mortgage, maybe you go get another
00:20:44.600 | house and now you'll have another mortgage. All those assumptions play a role. And so
00:20:51.280 | I wouldn't personally, if I were an agent, I would say, "This is what the number is.
00:20:55.800 | Do you want to buy a million bucks? It costs you $40 a month, $50 a month, something like
00:21:00.000 | that. Do you want to have a million dollars of insurance?" And I would just let you
00:21:02.200 | decide on that basis. Do you want it or not?
00:21:05.080 | Yeah. A couple of things. I was balancing the need to tell him, obviously, I want him
00:21:12.840 | to have true assumptions with the fact that I didn't want to get insurance on the... I
00:21:17.960 | didn't want to lie to him and say, "Oh, I'm going to work my whole life," because
00:21:20.480 | I know there's something to be said there about you have to have intent of working to
00:21:24.680 | get these kind of... Or maybe that's for the disability insurance or something. I have
00:21:29.800 | a desk job now. I have no intention of quitting my job, but one day I would like to. But I
00:21:37.280 | know I can get a certain rate because I'm a desk job right now. So I think that's why
00:21:41.960 | I was having trouble balancing how to tell him I might have a shorter than normal or
00:21:48.120 | average working cycle.
00:21:51.000 | And the other thing about the assumptions, when I talked to him, I would like to tell
00:21:53.960 | him, now that I have a baseline quote here, I can tell him, "Okay, I think if either me
00:22:00.400 | or my wife died, either of our lives would become much more typical than they are now
00:22:07.720 | because we're leveraging each other to be able to do this kind of extreme saving or
00:22:13.560 | somewhat better saving rate than maybe is typical. But I think if either of us died
00:22:18.000 | and had to deal with the children and life and working and all that, our needs would
00:22:23.280 | start lining up much more typical with an average person's, and the savings rate would
00:22:27.720 | obviously go way down. So those are the kind of things I think I need to help him update
00:22:33.280 | the assumptions with.
00:22:34.280 | - Right. So a financial plan or a needs analysis is always just simply a draft document, and
00:22:40.160 | you should treat it as such. You should always treat it as a draft document. The difference
00:22:44.060 | between you, Nick, and most people is in most insurance sales presentations, the needs analysis
00:22:52.620 | is simply used as a sales tool. It's simply used as a tool to say, "Look, I've done something
00:22:58.500 | that looks fancy." Most people don't read them. They don't use them. You give them to
00:23:02.680 | them and they just toss it in the corner of the desk and they don't ever look at it again
00:23:05.800 | because most people, they look at numbers and their eyes glaze over. So that's the actual
00:23:14.640 | reality that most insurance agents and most financial advisors get used to is when they're
00:23:20.280 | constantly – the stuff is constantly ignored.
00:23:22.640 | So what a financial advisor learns to do if they want to be effective at sales is they
00:23:28.560 | learn to point to the pictures and not to the numbers because the numbers make most
00:23:34.120 | people's eyes glaze over and you can see it. When you're in a sales presentation,
00:23:37.600 | you can see you – you can watch the client or prospective client get lost. So you learn.
00:23:43.160 | You point to the number. You point to the pictures and you try to skip past all the
00:23:46.040 | pages of text. The questions you're asking are all about all the pages of text and that's
00:23:50.680 | good.
00:23:51.680 | So what you need – what I would recommend that you do is articulate the fact to the
00:23:56.760 | insurance agent. Articulate to them, "Hey, I'm not just looking at the pictures. I'm
00:24:02.360 | looking at the numbers and I want to really understand these assumptions. Let's go over
00:24:05.880 | this together and let's just figure out what is the assumption that is correct and
00:24:09.320 | what's the assumptions that's not correct." The insurance agent can take that same tool
00:24:13.760 | that he's using and he can create a very detailed, carefully oriented solution for
00:24:22.360 | you based upon your situation.
00:24:26.280 | So if you want to suppress social security, suppress social security. If you want to demonstrate
00:24:32.200 | that you're retiring at 35, demonstrate that you're retiring at 35. You can change
00:24:38.400 | every one of those assumptions. Just make sure that you go over with them what are the
00:24:42.600 | assumptions being used in the plan and then now how do we apply them to my situation.
00:24:48.520 | The software is good. It helps with the calculations but software is only as good as the data that's
00:24:53.560 | input. So spend a lot of time talking to the agent about your actual data that's being
00:24:57.440 | input and at the end of the day, you very well might just simply come up like I said
00:25:01.440 | of, "Hey, how much is it? I know I only need $125 or $300 but let me just go ahead
00:25:07.280 | and buy half a million or buy a million."
00:25:10.400 | The reason that I said on a previous show of I don't really take it seriously when
00:25:13.440 | people say I want to buy a million dollars, I'm not talking about that in the context
00:25:17.140 | of somebody who's saved a million dollars. I'm talking about that in the context of
00:25:20.820 | people who are saying, "Well, I want to – I'm flat broke. I'm making $60,000
00:25:26.400 | a year but what I want to do is I just want to provide an extra $2,000 a month for the
00:25:30.320 | next three years to help in a transition plan." Okay. You can find that but I never really
00:25:35.040 | worked with that type of person who was kind of looking at those lower numbers.
00:25:39.520 | Term life insurance is so stinking cheap that I just don't see the reason why for young
00:25:45.160 | families not to have a lot of it. That's not a mathematical calculation. We can figure
00:25:49.360 | out the precise mathematics. I'm just saying if you see it as valuable, you'll feel better
00:25:54.640 | having a million dollars than having a hundred thousand.
00:25:57.240 | Yeah, yeah. I understand that. That sounds good and I think I have some good stuff to
00:26:05.600 | follow up with him about.
00:26:06.600 | Great. Well, I encourage you and I'm glad you're taking advantage of opportunities
00:26:10.280 | like this Q&A call to talk about it and if you're – it sounds like your advisor has
00:26:14.240 | had a good start for you and may they continue to serve you. Any other questions you want
00:26:17.880 | to ask Nick before we hang up on you?
00:26:20.120 | Is there anybody else who has a question or –
00:26:23.560 | Go ahead. You're the last caller on for right now so go ahead.
00:26:27.800 | I mean I guess this one's going to be kind of tough because I don't think you can answer
00:26:31.320 | this kind of stuff directly to my situation but in a theoretical situation like mine,
00:26:37.320 | would you tend to gravitate towards term or whole life? I know they have different – they're
00:26:40.840 | completely different products with different advantages but like you said, the term is
00:26:45.120 | so much cheaper. Of course, I'm really minded but I've heard you talk about the advantages
00:26:51.800 | of whole life insurance in the past and I am trying to kind of rectify that with is
00:26:58.200 | that something that would serve me or not as far as a product and I'm really not sure
00:27:03.160 | which way I'm leaning right now but I know that gets very specific and I'm not sure
00:27:06.760 | if you're able to answer that.
00:27:08.000 | So let's cover term or whole life right first. So this is the first thing that people
00:27:14.160 | often struggle with. Should I buy term life insurance or should I buy whole life insurance?
00:27:19.640 | The best metaphor to understand this would be the metaphor of how you should operate
00:27:25.520 | a car. You can rent a car, a cheap economy car in any city in the world for what? 20
00:27:32.920 | bucks a day. Sometimes you can get it on sale and it's cheaper but $20, $30 a day in the
00:27:36.480 | US at least. I shouldn't say any city in the world. So it's a lot cheaper for you
00:27:40.640 | to go and rent a car for $20 or $30 a day than it is for you to go and pay $30,000 to
00:27:46.640 | buy a car, right?
00:27:48.120 | Ryan: Right.
00:27:49.400 | Paul: Okay. Now, you can also lease a car. You can lease a cheap economy car in the United
00:27:54.680 | States for $150 to $250 a day. Excuse me, $250 a month depending on what deal. Honda
00:28:01.800 | is doing their 000 and you go $199 for a new Honda Civic. Great. That's a lot cheaper
00:28:06.840 | to lease a car for $199 a month than it is to go and pay $30,000 for a new car, right?
00:28:12.520 | Ryan: Correct.
00:28:13.520 | Paul: Okay. Now, does that mean that you should always rent cars or lease cars and not buy
00:28:18.800 | cars? The answer is obvious. No.
00:28:21.280 | Ryan: No. Right.
00:28:22.280 | Paul: The question of whether you rent or lease or buy is determined upon how long do
00:28:27.200 | you need to drive and what are your needs. So in a situation where you're looking at
00:28:33.360 | – well, let's see because I know that you are working hard towards early retirement.
00:28:38.160 | In a situation where you're saying, "Hey, I'm working hard towards early retirement.
00:28:42.080 | I think I've got – I'm just going to make up a number, 10 years left on this thing.
00:28:47.000 | In 10 years, I'm going to be in a situation where I'm going to be well-suited to provide
00:28:54.880 | for myself for the rest of my life." When you're going to own life insurance for 10
00:29:00.240 | years, you don't buy a whole life insurance for that. You lease that thing. You buy a
00:29:07.560 | term insurance policy.
00:29:09.040 | Now, whether you buy a 10-year term insurance policy or a 15-year term insurance policy
00:29:13.200 | or a 20-year term insurance policy, those are details that you've got to work out
00:29:16.440 | with an insurance agent because do I want an extra 10 years? Do I need to have the flexibility?
00:29:21.640 | What if my plan doesn't work? Is my plan predicated upon stock market returns or is
00:29:25.760 | my plan predicated upon me selling a business? Do I want to have the flexibility, etc.? That's
00:29:29.800 | where a life insurance agent will work through that.
00:29:31.600 | But the point is if you're going to own a life insurance policy for 10 years, that's
00:29:34.960 | a term insurance policy. That's a perfect fit. Young family, my kids are going to be
00:29:39.920 | 10 years older. You've got 10 years of expenses in the rearview mirror. Term insurance all
00:29:44.880 | the way for any kind of short-term need, term insurance. Just like if you're going to
00:29:49.000 | rent a car for a five-day trip, you're going to rent the car. You're not going to buy
00:29:52.560 | it. So term insurance is the perfect solution for any kind of short-term insurance need.
00:30:01.760 | Now is whole life insurance the ideal solution for a short-term insurance need? No. It's
00:30:10.320 | a terrible, terrible solution for any kind of short-term insurance need. Just like buying
00:30:15.600 | a car generally is going to be a very bad move for any kind of short-term thing because
00:30:20.960 | you're going to pay taxes on the purchase. You're going to have transaction costs. You
00:30:25.920 | don't buy a car and then sell it. Normal people, non-dealers, you don't buy a car and then
00:30:30.800 | try to turn around and sell it in an instant. You buy cars when you're going to own them
00:30:36.240 | for a relatively long period of time.
00:30:38.500 | So if you said to me, "Hey, I've got an insurance need that goes beyond 10 years. I've got an
00:30:43.240 | insurance need that goes beyond 20 years," now we start to look in a situation where
00:30:47.440 | we're going to start to compare the cost of a whole life insurance policy to the cost
00:30:52.760 | of a term life insurance policy. Now, these types of insurance needs are generally going
00:30:57.840 | to be smaller. If you're looking at a million dollars term life insurance versus a million
00:31:02.960 | dollars of whole life insurance, I mean your premium differential is you're looking at
00:31:06.120 | $50 a month for a term life insurance policy and $850 a month for a whole life insurance
00:31:11.560 | policy. So there'd be no reason for somebody with a young family to try to fund the need
00:31:17.480 | of protecting a young family with whole life insurance. That's a bad move.
00:31:21.280 | But if you were looking at your situation, you said, "You know what? I think I'd always
00:31:24.680 | like to have some insurance around forever," whether that's just a burial policy or whether
00:31:30.120 | it's just to make sure that I have some liquid cash at the time of my death, then you said,
00:31:36.200 | "Okay. Well, I'll go ahead and here's a $100,000 policy. Here's a $50,000 policy. I'm only
00:31:41.540 | going to have this thing around – this thing is going to be around forever, but this is
00:31:45.680 | the type of life insurance policy I'm going to want to carry for decades."
00:31:49.000 | Well, in that situation, that's not really a term insurance solution. That's a whole
00:31:52.520 | life insurance policy. When you're dealing with a normal young family situation like
00:31:59.000 | that, if you've got the disposable money and if you would value having a life insurance
00:32:03.120 | policy that's there forever, then that would be the situation that you would look at that
00:32:11.240 | because you can't have term life insurance until you're 100 years old. That's a whole
00:32:15.100 | life insurance solution.
00:32:16.300 | Now, let's talk about capital value. You do not make your decision between term life
00:32:21.640 | insurance and whole life insurance based upon investment returns. You make them based upon
00:32:28.620 | insurance because when you buy an insurance policy, you're buying an insurance policy.
00:32:32.820 | You're not buying an investment.
00:32:35.340 | Now, when deciding where to get the money from, you look at and understand with a life
00:32:41.500 | insurance agent the specific attributes of a whole life insurance policy or if you're
00:32:46.300 | looking at a universal life insurance, here's what it is, how it works, what's it invested
00:32:50.220 | in, what's the rate of return, etc. How does it work in my situation? If you desire
00:32:55.740 | to have any of the benefits of it – so for example, one of the reasons why I own whole
00:33:01.480 | life insurance, if I desire to have a very steady, stable source of cash that's not
00:33:08.220 | going to go up and down but it's going to give me slightly better return than I can
00:33:12.860 | make in a checking account or in a savings account or in CDs, it's going to give me
00:33:18.340 | a little bit better than that. It's going to be primarily a bond return but it's going
00:33:22.620 | to be owned within the context of a life insurance policy. So there are some attributes there
00:33:26.820 | where it's more flexible. If I can design a policy that's flexible and that has good
00:33:33.520 | cash accumulation, well, in that situation, it's an okay place for a little bit of my
00:33:37.680 | money. I wouldn't make that my primary source of my investing but I definitely have valued
00:33:43.200 | and appreciated having some very, very stable money that's not in the stock market but
00:33:49.400 | that's money that's protected and set aside. It gives me a lot of confidence to
00:33:53.420 | know that I can access the money anytime I want to but generally, it's just part of
00:33:57.760 | my long-term safe savings. It's not a big component of my financial life though. So
00:34:03.500 | if I were talking with somebody and if they were talking about, "I want to put a couple
00:34:07.840 | percent of my income into something like that," okay, fine. If someone says, "I'm
00:34:11.400 | going to make this my primary investment vehicle," I would be very uncomfortable with that, me
00:34:16.720 | personally. So that's how I approach it.
00:34:20.360 | The trouble with whole life insurance is you've got those two things compounded and people
00:34:25.080 | mix up the conversation and that's why it always goes so cattywampus. First, you decide
00:34:29.500 | what is the nature of the insurance policy that I want to need. Then, if you're looking
00:34:35.260 | at it from an investment perspective, then you understand what is the situation, what
00:34:41.700 | is the reason why I've done it. When I was an insurance agent, I sold whole life insurance
00:34:45.100 | policies into both of those situations but the approach is very different. This is where
00:34:50.180 | the individual has to make up the difference. If you're just buying a $50,000 policy,
00:34:53.860 | I'm not going to go on and on and on about the cash value and how investment return
00:34:58.940 | and any of those things. It's just a whole life insurance policy. It's going to have
00:35:02.380 | some cash value. It's going to have an okay rate of return, probably less than your
00:35:06.460 | stocks, probably about equal to your bonds. Maybe it could be a little bit better, a little
00:35:09.380 | worse depending on how the company does. But you're just buying a life insurance policy
00:35:13.100 | to have forever.
00:35:14.100 | That's different than some of the situations where – I can think of a couple of situations
00:35:18.980 | where I was specifically selling it for the benefit of the cash value. In those situations,
00:35:24.300 | there was one where we're coming in, we're talking, okay, putting hundreds of thousands
00:35:28.840 | of dollars of premiums into the policy. Well, there, it's a little bit about the death
00:35:33.260 | benefit but there, it was primarily about the cash. So you've got to do a rigorous
00:35:37.820 | analysis of it and that's how you should look at it in your situation. Why am I buying
00:35:41.620 | the policy? You don't buy a million dollars of life insurance early in your life when
00:35:46.180 | you don't have a lot of money of whole life insurance just because of the cash value.
00:35:49.420 | No, you buy term life insurance to protect the needs of your family. If you want a small
00:35:53.500 | policy that's going to last forever, that's the best move. It's better to get it when
00:35:57.460 | you're younger. But if you're going to look at it from an investment perspective,
00:36:00.380 | it's a different conversation and term isn't even in the question there. So disconnect
00:36:04.700 | the decisions.
00:36:05.700 | Okay. Yeah, that makes sense and that kind of lines up with what I was kind of feeling
00:36:11.860 | in my gut even without having done a spreadsheet of all the costs. But like you said, I think
00:36:19.220 | the need was for term initially. The benefits of the whole life did seem attractive but
00:36:24.660 | the cost of it far outweighed. I mean, what's the point of having cash flow from a whole
00:36:31.540 | life insurance later if it means my plan goes from whatever, let's say it goes to plan
00:36:39.740 | and like I said, it is relying on some fortunes of the market and all that stuff. But if things
00:36:45.500 | go well and it goes from, let's say it goes from 10 years to 20 years just because I have
00:36:49.060 | this now large expense, which would be my second largest expense I think by far after
00:36:56.380 | my mortgage, it doesn't make sense to add that for the minimal benefit and extending
00:37:02.340 | the real goal out almost double. So, and that's just kind of like my gut feeling about how
00:37:07.820 | much farther that would extend it out. But yeah, that makes a lot of sense. I think I'm,
00:37:13.940 | I know where to focus my questions now on term and also the assumption of the needs.
00:37:19.660 | So I appreciate it very much. Thank you.
00:37:21.660 | For sure. Talk to the insurance agent and ask the difficult questions. The only key
00:37:28.260 | to remember, they're not the same. They're not the equivalent. You're not trying to decide
00:37:33.060 | between a blue car and a red car. You're trying to decide between a pickup truck and a Maserati.
00:37:36.860 | Now, I'm not comparing either. I'm just saying they're very different. So the question is
00:37:42.620 | not should I pick either or? The question is what's appropriate for my situation and
00:37:48.060 | the goals that I have? And if you understand the benefits of each and then ask yourself,
00:37:52.340 | do I value these goals? Signing up for a life insurance payment that's going to be a huge
00:37:58.420 | component of your budget, that can be very, very frustrating to have. And personally,
00:38:04.340 | if I were an insurance agent, having learned the hard way, I would probably discourage
00:38:07.740 | you from that because you would probably bail on the policy in too short of a time. But
00:38:12.940 | it doesn't mean, it just means identify the situation. And that's what it is with all
00:38:17.100 | financial planning. So wish you the best and I hope this information sets you on a good
00:38:24.260 | foot for your conversation with your agent.
00:38:26.660 | Yeah, I think it certainly will. I appreciate it. I'll be focusing on disability insurance
00:38:32.740 | next week. So in the next few weeks, I'm going to start looking at this stuff. I'm trying
00:38:37.500 | to take it one bite at a time.
00:38:39.500 | Great. Awesome. I wish you all the best, Nick. Thank you all so much for listening to these
00:38:43.900 | Q&A shows. I hope that they're interesting and give you a useful tool in your pocket
00:38:50.820 | to think about some of these things. Key piece of advice when you're working with people,
00:38:56.500 | with financial people, ask lots and lots and lots of questions. If you ask lots and lots
00:39:01.540 | of questions and you're working with an agent or with an advisor of some kind, you will
00:39:05.180 | start to see and hear the different approaches. People are very leery and very wary of insurance
00:39:12.540 | agents, financial advisors, etc. And I think it's probably a deserved reputation. But just
00:39:18.300 | because you're leery of them doesn't mean that you can't educate yourself. You can't
00:39:21.420 | take the information and then apply it yourself and make a good decision for yourself. Don't
00:39:27.940 | be intimidated by people. Just ask lots of questions and then understand what the benefits
00:39:32.100 | are and ask yourself, "Do I value this?" And hopefully you'll be able to make better decisions.
00:39:36.260 | If you'd like to join a call like this in the future, become a patron of the show, radicalpersonalfinance.com/patron.
00:39:41.500 | If you would like to consult with me individually, I do have that option available for you. You
00:39:46.620 | can consult with me individually on your personal situation. If you don't want your financial
00:39:50.060 | details broadcast like in a show like this, you'll notice a lot of times with callers,
00:39:55.780 | I'm intentionally being vague and just trying to give them a little bit of privacy. But
00:40:00.700 | if you'd like to talk about personal details with me on something, I'd be happy to consult
00:40:04.500 | with you. I'm not an insurance agent nor am I a financial advisor, so I can't make any
00:40:10.540 | specific recommendations on anything that you should or shouldn't do with an insurance
00:40:15.540 | policy and I can't make any specific recommendations on whether you should sell out of the market
00:40:19.540 | at the high point or get rid of this stock or things like that. But the good news is
00:40:23.020 | the vast – that's the tiny minority of financial decisions. Everything else in your
00:40:27.980 | personal situation, I'd be happy to consult with you on. As long as it doesn't involve
00:40:31.340 | the sale of security or the sale of insurance product, I'm cool. So if you'd like to
00:40:35.940 | have information on that, go to radicalpersonalfinance.com/phonecall and you can book a personal consulting call
00:40:43.980 | with me. And in the meantime, I wish you all the best. Have a great week and be back with
00:40:47.940 | you soon.
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