RPF0685-Friday_QA-Business_Liability_Insurance_Life_Insurance_for_Fat_People_Short-Term_Savings_Dividend

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00:00:29.960 | Today on Radical Personal Finance is Friday and like any good Friday, that means Q&A.

00:00:45.000 | Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge,

00:00:58.520 | skills, insight and encouragement you need to live a rich and meaningful life now while

00:01:02.880 | building a plan for financial freedom in 10 years or less.

00:01:05.600 | My name is Joshua.

00:01:06.600 | I am your host and this is Friday, which means a live call-in show.

00:01:10.600 | I take a combination of calls.

00:01:12.880 | Sometimes I take written questions.

00:01:13.880 | I'm hoping we have some time today to get some written questions and these calls are

00:01:17.840 | open to patrons of the show, people who support the show on Patreon.

00:01:21.520 | Never know what they are.

00:01:22.520 | It's kind of like live radio, but here we go.

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00:01:32.960 | Patreon.com/RadicalPersonalFinance.

00:01:33.960 | I do that just in order to help meter out the call volume a little bit.

00:01:41.120 | Every now and then you never know.

00:01:42.160 | If you sign up and follow me in some of the other fun places, if you're on the email list,

00:01:46.800 | then that's a good thing to do.

00:01:48.640 | Then sometimes every now and then I'll send out an email and say, "Hey, I'm doing a live

00:01:51.560 | Q&A."

00:01:52.560 | If you're in the Facebook group, then sometimes I pop an announcement in there, "I'm doing

00:01:56.400 | a live Q&A."

00:01:57.400 | If you're following me in some of those formats, follow me on Twitter @JoshuaSheets or on Facebook

00:02:01.400 | in the Radical Personal Finance Facebook group or on the page.

00:02:04.440 | I'll often post announcements there.

00:02:06.160 | Again, email list, et cetera.

00:02:08.360 | Those are a few different ways for you to get involved.

00:02:11.320 | Sometimes I will do a Q&A for people who are following me there.

00:02:15.280 | But each and every Friday, the most reliable way to get on a Q&A show is to join on Patreon.

00:02:20.160 | Go to Patreon.com/RadicalPersonalFinance and sign up there.

00:02:23.640 | If you'd like to get on the email list, the best way to do that at the moment is to go

00:02:27.560 | to RadicalBooklist.com.

00:02:30.480 | If you go to RadicalBooklist.com, I will send you my recommended reading list for financial

00:02:36.000 | freedom, 12 books.

00:02:37.000 | I've had some great feedback just from that list alone.

00:02:39.760 | Several listeners have written to me and said that some of my book recommendations there

00:02:43.080 | have, and this is not hyperbole, have changed their life, have helped them in some really

00:02:47.160 | meaningful ways.

00:02:49.140 | That's another thing you can do.

00:02:50.140 | I encourage you to go to RadicalBooklist.com.

00:02:51.840 | Sign up there for the book reading list.

00:02:53.400 | You'll get a series of emails with explanations on each of the books that I recommend that

00:02:57.160 | you read.

00:02:58.160 | It's just a start to start you on your financial freedom education.

00:03:01.080 | But there are 12 books on that list.

00:03:02.480 | If you begin with those 12 books, I can promise you that your 2020 will be starting off on

00:03:08.560 | a very different foot.

00:03:09.720 | 12 books there, one book a month, that was a really good habit for you to set.

00:03:14.040 | I believe that all 12 of those books will serve you well.

00:03:18.520 | I've thought carefully about the order that I even present them to you.

00:03:21.800 | I begin with books that most people wouldn't recommend on a personal finance reading list,

00:03:26.600 | but that you will really want as you think about your 2020 goals and even consider this

00:03:31.680 | next decade.

00:03:32.680 | Now let's go to the phone to begin with Anne in Maryland.

00:03:35.280 | Anne, welcome to the Q&A show.

00:03:36.600 | How can I serve you today?

00:03:37.600 | Anne Reitman Hi, Joshua.

00:03:38.600 | Thank you for taking my call.

00:03:39.600 | First of all, I want to say that I really love the lyrics of the song for this conference

00:03:46.720 | call.

00:03:47.720 | I really want to dial again.

00:03:49.720 | J.P.

00:03:50.720 | Boyd Yes, and just because the audience doesn't

00:03:53.280 | get a chance to hear that, only you heard it.

00:03:56.000 | When people call in, there's a funny song when you're waiting on hold for me to show

00:03:59.120 | up and start the conference call for the live Q&A.

00:04:03.080 | And so it is very funny.

00:04:04.800 | But I'll tell you what, if you want to do that, go to patreon.com/radicalpersonalfinance,

00:04:07.920 | sign up and join me on the next call, and then you can hear the lyrics that Anne is

00:04:10.440 | alluding to.

00:04:11.440 | Anne Reitman Yeah, yeah.

00:04:12.440 | I love listening to it.

00:04:13.440 | That's why I call so frequently.

00:04:14.440 | So my question is, I would like for you to help me think about liability insurance.

00:04:25.240 | It's one of the topics that is very difficult for me to decide on.

00:04:29.600 | And I can give you a little bit of information that may be pertinent, and then feel free

00:04:34.840 | to ask any other questions that you think are important.

00:04:38.640 | So I have one member LLC, and this is my primary source of income for myself.

00:04:46.840 | It's not the only source of income for my household, but that's what I have.

00:04:51.240 | And obviously, many people I know, they have liability insurance, and all sorts of insurances.

00:05:00.260 | I listened to some of your podcasts about insurances, about asset protection planning,

00:05:07.640 | and so on and so forth.

00:05:08.640 | And I can't decide what do I need or should consider, and what do I really not need at

00:05:18.240 | all.

00:05:19.240 | So let's begin here.

00:05:24.440 | Tell me just a little bit about your business.

00:05:26.080 | You don't have to give specifics unless you want free advertising, but what kind of work

00:05:29.880 | are you doing, and what is the liability that you're exposed to?

00:05:33.080 | Right.

00:05:34.080 | So my business is a service business.

00:05:37.760 | It's essentially a consulting.

00:05:40.560 | In that particular sense, I do not provide consulting that is associated with liability.

00:05:49.520 | For example, I do not recommend insurances, or I do not do any regulatory work that has

00:05:56.600 | to do with a proper documentation.

00:05:59.720 | None of that.

00:06:00.720 | It's more of a, if you were to think about, let's say, market research, that's probably

00:06:05.720 | the closest to what I do in terms of liability.

00:06:11.960 | So in other people who are in your line of work, do they regularly purchase liability

00:06:15.680 | insurance?

00:06:16.680 | Are there policies available that are tailored to your marketplace?

00:06:20.560 | That's a good question, because I spoke with several consultants who have been in this

00:06:30.160 | business for some time, and what they have is only an umbrella policy for themselves,

00:06:39.200 | and they do not have any other specialized insurance.

00:06:43.000 | Okay.

00:06:45.400 | Do you have a physical business location where your clients come and meet with you, or where

00:06:51.400 | members of the public come in to that physical business location?

00:06:55.600 | No.

00:06:57.440 | Do you have any physical employees that are actual employees working on premises, or do

00:07:01.680 | you just hire some contract work here and there?

00:07:05.520 | Only contract work.

00:07:07.840 | So the short answer is, I think then, with what you're describing, I would not really

00:07:14.560 | pursue liability insurance unless there's something that's specifically marketed to

00:07:19.600 | your occupation, and you say, "Wow, this is a perfect fit for me," and I'll explain how

00:07:27.560 | I get there.

00:07:29.520 | We begin with a disclaimer.

00:07:31.800 | I have never worked as a liability insurance agent.

00:07:36.360 | I have spoken to some, but I have never worked in that, and probably if I worked in that

00:07:40.600 | business, I would probably be more scared than I am.

00:07:44.580 | So you're just getting kind of a knowledgeable layman's perspective on this, rather than

00:07:51.300 | a liability insurance agent's perspective.

00:07:53.780 | And I would encourage you, this would be a good conversation to speak with a liability

00:07:57.960 | insurance agent over.

00:08:00.260 | And that, for anybody, that would really be your first call.

00:08:03.180 | Insurance agents are generally, in my experience, very willing to speak to people, and they're

00:08:08.340 | the ones who really understand their marketplace.

00:08:11.100 | But now here is my understanding, which will hopefully give you a little bit of insight

00:08:15.340 | as you make a couple of calls locally.

00:08:18.620 | Let's begin with a philosophy of insurance.

00:08:24.260 | Insurance is a wonderful tool for managing risk, but it's not necessarily the perfect

00:08:30.900 | tool for managing all risks.

00:08:33.700 | Way back in the archives of Radical Personal Finance, just a moment, I'm going to find

00:08:38.740 | the show number.

00:08:40.060 | All right, there it is.

00:08:42.300 | So back in episode 91 of Radical Personal Finance, Radical Personal Finance episode

00:08:48.660 | 91, first published on October 29, 2014, the show is titled, "Do I Need Insurance?

00:08:55.820 | A Mental Model to Analyze Methods of Dealing with Risk."

00:08:59.780 | In that show, I talked about a model, a framework that you can apply to assessing whether you

00:09:07.860 | need insurance to manage a risk.

00:09:10.460 | We talked about the different ways to look at it.

00:09:14.620 | There are some methods of risk management.

00:09:24.300 | There are some risks that we face that are, if we build a quadrant, we can build a four-part

00:09:33.060 | quadrant.

00:09:34.060 | On one axis, we'll talk about is the frequency of risk low or is the frequency of risk high?

00:09:41.820 | And then we can build on the other quadrant of our XY graph.

00:09:45.740 | We can discuss whether or not the impact of the risk is low or the impact of the risk

00:09:52.100 | is high.

00:09:53.520 | And then for each quadrant, we will develop an appropriate strategy for how to manage

00:09:59.460 | that risk.

00:10:00.920 | And I talk through in that show, I talk about risk avoidance, loss prevention, loss reduction

00:10:07.220 | and non-insurance transfers.

00:10:09.100 | We talk about how you should handle each of those types of risks.

00:10:14.500 | So I'm not going to repeat that show.

00:10:17.980 | It's an entire show and I can go back and listen to episode 91 and it'll give you that

00:10:21.180 | framework, that mental model that you can use to handle risks.

00:10:25.580 | So when you begin with that, you recognize that insurance is a really good tool for handling

00:10:30.380 | some things.

00:10:31.380 | And what insurance works really well at is controlling for the risks that are very infrequent

00:10:37.580 | but yet have a very high potential damage.

00:10:41.300 | And then we look and say, okay, what are the risks that we're worried about?

00:10:45.820 | Well, some of the obvious risks are the things we insure against all the time.

00:10:50.220 | So that's why I ask you about, do you have business premises?

00:10:53.320 | If you, for example, if you have a storefront that's open to the public and somebody comes

00:10:59.600 | in and they slip and fall on a slippery floor because water was left there, well, that can

00:11:05.940 | be a risk that you have liability in.

00:11:09.380 | It's a very low, like the low frequency risk, but it's something where if somebody sues

00:11:16.420 | you successfully for massive injuries that they've suffered as a result of your negligence

00:11:21.460 | and having a slippery floor, that could be a very big financial cost to you.

00:11:26.860 | So what can you do?

00:11:28.060 | Well, you of course put in place proper structures to make sure that you don't leave a slippery

00:11:34.840 | floor.

00:11:35.840 | You wipe up spills, you make sure that there's proper rugs and such at the entrance.

00:11:40.780 | Then of course you manage your legal liability.

00:11:42.940 | That's one of the reasons that people put out signs.

00:11:47.420 | So people put out signs to say slippery floor.

00:11:50.060 | That does two things.

00:11:51.060 | Number one is it warns someone that the floor may be slippery, which hopefully will help

00:11:54.960 | someone to be more careful and avoid the slip and fall, but then it also helps to mitigate

00:12:00.020 | the legal risk that it shows that the shop owner is not being negligent, that they're

00:12:05.580 | indicating that there could be a hazard here.

00:12:08.500 | How all that works out in court, I don't know.

00:12:11.900 | That's not my area of expertise.

00:12:15.140 | But something like that is properly insured for.

00:12:19.500 | And so you would absolutely, if you opened a storefront to the public, you would absolutely

00:12:23.860 | maintain an insurance policy that would have provisions for the liability that exposes

00:12:28.620 | you to.

00:12:29.620 | Now in your case, you've done something a little simpler, just simply not have a storefront.

00:12:33.660 | So you don't need insurance for that if you don't have a storefront.

00:12:37.440 | Similar things would involve dealing with employees.

00:12:39.580 | If you have employees, you now are exposed to certain legal risks as a business owner.

00:12:45.660 | Could be the same exact type of things.

00:12:47.400 | What happens if your employee slips and falls while they're at work?

00:12:51.020 | Well that's where you have liability insurance and that's where you have things like workers

00:12:54.620 | compensation plans.

00:12:57.060 | What about if your employee alleges that they've been harassed or sexually harassed in the

00:13:01.740 | workplace that exposes you to liability?

00:13:04.900 | And so the simplest way to avoid that is to not have employees, which is a model that

00:13:10.260 | I like.

00:13:11.260 | If you can do everything with contractors, it dramatically limits your liability, makes

00:13:14.660 | for a very flexible business.

00:13:17.020 | It's a little bit easier, but not all businesses can be built with contractors.

00:13:21.500 | Or you need to insure for those risks.

00:13:23.980 | So when you have employees, you put all those proper insurance programs in place to protect

00:13:27.900 | you from the liabilities that those employees expose you to.

00:13:32.020 | And so in your situation, you've minimized your liability exposure.

00:13:37.740 | So then we go down to specific areas of liability.

00:13:43.460 | When I was a licensed financial advisor back in the day, we always carried errors and omissions

00:13:50.100 | insurance because the specific professional liability that I was exposed to was if I give

00:13:55.780 | a recommendation and I make an error or I omit some material fact and my client suffers

00:14:03.620 | a financial loss, then because due to that risk, I need to be protected from that.

00:14:09.060 | And so you buy an errors and omissions insurance policy.

00:14:11.540 | And that's standard practice for accountants, for professionals giving professional advice

00:14:19.700 | in that context.

00:14:21.620 | Other kinds of risk that's insured.

00:14:25.140 | In the financial business, there's insurance for broker-dealers where people who are defrauded

00:14:31.120 | by the broker-dealer, they have access to the SIPC insurance program to protect people

00:14:38.140 | from fraud by broker-dealers or by insurance agents, depending on which insurance, which

00:14:44.740 | part of the financial business they're involved in.

00:14:47.180 | Now if you're primarily involved as a consultant giving advice that is a little bit more general,

00:14:54.860 | you don't quite have that same risk because you're probably not exposed to that same legal

00:15:00.620 | liability.

00:15:02.100 | The legal liability for a financial advisor is pretty substantial because you're giving

00:15:05.420 | advice on potentially large amounts of money and your clients could suffer significant

00:15:10.420 | amounts of loss.

00:15:12.980 | Now it's not that your advice is not unimportant or that somehow they couldn't suffer loss,

00:15:18.460 | but I think your liability is much more limited.

00:15:22.140 | And it's especially just simply limited based upon some of the legal doctrines involved

00:15:25.860 | in that space.

00:15:28.140 | Did you do the best that you can?

00:15:30.900 | Did you give advice that you thought was right and did the client get what they expected?

00:15:33.860 | I can't on the spot go through all of those, the legal standards that would be used, but

00:15:42.260 | I'm not so worried about it with a model that like you're describing.

00:15:45.900 | I don't think you have such a significant risk.

00:15:49.300 | So the way that I would look at it is I would say first, what are my risks?

00:15:55.520 | And in your situation, you probably don't have many significant risks.

00:16:01.620 | And it'd be good of course to speak to an advisor, speak to an attorney and just see

00:16:06.940 | if there's any risks that I'm not aware of, but you probably don't have any real significant

00:16:11.300 | cases that somebody could make due to liability risk.

00:16:15.380 | Your most likely risks would be things like perhaps breach of contract or fraud, things

00:16:20.820 | like that.

00:16:21.820 | So if you avoid making fraudulent representations to somebody, if you avoid breaching contracts

00:16:27.060 | then you do your best job, you've really minimized most of those risks.

00:16:33.700 | I don't think that there is a significant risk that would need to be protected against

00:16:38.340 | for a business like you're describing.

00:16:41.220 | And then you get to, well, what other tools are available other than insurance?

00:16:45.000 | If insurance is available, you should consider it.

00:16:46.900 | But the fact that you didn't come with a specific insurance policy tells me that probably no

00:16:51.180 | one's marketing to your industry and I don't even know if it's even available.

00:16:54.580 | So then you get to, well, how can I protect myself and my personal assets?

00:16:58.860 | And the simplest solution there is not an insurance policy, it's to use the business

00:17:04.100 | structure.

00:17:05.740 | Now in this case, the only thing that is concerning, modestly concerning, is the fact that you're

00:17:13.500 | involved in a single member LLC, is that right?

00:17:16.740 | Yes.

00:17:17.740 | Okay.

00:17:18.740 | So a single member LLC does protect you, legally speaking, from some of the risks.

00:17:26.340 | And so the idea is if you're operating under a business infrastructure, you're operating

00:17:32.500 | a business through a limited liability company, that company has to stand good for any claims

00:17:40.580 | against that company.

00:17:41.660 | So if you're operating in your capacity as an employee or manager of that limited liability

00:17:48.500 | company, and the company does something that's wrong, and somebody sues the company, and

00:17:53.580 | they sue the company for $200,000, and they win the lawsuit, then the company assets have

00:17:59.500 | to stand good for that particular lawsuit.

00:18:06.740 | And in theory, if the limited liability company operates as it should, in theory, then it

00:18:12.580 | should protect your personal affairs and your personal assets from the operations of the

00:18:18.180 | company.

00:18:19.180 | And as long as you don't have personal liability in your conduct in some way, then that should

00:18:24.700 | protect some of your other assets.

00:18:26.380 | Now here's where it gets tricky.

00:18:28.620 | That's very easy to teach when we're talking about the value of a limited liability company.

00:18:34.360 | But my understanding is that basically, if somebody's going to sue your company, they're

00:18:40.100 | all automatically going to name you as an individual as a defendant in the lawsuit as

00:18:46.700 | well.

00:18:47.700 | They're going to sue both you and your company.

00:18:49.980 | And so most of the way that I would manage risk if I were in a situation like you is

00:18:54.180 | to make sure that you're very careful about maintaining a clear wall of separation between

00:19:01.140 | the business of the company and you as an individual.

00:19:05.780 | And this is where a lot of people really do break down, especially with a small, closely

00:19:10.700 | held company where you're the only person operating in that company.

00:19:16.340 | It can be a real danger here for you to be too closely associated with that company.

00:19:24.340 | So here are a couple of practical best practices that I think you want to make sure of.

00:19:30.180 | First, anytime you're doing business, it's very important that you always are very clear

00:19:35.020 | that this is the LLC itself that is contracting with somebody for the work.

00:19:42.700 | You never sign contracts yourself.

00:19:45.140 | You always make sure that the LLC and you are a representative of the LLC, that that's

00:19:50.460 | who is actually signing the contract.

00:19:53.580 | You make sure that all of your paperwork clearly indicates that they're doing business with

00:19:57.740 | a limited liability company and that your name is just simply here and there as a representative

00:20:04.580 | of that company, but that everything is with the company.

00:20:06.980 | Your website is with the company.

00:20:09.180 | All your documents are with the company.

00:20:10.660 | The business card is with the company.

00:20:12.900 | I think that it's important to do things like make sure that you have separate email accounts.

00:20:18.580 | So you would never send, you don't interact with clients as an individual.

00:20:22.660 | You interact with clients underneath your company email account.

00:20:26.060 | I think that it's important to do things like have separate phone numbers, separate phone

00:20:30.340 | lines.

00:20:32.100 | It's worth it, in my opinion, to carry two cell phones if you need to.

00:20:35.180 | One is the company cell phone, one is your cell phone.

00:20:37.320 | Don't mix those things because if you're careful about following those simple rules, the money

00:20:42.260 | goes into the business account.

00:20:43.940 | The business account pays you as the member of the LLC a salary or an income, but everything

00:20:50.220 | is carefully, nothing is commingled.

00:20:52.980 | Then you do a good job of building that strong corporate wall and you dramatically minimize

00:20:58.140 | the risk that a judge would come along and would be willing to pierce the corporate veil

00:21:02.580 | and try to come after you personally.

00:21:04.900 | Now the reason I asked about the single member LLC, it's unclear to me.

00:21:10.620 | I do know that when you get to the perspective of asset protection, a single member LLC is

00:21:16.460 | not as robust as a multi-member LLC.

00:21:19.940 | A single member LLC is the most, is the very best and simplest LLC that you can do from

00:21:29.300 | the sheer ease of operations.

00:21:32.780 | And so they're great to set up, they're fast to set up, they're easy.

00:21:36.820 | The IRS completely disregards them, they're a totally disregarded entity.

00:21:41.100 | So that makes your tax and your business structure very, very simple.

00:21:44.660 | But they have a higher exposure of risk and a higher ability to be pierced by a judge

00:21:51.740 | than a multi-member LLC or some other form of corporation.

00:21:55.580 | So I think that if you were talking with an asset protection attorney and that attorney

00:21:58.860 | were giving you advice, what that attorney would like to see is that attorney would like

00:22:02.660 | to see some intermediary that is not a single member LLC between you and the company.

00:22:09.320 | Is that worth it in your situation?

00:22:10.460 | I have no idea.

00:22:11.860 | But we're just kind of going through the theory.

00:22:13.740 | The theory is that if you're going to operate as a single member LLC, it might be smart

00:22:17.580 | to go ahead and have another entity own that single member LLC and make sure that there

00:22:21.180 | are multiple people involved in that other entity because that adds a greater structure

00:22:28.940 | to it.

00:22:31.760 | And then the other thing that you have to look at is just simply looking at your personal

00:22:35.980 | assets.

00:22:36.980 | Are you vulnerable?

00:22:40.460 | Are your other assets vulnerable?

00:22:41.980 | You listened to my asset protection series.

00:22:44.980 | If your assets, let's say that you have a home and that home is in a, you live in a

00:22:51.380 | state where you've got significant homestead protection laws, your other assets are in

00:22:56.500 | qualified accounts that are protected either by federal law or perhaps IRAs and such that

00:23:01.540 | are protected by your state.

00:23:03.100 | You don't have a lot of money exposed so that even if someone did sue you, you'd be very

00:23:08.520 | hard to collect on.

00:23:10.020 | I think that you make a judgment call and say, "I'm pretty good here."

00:23:13.420 | But if all of a sudden you have actually $10 million and that $10 million is sitting in

00:23:17.980 | a checking account, then now all of a sudden it becomes worth it to go ahead and add in

00:23:23.020 | another corporate layer with multiple members and we want to put a little bit more distance

00:23:28.420 | between us and this business that we're operating.

00:23:31.780 | So my guess is, my hunch is you don't need liability insurance for the reasons stated.

00:23:38.300 | You're probably fine operating through the business entity, but be a good student and

00:23:43.220 | make sure number one, talk to a liability insurance agent.

00:23:46.220 | See if there even is an insurance policy that could protect you from any risks that you

00:23:51.180 | do have.

00:23:52.860 | Be very, very careful about running your affairs cleanly.

00:23:56.860 | Most of the times when a corporate liability structure breaks down, I think most of the

00:24:03.580 | time, it's my understanding that most of the time that's due to carelessness by the business

00:24:09.100 | operator.

00:24:10.100 | So don't be careless.

00:24:11.500 | Make sure that your materials are clear.

00:24:14.080 | Make sure your contracts are clear.

00:24:15.300 | Make sure it's very clear that you are not doing business as an individual, that rather

00:24:21.420 | you're doing business as a representative of this limited liability company.

00:24:26.620 | And then think about your personal risks.

00:24:29.220 | And if those things are simple and you're good with keeping your corporate formalities,

00:24:34.860 | etc., then I think you're probably safe enough.

00:24:39.600 | And I wouldn't worry too much about it.

00:24:45.740 | Thank you.

00:24:46.740 | Yeah, it seems to me that I do follow all these rules that you recommended to look into.

00:24:54.340 | And do you think that...

00:24:55.340 | So sometimes I'm not sure whether something can be done even cleaner or maybe I forgot

00:25:01.820 | something.

00:25:02.820 | Maybe it's a conversation also with my accountant to see if they think that everything looks

00:25:10.060 | just like it should be or if I could make it better.

00:25:16.060 | There's an endless...

00:25:17.060 | Yes, you should have those conversations.

00:25:19.460 | Here's the challenge.

00:25:21.860 | You've got to be practical about it.

00:25:24.220 | There is an endless amount of things that you could do to make it better.

00:25:28.580 | But every step to making it better adds cost and complexity and hassle.

00:25:35.520 | So it's a judgment call as to where is the right balance between this is good, this should

00:25:42.580 | work and this is smooth and simple and streamlined and this will work effectively.

00:25:52.060 | There's no bright line between these.

00:25:53.940 | It's a judgment call.

00:25:55.780 | If I were involved in a very risky business, something that had significant amounts of

00:26:02.340 | liability and so let's talk about things that would increase.

00:26:05.300 | If I'm running a restaurant where now all of a sudden I have massive exposure to the

00:26:12.980 | public and I've got a lot of employees, your risks just go way up compared to what you're

00:26:19.980 | doing.

00:26:20.980 | So if you're operating equipment, you're running a road construction equipment company with

00:26:30.620 | millions of dollars of heavy equipment that could crush somebody who runs into it on the

00:26:36.140 | side of the road or that some careless employee backs over somebody behind them.

00:26:42.920 | Those are things where the liability just goes up through the roof.

00:26:46.340 | And so your whole profile changes and now everything becomes much, much more important.

00:26:53.980 | But from what I'm hearing from your situation, your situation is fairly simple.

00:26:59.340 | And so I think the natural limited liability of the limited liability company, that's the

00:27:06.460 | goal of an LLC, is probably sufficient.

00:27:09.660 | Now I would not keep tons of money in the company unless you need it.

00:27:14.580 | You have to have enough money in the company to need it, but I wouldn't keep tons of assets

00:27:18.340 | there.

00:27:19.340 | I wouldn't co-mingle my activities in this business with my activities anywhere else.

00:27:24.140 | You want to make sure there's clear separation there.

00:27:26.320 | You want to make sure that you're just working in one line of business in this particular

00:27:30.140 | company.

00:27:31.140 | But as long as you're doing those things, I think you're probably okay.

00:27:34.540 | But continually solicit professional advice on the subject.

00:27:41.180 | Okay, one last very small point.

00:27:45.820 | I actually thought that maybe keeping a sufficient amount of capital in the company is actually

00:27:53.100 | a good thing.

00:27:54.100 | But now you're saying maybe don't, I mean, again, we don't know what sufficient is or

00:27:58.540 | what's ton mean.

00:28:00.100 | But I thought that if there isn't a significant amount of money in the company, then it kind

00:28:05.820 | of shows the capitalization of the company and also maybe satisfies the claims of whoever

00:28:13.060 | is going after the company.

00:28:15.300 | And I thought, okay, if it's very little, then they may not be satisfied and they would

00:28:20.660 | want to go after a person and try to find any way to pierce the corporate veil.

00:28:26.500 | You are correct in that.

00:28:27.540 | One of the hallmarks, one of the things that judges will look at when deciding whether

00:28:33.820 | or not to respect the corporate structure or whether to pierce the corporate veil, one

00:28:39.780 | thing they will look at is, was the company sufficiently capitalized in an appropriate

00:28:46.140 | way for that company?

00:28:47.660 | So when you capitalize a company, you need to make sure that you capitalize it to an

00:28:51.880 | appropriate level for that company.

00:28:54.620 | Now, operating a consultancy, that number is probably thousands of dollars, not hundreds

00:29:00.920 | of thousands of dollars.

00:29:02.660 | But on the other hand, if you are operating something that has a very large working budget,

00:29:07.620 | you need to capitalize that company to an appropriate level.

00:29:10.900 | The key is, it just needs to be appropriate.

00:29:13.540 | And then as long as it's appropriate for your industry, for the company type, et cetera,

00:29:18.700 | then you're good.

00:29:19.700 | But that absolutely is one of the things that somebody will look at.

00:29:24.160 | You additionally then, of course, would want to keep an appropriate amount of working capital

00:29:28.180 | in the company.

00:29:29.180 | If you're going to operate this clearly as a separate entity, this is not your money,

00:29:35.540 | this is the company's money.

00:29:36.780 | And just like you would always make sure that you have enough money in your checking account

00:29:41.820 | to do business, the company needs to have enough money in their checking account to

00:29:45.180 | do business.

00:29:46.320 | But if with a consultancy, perhaps your business expenses are a few thousand dollars per month,

00:29:52.340 | then there's no need to have hundreds of thousands of dollars in a business checking account.

00:29:57.460 | Some thousands or perhaps $10,000 should be sufficient.

00:30:01.180 | What I would caution you about is exposing assets unnecessarily to liability.

00:30:08.380 | So one of the principal ideas of asset protection planning is anywhere there is liability, we

00:30:15.460 | try to seek to constrain that liability to a structure that doesn't have a lot of assets.

00:30:24.780 | And anywhere there's a lot of assets, we try to make sure that that structure doesn't have

00:30:30.140 | a lot of exposure.

00:30:32.100 | So the simplest example would be back to the heavy equipment example.

00:30:38.100 | If you're operating a business that has a lot of liability and you've got a million

00:30:45.700 | dollars of heavy equipment for a road construction company, well, that's a big asset.

00:30:51.740 | That's a lot of equipment right there.

00:30:54.180 | And you've got tremendous liability that is going to be created by the operation of

00:30:59.820 | that company.

00:31:00.940 | You've got liability exposure for employees.

00:31:03.260 | You've got liability exposure to customers.

00:31:05.500 | You've got liability exposure for onlookers and bystanders, property damage, et cetera.

00:31:12.100 | And you've got a million dollars of equipment sitting here in this company.

00:31:15.900 | So the simple solution is somebody could sue the company and they could assess the million

00:31:24.780 | dollars of equipment as part of what they could collect on.

00:31:28.460 | They may not be able to pierce all the way through to the owner's personal assets, but

00:31:33.020 | they could access this million dollars of equipment.

00:31:35.860 | And so my understanding, what an attorney would recommend in a situation like that is

00:31:41.500 | you would try to segment the liability to a structure with fewer assets and you would

00:31:46.940 | try to move the assets into a structure where there's not going to be liability created.

00:31:51.340 | And so instead of the company that's doing the operating company owning all the equipment,

00:31:56.500 | you would have a holding company separately owned by a few different people.

00:32:02.060 | And hopefully some of those people are not involved in the business.

00:32:05.140 | So let's say my wife and I were running a road construction business.

00:32:07.460 | I think we would set up a family holding company that owned equipment.

00:32:11.860 | And that's the family holding company that owns all the equipment for business.

00:32:16.780 | But then we would establish leasing contracts and that equipment would be leased to the

00:32:20.300 | operating company.

00:32:21.860 | So now that million dollars of assets are not necessarily exposed to the operating company

00:32:29.580 | itself.

00:32:30.580 | Now, we would get good legal advice.

00:32:34.180 | My understanding, legal advisors would make recommendations such as having multiple unconnected

00:32:40.700 | people involved in the leasing company.

00:32:43.540 | That would be intelligent from a tax strategy as well.

00:32:46.180 | So my wife and I might be shareholders in that company.

00:32:49.620 | My children might also be shareholders in that company.

00:32:52.500 | We would also possibly lease equipment to other companies so it wasn't just simply that

00:33:02.940 | this was our only customer.

00:33:04.380 | It's fine if it's our primary customer, but we don't want it to be our only customer.

00:33:09.180 | And in following those practices, we can now make a really good case that these assets

00:33:17.100 | should not be exposed to the liability that's being generated inside the operating company

00:33:22.540 | any more than the fact that in our operating company, we go to another big commercial leasing

00:33:27.820 | agency and we lease a Bobcat for the day.

00:33:30.340 | Well, the company that's leasing us the Bobcat doesn't have any liability for what we do

00:33:34.060 | with the Bobcat.

00:33:35.700 | They're just simply leasing the Bobcat to us.

00:33:38.740 | So you look at liability and you see how do we constrain this liability inside of a company

00:33:46.060 | with fewer assets that are at risk and how do we make sure that in the companies that

00:33:50.940 | we hold assets in that we don't generate liability risks inside those companies.

00:33:59.420 | One more example, you do the same thing with employees.

00:34:02.380 | One of the big risks is to have is employees.

00:34:05.760 | Employees can bring tremendous liability risks to a business operator.

00:34:09.940 | And so through a variety of mechanisms, you try to move that employee risk to a structure

00:34:14.780 | that doesn't have a lot of assets.

00:34:17.260 | So you see this with employee leasing companies.

00:34:19.560 | You see this with using contractors for labor instead of employees.

00:34:23.560 | And then you keep the assets tucked aside where you're not going to generate liability

00:34:27.820 | inside of that company.

00:34:30.020 | So this all has to be done at appropriate scale, but those are the basic principles

00:34:33.820 | that are applied.

00:34:35.220 | To your situation, all of this sounds unnecessary as long as you follow good corporate formalities,

00:34:41.380 | which by the way, one of the areas of weakness is because LLCs are so simple to create and

00:34:49.220 | because you don't have the same requirements of corporate record keeping, of annual meetings,

00:34:56.660 | all those things, people often are very lax with that and they basically run the LLC as

00:35:02.220 | an alter ego.

00:35:03.860 | I think that creates danger.

00:35:05.500 | And I think that if somebody is prudent, you should run your LLC exactly like you run a

00:35:11.020 | corporation and keep the same structure, keep the same habits in place because that helps

00:35:18.060 | you in the worst case scenario if you're ever in front of a lawsuit.

00:35:22.140 | That's my answer, Anne.

00:35:23.140 | Thank you.

00:35:24.140 | That's very good.

00:35:25.140 | Thank you so much.

00:35:26.140 | My pleasure.

00:35:27.140 | Anything else?

00:35:28.140 | Only if you have one.

00:35:29.140 | Go ahead.

00:35:30.140 | Go ahead.

00:35:31.140 | I've got two other callers on the line, but I've got time for one more.

00:35:36.140 | Go ahead.

00:35:37.140 | Okay.

00:35:38.140 | One more.

00:35:39.140 | This probably doesn't matter, but the fact that my LLC is taxed as S corporation, does

00:35:49.380 | it change anything in terms of what you said?

00:35:52.940 | Or it doesn't really matter at all because it's only...

00:35:57.980 | No, that doesn't change anything.

00:36:00.060 | The tax corporation status is simply an arrangement with the IRS and that is independent of these

00:36:06.340 | principles, these legal principles that we're discussing.

00:36:09.140 | Right.

00:36:10.140 | That's what I thought.

00:36:11.500 | Well, thank you so much.

00:36:13.100 | My pleasure.

00:36:14.100 | All right.

00:36:15.100 | We go on now to, it looks like James.

00:36:16.100 | James, welcome to the show.

00:36:17.100 | How can I serve you today?

00:36:18.100 | Hey, Joshua.

00:36:19.100 | Can you hear me?

00:36:20.100 | Sounds good.

00:36:21.100 | Go ahead.

00:36:22.100 | Excellent.

00:36:23.100 | All right.

00:36:24.100 | So this has to go back to a couple of weeks ago when you did the episode, the first episode

00:36:32.060 | on your podcast about your dealings with dieting and overweight, being overweight, like different

00:36:40.180 | periods throughout your life.

00:36:41.380 | My question about that is, first off, the statement that I can relate in that I am overweight

00:36:49.300 | and have been different degrees of overweight throughout my life, but relatively healthy,

00:36:56.140 | no chronic health issues related to my weight.

00:36:59.020 | I have had trouble getting insurance.

00:37:03.020 | And I remember distinctly, I was driving when I was listening to your podcast, you said

00:37:07.140 | something along the lines of like, you've always had premium top of the line life insurance.

00:37:12.540 | I might've said health insurance earlier, but I meant life insurance.

00:37:17.740 | And I wanted to just ask you to unpack that if you don't mind, because I have a family

00:37:24.020 | with a young child and I definitely want to make sure that I have coverage, whether it's

00:37:29.420 | through work or not.

00:37:30.700 | And I just want to know maybe what my options were, given that I share some similar physical

00:37:38.060 | history as you.

00:37:40.020 | Yeah.

00:37:41.020 | So this is one of the areas where working with a good insurance agent should solve this

00:37:45.900 | problem.

00:37:46.900 | So I'm curious, when you have applied for insurance before, did you use an agent?

00:37:51.540 | Did you use a website?

00:37:52.540 | What did you do previously?

00:37:55.420 | It was always through like, I got a new job, I'm signing up to get my benefits and I'll

00:38:02.820 | sign up for life insurance.

00:38:03.820 | And they'll say, you know, based off of the information you input about yourself, like

00:38:08.220 | we can give you up to a certain amount, like a low amount, like $200,000 or something like

00:38:12.140 | that.

00:38:13.140 | Right.

00:38:14.140 | Right.

00:38:15.140 | And essentially, I kind of just felt like I was not going to get any more insurance

00:38:19.300 | from them.

00:38:20.300 | And I kind of just took it as like, okay, well, I'm overweight and that's the way things

00:38:24.660 | are.

00:38:25.660 | But obviously, I want to revisit that.

00:38:27.500 | Right.

00:38:28.500 | So my other caller dropped off.

00:38:29.620 | So I'm going to give you a little bit of time and I'm going to give you a mini lesson on

00:38:33.220 | how you as a young father should go around getting insurance.

00:38:38.500 | And it'll be a refresher for others who need this as well.

00:38:41.380 | So let's begin with first, personal versus group insurance.

00:38:46.740 | Many people buy life insurance and all of this is about life insurance.

00:38:50.700 | Every line of insurance is different.

00:38:52.780 | Dental insurance and health insurance and life insurance and disability insurance.

00:38:56.300 | These are all unique lines of insurance and there's different advice for each and every

00:38:59.780 | one of them.

00:39:00.820 | So we're exclusively here talking about life insurance.

00:39:04.620 | When it comes to life insurance, many people buy their life insurance through their job,

00:39:12.180 | the way that you have done.

00:39:13.900 | First, that is not ideal.

00:39:16.860 | And the reason it's not ideal is for is reasons that it's not ideal is these.

00:39:22.380 | First, if you buy life insurance through your job, then if you leave your job, you lose

00:39:27.020 | your life insurance.

00:39:29.060 | Some policies will have conversion privileges.

00:39:33.540 | Sometimes you can take it with you.

00:39:35.380 | For the most part though, you can't.

00:39:37.380 | Or at least you can't take it with you at a rate you can afford.

00:39:39.940 | So for example, some life insurance that's issued through a group contract will be issued

00:39:47.540 | as a term insurance policy.

00:39:49.280 | But then when you leave, yeah, you can keep the policy, but you have to convert it to

00:39:52.020 | a permanent life insurance policy, a whole life policy.

00:39:55.180 | You probably can't afford that increase in premiums.

00:39:57.760 | So Joshua's first rule of life insurance, don't buy life insurance through your job.

00:40:03.360 | Always buy life insurance through a personal policy that is underwritten for you personally.

00:40:10.380 | Unless you can't get life insurance or you can't get life insurance at a good rate personally,

00:40:15.460 | and then you go and look to see if you can get life insurance through your job.

00:40:20.140 | There are a few different ways that life insurance policies are underwritten.

00:40:25.940 | So you have policies that are fully underwritten.

00:40:30.140 | So if you decide to go out and you contact an insurance agent, you say, "I want to own

00:40:33.980 | a million dollar life insurance policy," that insurance agent will underwrite the policy.

00:40:39.740 | Insurance agents are actually called field underwriters.

00:40:42.500 | It's not really used anymore.

00:40:43.940 | But the idea is that the first method of underwriting that the insurance company uses is the individual

00:40:49.460 | life insurance agent.

00:40:50.460 | So the life insurance agent is keeping their eyes open when they're in your house for fraud.

00:40:56.300 | They're keeping their eyes open for are you telling the truth.

00:40:58.780 | And they have a legal duty to the company when they fill out an insurance application

00:41:03.020 | that the information on that application is truthful and that they don't have any additional

00:41:08.620 | knowledge about any reason why the applicant is reporting information that is not truthful.

00:41:14.060 | But when the company does that, they fully underwrite the policy on a personal basis.

00:41:19.980 | And so what they do is they will send a nurse out.

00:41:23.740 | They'll do a medical exam.

00:41:25.300 | That medical exam will involve a full medical history questionnaire where you respond to

00:41:30.880 | all these detailed questions.

00:41:32.740 | They will solicit all of your doctor records from any doctor visits, usually in about the

00:41:37.420 | last five to 10 years.

00:41:39.320 | But if it's significant, they can go back farther than that.

00:41:41.640 | And they'll collect all your medical records.

00:41:43.660 | And the underwriter in the home office of the insurance company will read all those

00:41:47.660 | medical records.

00:41:49.460 | All your medical information will go into a centralized depository of health information

00:41:56.820 | that the insurance companies access.

00:41:59.020 | And then the individual nurse will take a current measurement.

00:42:02.660 | They'll put you on a scale, find out what your current weight is.

00:42:05.660 | They'll take your blood pressure.

00:42:07.380 | Depending on the amount of insurance, they will take a urine sample.

00:42:11.220 | They'll take a blood sample.

00:42:12.800 | If you're applying for several millions of dollars of insurance, there will be a heart

00:42:18.460 | EKG.

00:42:19.460 | They'll do an EKG.

00:42:20.460 | They'll do a field EKG.

00:42:23.040 | When you're underwriting very large policies, they'll bring somebody in, put them on a treadmill,

00:42:27.480 | do some of the stress tests and very advanced tests, depending on the amount of insurance.

00:42:32.400 | Now, when you're dealing in the million, two million, three million dollar range of insurance,

00:42:37.240 | those things are fairly simple.

00:42:38.340 | If you're buying small policies of a few hundred thousand dollars, often it's just a urine

00:42:43.820 | sample and a blood pressure.

00:42:46.680 | If you're buying very small policies, the insurance agent will do the whole thing themselves.

00:42:51.120 | So if I didn't sell much, because I could usually get somebody at least a half a million

00:42:56.800 | dollars of insurance, but you never know.

00:42:59.040 | If you sell a hundred thousand dollar insurance policy, they would do a mouth swab.

00:43:04.560 | And the mouth swab has some information and I carried a kit in the back of my car, so

00:43:10.280 | if I needed to do it right there, I would do the medical history questionnaire and a

00:43:13.120 | mouth swab and that's good enough for a hundred thousand dollars of insurance.

00:43:16.920 | But all of those policies are underwritten on an individual basis, where the company

00:43:22.120 | has the right to decline the coverage if they don't like it, or they have the right to rate

00:43:26.320 | the coverage, meaning they'll charge you whatever you want to be charged, whatever they decide

00:43:31.080 | they want to charge you.

00:43:32.320 | And you'll know that eventually, before you accept the policy, you'll know exactly what

00:43:36.640 | the rate's going to be based upon the individual underwriting of the insurance company.

00:43:41.920 | Now there are other ways, however, of providing insurance.

00:43:48.000 | There is a standard of insurance called simplified issue.

00:43:51.720 | And what simplified issue means is the insurance company is going to offer insurance policies

00:43:58.000 | to a group of people, there usually needs to be an affiliation of some kind, so this

00:44:02.440 | is often people all working at a company or all part of a certain group of people, and

00:44:07.960 | you just simply have to answer some basic questions, maybe your height, your weight,

00:44:11.960 | a little bit of your family history, but they're not going to make you go through the full

00:44:15.400 | line of underwriting.

00:44:17.700 | And that's simplified issue.

00:44:19.020 | In simplified issue, they still have the opportunity to charge you more, so if your weight is a

00:44:23.800 | little bit too high, they'll say, "We're going to increase your premiums because of that."

00:44:27.680 | Or if you have a bad family history, "We're going to change your premiums because of that."

00:44:31.280 | That's called simplified issue.

00:44:32.280 | And then the third is what's called guaranteed issue, where the insurance company guarantees

00:44:37.160 | that we will issue a contract, a life insurance policy, on everybody who is within this affinity

00:44:42.360 | group, usually a company.

00:44:44.520 | And with guaranteed issue, they don't ask you any questions, they just simply say, "We'll

00:44:48.680 | give it to you."

00:44:49.920 | Now with guaranteed issue, you can recognize there's a tremendous liability exposure that

00:44:55.400 | the insurance company has.

00:44:57.200 | Let's say that I've smoked eight packs of cigarettes a day, my father died of cancer

00:45:01.960 | at 42, my mom died of cancer at 43, I've had six heart attacks, and I have four stents,

00:45:07.880 | and all of a sudden I'm 41, and I decide that I want to go and get a life insurance policy.

00:45:16.240 | Well, if I just go down to XYZ company, and I come into that XYZ company, and I say, "Hey,

00:45:23.600 | here I am.

00:45:24.600 | Now you've got to give me half a million dollars of life insurance company."

00:45:26.800 | That could destroy the integrity of the group of insureds that the insurance company has.

00:45:32.560 | And so they want to guard against that.

00:45:33.720 | Well, the way to guard against that is usually by limiting those guaranteed issue contracts

00:45:37.440 | to relatively small face amounts of insurance, usually $50,000, maybe $200,000.

00:45:44.960 | It's got to be small.

00:45:46.160 | You generally don't get those with millions of dollars.

00:45:49.280 | Sometimes, depending on the affinity group, because of the basic characteristics of the

00:45:53.520 | group, an insurance company will be a little bit more liberal with the size of the contracts

00:45:58.520 | they'll issue.

00:45:59.520 | So you'll see this with things like a bar association, or a CPA group, or something

00:46:04.720 | like that.

00:46:05.720 | Lawyers and accountants and lawyers, these are often relatively low-risk people, and

00:46:13.240 | they're at a fairly low risk of dying.

00:46:15.580 | People are usually intelligent.

00:46:17.340 | And so if somebody's going to be an attorney, there are lots of attorneys that smoke cigarettes.

00:46:24.420 | But on a class basis, I would bet you five bucks that there are far fewer attorneys who

00:46:29.620 | smoke cigarettes every day than there are construction workers, than there are janitors,

00:46:35.540 | etc., because the kind of person that becomes an attorney has a different health profile

00:46:41.260 | than the kind of person who takes an entry-level job.

00:46:45.060 | So the insurance company knows this, and so sometimes they'll offer higher simplified

00:46:50.580 | issue or higher guaranteed issue policy amounts to some of those very low-risk groups.

00:46:57.700 | And that's how it works.

00:47:01.460 | Now back to you as an individual versus a group.

00:47:05.300 | If you can get insurance yourself, you should always buy it yourself.

00:47:08.140 | And the first reason that I already said was that you can take it with you when you leave

00:47:14.340 | your job and you can maintain your insurance coverage.

00:47:17.140 | The second reason why, or a second reason why, you should buy the policy individually

00:47:23.060 | is that you can often get better rates.

00:47:26.540 | Because of the risk that the insurance company faces of the potential for what's called adverse

00:47:32.540 | selection, people who know they're sick and they're going to die coming to that company

00:47:36.800 | and intentionally getting it, that's called adverse selection.

00:47:41.500 | Because of the risk, I've been smoking too many cigarettes today, because of the risk

00:47:47.860 | that the company faces, the group policies are issued at higher rates to protect the

00:47:55.700 | company.

00:47:56.700 | So sometimes you can save a lot of money as an individual by just simply having a policy

00:48:01.100 | that's underwritten for you as an individual versus through your group contract.

00:48:06.540 | I've seen that many times where if you're just buying a standard term insurance contract,

00:48:10.940 | you can save significant money by buying that policy yourself than through the group.

00:48:16.300 | You don't really get much group benefit as far as, there's not a lot of benefit to the

00:48:21.540 | insurance company of taking on those group contracts.

00:48:24.100 | They like to have more insureds, they like to sell more business.

00:48:27.280 | So there is some ability, they don't have to pay as many agent commissions as they do

00:48:31.220 | in the individual side.

00:48:32.220 | So there may be some cost savings, but the risk of adverse selection undoes a lot of

00:48:37.940 | those things.

00:48:38.940 | So it depends on the person, depends on the company, all of this is highly variable, but

00:48:43.060 | you can often save money as an individual as compared to a group.

00:48:47.180 | And then also, there's often very little incentive to buy group insurance.

00:48:52.260 | The company that offers you benefits can give you a tax-free benefit of up to $50,000 of

00:48:58.220 | life insurance, term life insurance.

00:49:00.500 | And so many companies will automatically give $50,000 as a nice group benefit as a tax-free

00:49:05.260 | benefit.

00:49:06.260 | But anything more than that, you have to pay for.

00:49:08.060 | And if the company is paying for it, then that's a taxable benefit to you.

00:49:10.900 | So that's not particularly favorable in many group benefit plans because of the tax structure.

00:49:17.340 | That changes when we move into executive benefit planning, where oftentimes a healthy life

00:49:23.500 | insurance executive benefit can be carved out.

00:49:27.220 | But just for most people who are involved in most aspects of the group benefits marketplace

00:49:32.460 | in the United States, life insurance, you're not going to get a lot of life insurance benefits

00:49:36.260 | at work.

00:49:37.720 | So always buy it yourself as an individual.

00:49:40.980 | And you get the opportunity when you're buying it yourself as an individual to have full

00:49:45.460 | underwriting done that takes into account the totality of your circumstances.

00:49:49.900 | Now next part of Joshua's lecture on insurance, insurance agent versus website or something

00:49:56.380 | like that.

00:49:57.380 | I see no benefit to ever buying from a website versus working with a local insurance agent.

00:50:07.620 | I'm not aware of any specific companies, although I have this nagging feeling in the back of

00:50:11.620 | my head that there are at least a couple of insurance companies that are now selling insurance

00:50:15.780 | policies without commissions, but it's not a meaningful part of the market insurance

00:50:20.300 | marketplace at all.

00:50:21.780 | So insurance companies pay commissions to agents who sell their policies.

00:50:28.640 | And those insurance commission rates are basically the same no matter who sells the policy.

00:50:36.820 | I won't go into the exceptions.

00:50:38.660 | Basically it's good enough.

00:50:40.260 | So I can sell insurance in two ways.

00:50:42.500 | I can be an individual life insurance agent and I can say go ahead and come in and I'll

00:50:47.180 | work with you as an individual.

00:50:49.300 | Or if I want to make a lot of money in the insurance business, I simply set up an insurance

00:50:53.220 | website.

00:50:55.140 | I get licensed agents who work in my insurance agency, but our method of marketing is through

00:51:00.900 | a website and through the phone.

00:51:02.940 | But you often don't get as experienced agents or as knowledgeable agents in that kind of

00:51:08.020 | marketplace as you do with an individual agent, life insurance agent, who's made their career

00:51:13.660 | out of life insurance.

00:51:15.380 | When I was doing this business, I was a life insurance agent.

00:51:18.900 | I knew far more about life insurance than anybody who would ever be working a phone

00:51:23.580 | at a website.

00:51:26.500 | And I could bring that expertise to my clients.

00:51:29.640 | And so if I sold a policy, you could go to termlifeinsurance.com or whatever, that's

00:51:34.260 | just a generic name for whatever website is out there.

00:51:37.980 | And that life insurance general agent would have established an agency, they established

00:51:43.000 | contracts with a half a dozen different companies.

00:51:47.420 | Might be Banner, might be Prudential, might be AXA, whatever the companies are of the

00:51:51.740 | day.

00:51:52.740 | And so they would sell those policies.

00:51:54.640 | But I had exactly those same companies that I was contracted with.

00:51:58.160 | But the difference was you got the access to the knowledgeable agent versus the sometimes

00:52:03.900 | basic, all the telephone representatives, they're knowledgeable enough to pass an insurance

00:52:09.100 | exam.

00:52:10.100 | But that doesn't mean that they're deeply knowledgeable in the space.

00:52:13.280 | And I get paid the same commission as the owner of that agency gets paid.

00:52:17.480 | So why wouldn't somebody want to come and work with me as a knowledgeable life insurance

00:52:22.120 | agent instead of working through the website?

00:52:24.480 | There's no cost savings that can be gotten by the customer.

00:52:29.480 | It's just simply a marketing operation for the company.

00:52:35.520 | I don't have any problem with that business model.

00:52:37.880 | But as an individual, I can't make a clear recommendation that you should go and use

00:52:43.720 | a website as your primary source of searching for insurance.

00:52:47.000 | I don't see the benefit.

00:52:48.440 | You don't save any money and I don't think you're going to access as high of a caliber

00:52:56.480 | of insurance agent through that system.

00:52:59.600 | The people that would be representatives at that kind of company, at a website-based company,

00:53:04.560 | are people who are intelligent enough to pass the life insurance exam.

00:53:10.560 | They got to be licensed agents.

00:53:12.560 | But they're probably not going to be committed necessarily to the life insurance business.

00:53:17.440 | They're not going to be as aggressive.

00:53:19.360 | They're not going to have the incentives to become as knowledgeable as I think an individual

00:53:24.960 | agent could be.

00:53:26.080 | Now you measure that for yourself.

00:53:27.540 | That's my personal experience and I'm biased because of the path that I took.

00:53:31.280 | I'm sure there are excellent insurance agencies that are doing most of their business through

00:53:35.720 | call-in business, etc.

00:53:37.680 | But with my experience, I don't see any reason to go that route.

00:53:41.160 | Which brings me now to the specific answer to your question.

00:53:45.320 | One of the things that's important when you're getting insurance is you want the ability

00:53:49.520 | to work with an insurance agent who has access to a broad number of companies and who has

00:53:54.880 | knowledge of those different companies underwriting standards.

00:53:58.720 | There are different ways that insurance companies underwrite policies.

00:54:02.960 | For basic purposes, most insurance companies will have a tier of premiums that they charge

00:54:08.880 | based upon something like they have a standard rate, then they may have a preferred rate

00:54:13.480 | or a super preferred rate.

00:54:15.400 | So standard is here's what a standard person of standard health and standard family history

00:54:19.400 | and standard weight, blah, blah, blah, blah, blah, gets as standard.

00:54:21.960 | But then preferred is if you're skinnier or you're healthier or your parents are older

00:54:26.040 | or super preferred, everything is in your favor.

00:54:28.800 | And then they have what are called their table ratings.

00:54:30.360 | It might be table one, table two, table three, all the way down to 10, 12, 15, whatever.

00:54:35.280 | And so you say, "Well, I had a cancer diagnosis eight years ago, but since then everything

00:54:40.080 | is good."

00:54:41.080 | All right, we're going to give you table one.

00:54:43.200 | Your premiums are adjusted based upon where you come in at this level on these tables.

00:54:49.680 | Now different insurance companies though have different ways that they arrive at their rating

00:54:55.680 | based upon their inside actuaries experience.

00:55:00.480 | And so speaking simply, they basically fall into two different categories.

00:55:05.440 | Some insurance companies models will kick you down to a lower rating if you fail one

00:55:11.200 | certain thing.

00:55:12.640 | So this sounds like what happens to you based upon the underwriting methodology that you

00:55:17.400 | went into.

00:55:18.880 | They said, "Hey, James has, his heart is great.

00:55:22.280 | No history of heart disease.

00:55:23.360 | Mom and dad didn't have heart disease.

00:55:25.120 | Mom and dad are still alive and they're 99 years old.

00:55:28.280 | James doesn't smoke.

00:55:29.280 | That's great.

00:55:30.280 | James has great blood pressure.

00:55:31.880 | James is totally healthy.

00:55:32.880 | He's a little bit fat.

00:55:35.240 | BMI over this number.

00:55:36.960 | And because of that, because the BMI is over that, that automatically drops James from

00:55:41.280 | he's not super preferred that automatically puts him into standard rates.

00:55:46.480 | But other companies use a pointing system, a point system where they'll say, "All right,

00:55:51.800 | everybody starts at standard and James's mom and dad are 99 years old and they're in perfect

00:55:55.840 | health.

00:55:56.840 | So plus 10 points, plus 10 points.

00:55:59.360 | James has perfect blood pressure, plus eight points.

00:56:02.760 | James has no family history of cancer, plus four points.

00:56:05.920 | James runs.

00:56:07.120 | James doesn't drink alcohol, plus plus.

00:56:10.440 | But James's BMI is, he's a little bit fat.

00:56:12.920 | Okay, minus six points.

00:56:14.400 | Total it all up, we came up to 42 points.

00:56:16.800 | So that puts James right in our preferred category.

00:56:19.400 | 42, you know, 40 points and above is still preferred.

00:56:22.400 | And that gives a little bit of wiggle room.

00:56:25.520 | Nobody except the companies and experienced people know each of the different companies

00:56:31.200 | structures.

00:56:32.880 | So what I prefer that you do is you contact a knowledgeable agent and then you, and you

00:56:38.680 | apply with that knowledgeable agent, you go through the underwriting process.

00:56:41.280 | And then if you get rated with one company, look to see if there's another company that

00:56:45.480 | is willing to make you an offer of a better quote.

00:56:54.920 | And so that way you at least know if you're going to get rated, you know you got rated

00:56:58.600 | with 12 companies or 15 companies or whatever instead of just the one company that kicked

00:57:03.040 | you out.

00:57:04.120 | So back when I was an agent with a big mutual company, that was always what I would do is

00:57:08.800 | I would always start with the company, I was a Northwestern Mutual agent.

00:57:11.880 | I would start with Northwestern Mutual and put people and do that and start with that.

00:57:17.440 | Unless then if somebody got rated with Northwestern Mutual, I'd take that policy and I would shop

00:57:22.000 | it to other companies and see what quotes we got back and then come back and see, well,

00:57:26.720 | what were the opportunities there?

00:57:28.720 | And what I often found was a lot of variability in the offers that we would get.

00:57:35.240 | And so in one of the reasons is based upon this system of underwriting.

00:57:39.640 | So with my life insurance, Northwestern Mutual was one of those points-based companies where

00:57:45.440 | they would do it based upon a totality of points.

00:57:48.440 | I had a stellar family history, I had stellar blood pressure, I had stellar, I don't know,

00:57:53.040 | cholesterol, all the rest of this stuff.

00:57:54.520 | I have no history of chronic disease whatsoever in my family, very high longevity.

00:57:59.760 | So even though my BMI was high, I always got preferred, whatever that came up, Premier,

00:58:04.360 | I guess it was Northwestern Mutual's name for it.

00:58:06.800 | I always got the best rates because of that.

00:58:09.320 | And it was due to some of this inside insurance industry stuff that we're talking about here.

00:58:14.720 | So the end of the day, you got to find a company that's willing to make you an offer.

00:58:22.160 | But if you shop around, you can get good rates.

00:58:25.120 | And just because you're a little bit fat doesn't mean that you can't get a better price.

00:58:31.200 | Now of course, stop being fat if you can, work hard on getting less fat and then go

00:58:36.340 | ahead and get it better.

00:58:37.620 | And that's also one of the important things that you should do.

00:58:41.340 | So back when I did that business professionally and I would talk to people, you say, "Okay,

00:58:46.960 | well this company, you got a preferred rating here, but here's your target.

00:58:51.180 | The reason we got a preferred rating," we'd talk to the underwriter, the underwriter would

00:58:54.040 | say, "Here's why this person got a standard rating.

00:58:57.100 | But if you can go from standard to preferred, it'll drop your premiums by $40.

00:59:03.020 | So Mr. Client, here is my challenge for you.

00:59:06.540 | Drop your body weight 40 pounds.

00:59:08.480 | And if you can drop 40 pounds, then we can apply for reconsideration in one year, two

00:59:13.000 | years or whatever."

00:59:14.000 | And that's the other thing is that whenever an underwriter rates a policy, they'll tell

00:59:17.380 | you whether there's reconsideration available or not.

00:59:20.880 | And so sometimes with significant, somebody, you're getting a policy for somebody who's

00:59:25.760 | had a history of heart attacks or history of cancer, they'll say, "Rating is table one,

00:59:30.540 | no reconsideration available."

00:59:32.480 | But if somebody has a high BMI, they'll say, "Okay, it's going to be right now a standard

00:59:37.040 | rating for now, but reconsideration is available in one year or two years."

00:59:41.680 | And so then the person should get the policy because if you are getting rated by a life

00:59:47.360 | insurance company, that's a good clue that you need more life insurance because they

00:59:51.520 | really want to sell the policy.

00:59:53.320 | And if they're going to charge you more, they're charging you more because the risk of your

00:59:56.040 | dying soon is a lot higher.

00:59:58.300 | So there's my sales pitch for how to sell rated policies if you're an insurance agent.

01:00:03.440 | If you get rated by an insurance company, the need for life insurance just went up.

01:00:07.720 | And so that's why you should definitely buy it if you got rated.

01:00:12.560 | Doesn't always work, but it's true and so often people find that persuasive.

01:00:18.400 | But then the challenge is lose 40 pounds, keep it off and apply for reconsideration

01:00:22.200 | in a year.

01:00:23.200 | And when you do that, we can drop you up or bump you up to the next health classification.

01:00:27.380 | Your premiums will drop by $500 a year and now that should give you some additional incentive

01:00:32.680 | to lose fat.

01:00:34.600 | So that's Joshua's mini lecture on life insurance, James.

01:00:39.160 | It's going to be a matter of finding a knowledgeable agent and finding somebody who is willing

01:00:43.820 | to put in that legwork for you.

01:00:46.280 | And the same thing applies if somebody has risk factors.

01:00:49.720 | Same thing applies if you have a bad family history or bad cancer, etc.

01:00:55.000 | The key is to shop around.

01:00:56.320 | There are thousands, but realistically there are hundreds of life insurance companies and

01:01:01.000 | most life insurance agents that do it professionally are contracted and appointed with at least

01:01:05.520 | a couple dozen.

01:01:07.040 | And so you want to work with somebody who's going to shop it around and get you the best

01:01:11.800 | deal.

01:01:12.800 | And a lot of times this is where competition really can play a role.

01:01:20.040 | That was extremely educating.

01:01:21.640 | Thank you.

01:01:22.640 | Good.

01:01:23.640 | I have one more clarifying question because I occasionally listen to Dave Ramsey and he

01:01:31.600 | talks about term versus whole and I will admit I don't really understand what I should be

01:01:40.320 | having given my situation.

01:01:42.760 | So could you touch on that if you have a minute?

01:01:46.360 | Sure.

01:01:47.360 | So in general, the rule is very simple.

01:01:50.240 | You buy term life insurance for all insurance needs that are temporary.

01:01:55.440 | That's what term life insurance is for.

01:01:57.080 | And so for somebody in a family stage like yours, the vast majority or the entirety of

01:02:03.480 | your insurance need is temporary.

01:02:05.880 | And so you should buy term life insurance.

01:02:08.360 | And you always solve as an insurance agent, you always solve for death benefit needs with

01:02:13.160 | term life insurance because that's the cheapest solution now.

01:02:16.760 | So let's say you go through an insurance analysis and you come out with that you have a need

01:02:22.920 | of $1.5 million of term life insurance.

01:02:25.480 | Well, $1.5 million, how old are you James?

01:02:29.320 | 35.

01:02:30.320 | $1.5 million of term life insurance for a healthy 35-year-old non-tobacco male is probably

01:02:36.360 | in the range of $50 to $70 a month, something like that, $50 to $60 a month.

01:02:40.560 | So you can buy a million and a half dollars of insurance for $50 or $60 a month.

01:02:44.600 | Not that big of a deal to sign up for, not going to break your budget, etc.

01:02:48.540 | You go around and you try to buy $1.5 million of whole life insurance, it's going to cost

01:02:52.880 | you 12 grand a year.

01:02:54.880 | You can't afford that.

01:02:56.120 | So you solve for your death benefit need for your family with term life insurance.

01:03:01.680 | That's first and foremost.

01:03:03.440 | Now over time, your insurance need should decline because every year that goes on, you

01:03:09.760 | now have more money, you've saved more money and your obligations, your financial obligations

01:03:14.480 | ideally will go down.

01:03:16.480 | If you have one child and you don't have any more children, then you move to a situation

01:03:21.220 | where five years from now, there's five fewer years of living expenses that you need.

01:03:26.120 | So you can drop your insurance at that point in time or as you save more money, if you

01:03:30.800 | needed $1.5 million of life insurance but your net worth increased by half a million

01:03:36.000 | dollars, then you're in a situation now where you can drop your insurance coverage

01:03:42.920 | from $1.5 million to $1 million.

01:03:47.240 | And Dave Ramsey is a big proponent of the idea that you become self-insured.

01:03:52.420 | The way that you become self-insured is by having enough money that your family would

01:03:57.260 | be okay if you didn't need insurance.

01:03:59.380 | And there's nothing at all wrong with that.

01:04:01.700 | Can it be done?

01:04:02.700 | Absolutely.

01:04:03.700 | It can be done.

01:04:04.700 | Now, if you have a need for life insurance that is permanent, that will last for your

01:04:09.020 | entire life, then you need permanent life insurance.

01:04:13.340 | You need life insurance that never goes away.

01:04:16.140 | And what are some needs that would last for your entire lifetime?

01:04:20.380 | One example would be something like, I want to make sure that there's money available

01:04:23.560 | to bury me.

01:04:25.500 | And so if you know you'd like to have money to pay for a funeral or for burial expenses,

01:04:31.940 | then a permanent life insurance policy that will pay out if you die at 36 or die at 96

01:04:37.500 | is nice to have.

01:04:38.780 | Now what Dave would say if he were on this conversation is Dave would say, "Funerals

01:04:44.420 | don't cost that much and it should be easy for you if you've got a million dollars in

01:04:48.740 | IRA when you die, it should be easy for your family to come up with $20,000 for your funeral

01:04:53.380 | expenses."

01:04:54.380 | He's not wrong.

01:04:55.740 | I think that's true.

01:04:57.500 | But I've had some experience to show me that a lot of people don't necessarily always do

01:05:02.140 | that.

01:05:03.140 | One experience, another example of something that would be nice to have insurance no matter

01:05:07.220 | when you die.

01:05:08.220 | I had an experience with a client.

01:05:10.780 | It wasn't a client that I originally sold insurance policies to.

01:05:13.820 | It was a client that I picked up as a client of the company and I worked with them.

01:05:19.340 | And the client's wife got sick and died.

01:05:21.820 | And one of the things that really that I noticed that was new for me because I used to preach

01:05:27.260 | by term and vest the difference, the very hardest moral quandary that I had when thinking

01:05:32.700 | about going into the life insurance industry was could I ever sell whole life insurance.

01:05:37.920 | When I was thinking about joining Northwestern Mutual, I interviewed with a couple of different

01:05:44.760 | companies.

01:05:45.760 | But I interviewed in the same week with Primerica, which is the current name for the company

01:05:51.000 | started by A.L. Williams.

01:05:53.000 | A.L. Williams built his career on by term and vest the difference that someone should

01:05:57.420 | only buy term life insurance.

01:05:59.960 | And Primerica as a company only sells term life insurance based upon that philosophy.

01:06:03.360 | A.L. Williams is like the ultimate expression of the by term and vest the difference.

01:06:07.820 | For him it was a moral crusade of watching people be sold far too much whole life insurance

01:06:14.000 | and then die without having enough insurance.

01:06:16.040 | And I acknowledge that I think that's happened in many cases and it's a great stain on the

01:06:20.680 | life insurance business.

01:06:22.600 | But then I interviewed the same week with Northwestern Mutual, which was one of the

01:06:26.600 | biggest sellers of whole life insurance of any company out there.

01:06:30.800 | New York Life and Northwestern Mutual, Mass Mutual, Guardian, huge amounts of their business

01:06:35.600 | are made up in whole life insurance.

01:06:37.360 | And I didn't know if I could ethically sell whole life insurance.

01:06:40.840 | So I had that idea.

01:06:42.600 | But these clients, I met with them fairly early in my career and it really, the details

01:06:50.600 | are fading a little bit at this point, but the clients were wealthy but they had spent

01:06:55.680 | a lot of money on his wife's health care and they had spent a lot of money on their retirement

01:07:00.680 | and they had assets but those assets were tied up.

01:07:03.880 | And I think it was a rental property, they had spent down their IRAs and they just didn't

01:07:10.800 | have a lot of money.

01:07:12.480 | And so when the wife died, the life insurance payout, although it was only, I don't know,

01:07:19.560 | $150,000, $200,000, something like that, was such a blessing to the husband because he

01:07:26.040 | was totally cash poor.

01:07:27.880 | He wasn't poor but he was cash poor.

01:07:31.040 | And he was able to use the money to have a big funeral for his wife, which was important

01:07:35.840 | to him, and then he was able to use the money to see him through the time for him to go

01:07:40.220 | ahead and liquidate the real estate, move out of the big family house and move into

01:07:44.080 | a smaller place that would be good for him for an ongoing, for the rest of time.

01:07:49.760 | And seeing the massive blessing of those whole life insurance policies changed me and it

01:07:55.960 | made me realize that although I may have the best laid plans, that I'm going to have so

01:08:00.960 | much money and I'm always going to keep a liquid burial fund and make sure that I always

01:08:04.400 | have liquid assets because I'm going to be smarter than everyone else, I realized that

01:08:08.360 | it doesn't always work out like that.

01:08:10.160 | So it would be another example of value of having a whole life insurance policy payout

01:08:14.640 | when you die as just simply liquidity.

01:08:17.280 | And I would want to make sure if I die and I'm 90 years old, my wife is 90 years old,

01:08:22.240 | I would want to make sure that she had plenty of liquidity, that she didn't have to worry

01:08:25.520 | about money in the short term.

01:08:27.400 | And there's nothing better than a life insurance payout for that.

01:08:31.040 | What the life insurance company will often do, depends on every company, how they do

01:08:34.840 | death claims, but they'll send, if I died, they'd send my widow a checkbook.

01:08:40.360 | And the checkbook has an account associated with whatever the amount of insurance was.

01:08:46.280 | I have millions of dollars life insurance.

01:08:47.640 | My wife immediately gets access to a checkbook with millions of dollars in it and she can

01:08:51.440 | just write checks.

01:08:52.440 | She can write a two and a half million dollar check to her personal checking account if

01:08:55.840 | she wants, boom, all the money's there.

01:08:57.840 | Or she can just write little checks to other people.

01:09:03.000 | Now there are other interesting situations that you can get into.

01:09:05.800 | Things like creditor disputes.

01:09:07.760 | Let's say that somebody has money, but they're in the middle of a creditor dispute because

01:09:11.320 | Joshua did something stupid.

01:09:13.240 | He went, or he created a big business.

01:09:15.760 | This was going to be his last hurrah.

01:09:17.560 | All of a sudden the business failed and now there's $15 million of claims outstanding.

01:09:21.480 | And yeah, Joshua saved a couple million bucks when he was old, but now all of a sudden his

01:09:27.200 | assets are tied up.

01:09:28.320 | Well, the life insurance policy can come in there.

01:09:31.480 | Other scenarios when we get into more other areas of financial planning.

01:09:35.200 | Things like buy-sell arrangements where let's say that I own a business with a business

01:09:40.400 | partner and our business is worth $2 million.

01:09:43.080 | My share is a million dollars, but we want to make sure that if I die or my business

01:09:46.840 | partner dies, then we can buy each other out so that neither of us has to be in business

01:09:51.720 | with each other's widows.

01:09:54.680 | And so we put in place a buy-sell arrangement and we can go ahead and fund that with a whole

01:09:58.500 | life insurance policy.

01:10:00.320 | And then the nice thing about a whole life insurance policy when funding a buy-sell arrangement

01:10:03.840 | in a business is that we have a guaranteed death benefit at death, but then we also have

01:10:08.600 | cash value that accumulates over time.

01:10:10.920 | And that cash value is segregated from the business assets and that cash value is very

01:10:15.280 | stable.

01:10:16.280 | It grows slowly, but it grows guaranteed.

01:10:18.840 | And then that cash value can be available as an asset to pull the money out and buy

01:10:22.960 | the business if one of us wants to retire and buy each other out at retirement or due

01:10:26.720 | to some whatever our buy-sell arrangement says.

01:10:31.020 | And so the actual scenarios go on and on and on.

01:10:34.480 | This is not the kind of financial planning that Dave frequently talks about.

01:10:39.280 | This is not the kind of financial planning that's kind of entry-level, you know, 101

01:10:44.280 | planning.

01:10:45.280 | It's a little more complex, but those are some of the types of areas where whole life

01:10:48.120 | insurance really does shine.

01:10:51.960 | So those would just be examples.

01:10:52.960 | Now, in your situation, probably none of that is necessary.

01:10:57.360 | Always start, figure out your insurance need.

01:11:01.360 | Begin before you ever buy life insurance, buy disability income insurance, far more

01:11:05.120 | important than life insurance.

01:11:06.960 | Then buy term life insurance.

01:11:08.920 | And if you have money left over, consider buying some small amount of whole life insurance

01:11:12.880 | if you want some.

01:11:14.080 | Make sure that you're not funding your Roth IRA, not funding your 401(k) to buy whole

01:11:20.320 | life insurance.

01:11:21.560 | Buying some small amount of whole life insurance, I'm happy for young people to do it as long

01:11:24.880 | as they have income and they can sustain the policies.

01:11:27.680 | Now after those things are done, you got disability income insurance, you got lots of term life

01:11:31.600 | insurance, you're funding your qualified account.

01:11:34.160 | If you still have money left over, now let's go to your investment plan.

01:11:38.480 | And then that's where you can start looking at a cash value policy and say, "Does this

01:11:42.120 | fit as a component of the investment plan?"

01:11:44.000 | The answer is always, "It depends."

01:11:45.440 | What else are you going to invest in?

01:11:46.760 | What's the opportunity cost?

01:11:48.040 | Do you have things that are better, etc.?

01:11:54.240 | That's how I would approach your question.

01:11:56.920 | For a young father, you need lots of term life insurance, lots and lots of it.

01:12:01.880 | So just get that.

01:12:03.160 | But get it with a company that you wouldn't mind converting your term life insurance over

01:12:06.560 | to a whole life insurance policy at some point in time as well.

01:12:10.000 | >>Sam: Thank you so much.

01:12:13.440 | I think I know where I'm going to seek out a local agent as well.

01:12:17.720 | I never did that.

01:12:18.720 | I just always assumed that they were more expensive.

01:12:20.520 | I've had biases against it.

01:12:23.040 | So I'm happy to hear your input.

01:12:24.480 | >>Dave: I will accept checks from all the life insurance agents who get business from

01:12:28.920 | me.

01:12:29.920 | Go ahead and you can just send Joshua a contribution.

01:12:34.080 | But it is true.

01:12:35.080 | There's no difference in cost.

01:12:37.040 | There's not.

01:12:38.600 | And so on this one, for me, it's a big deal.

01:12:42.080 | I see no reason whatsoever to, in today's marketplace, 10 years from now, something

01:12:47.160 | may change.

01:12:49.080 | Because of the success of the no commission mutual fund industry, there have been companies

01:12:54.960 | that have been trying to sell no commission life insurance.

01:12:58.560 | But in my current knowledge, if you find differently, email me and tell me that I'm wrong.

01:13:03.520 | I'm happy to know that.

01:13:04.640 | But in my current knowledge, none of those companies are really making a big difference.

01:13:12.840 | And the reason is because life insurance still seems to be something that has to be sold

01:13:17.880 | by an agent.

01:13:19.360 | Whereas people want to buy mutual funds, they want to fund their IRAs, et cetera.

01:13:24.240 | And so the Vanguard revolution was more doable in the world of investments.

01:13:29.040 | But the Vanguard revolution has not happened in life insurance.

01:13:32.720 | Now if any listener can start the Vanguard revolution in life insurance and get people

01:13:36.280 | insurance at lower prices, great.

01:13:39.400 | But it seems to be the case that most people need to be sold life insurance by somebody

01:13:45.760 | who's motivated to come out and sell it to them.

01:13:48.480 | And so in order to get people to sell their products, insurance companies pay commissions.

01:13:53.720 | And so the prices are the same, whether that commission is paid to an individual or paid

01:13:57.460 | to a guy running a website or advertising on TV, et cetera, or advertising on a radio

01:14:05.280 | show.

01:14:06.280 | Zander Insurance I'm sure does a great job.

01:14:09.420 | But at the end of the day, you don't get any discount by calling Zander versus calling

01:14:14.180 | your local life insurance agent.

01:14:16.040 | Zander has to make up all of the costs of sponsoring Dave's program and sponsoring all

01:14:22.680 | of their advertising and all of their training, et cetera.

01:14:26.120 | And so there's no savings to you.

01:14:28.080 | All you know when you go to Zander is you're going to get a term insurance policy.

01:14:31.600 | You're not going to get a whole life policy.

01:14:33.580 | And so in my opinion, that's very short-sighted.

01:14:36.100 | But for those who are deeply convicted of I'm only going to buy term and invest the

01:14:39.680 | difference, fine.

01:14:40.680 | It'll work as well as anything else.

01:14:42.200 | James, I want to expand this.

01:14:44.720 | Thank you, Josh.

01:14:45.720 | Yeah, my pleasure.

01:14:46.720 | I'm going to give you one more lesson.

01:14:48.200 | I want to explain to you how insurance underwriting works so that you can understand your options,

01:14:53.240 | especially as you're trying to work through your ratings or potential ratings.

01:14:59.520 | When you go to a life insurance agent and you're talking to a life insurance agent and

01:15:08.000 | you say, "All right, life insurance agent, I want to buy a life insurance policy."

01:15:12.880 | The life insurance agent can put the policy in force on what's called a conditional basis.

01:15:17.560 | And a life insurance contract, let's see if I can remember these fancy words, is a non-alleatory

01:15:24.680 | contract of adhesion.

01:15:26.240 | I think I got that right of the technical words, which are meaningless to you.

01:15:30.200 | But what it means is that in order for a life insurance contract to be fully in force, both

01:15:36.000 | you as the insured and the insurance company have to come to an agreement that you're both

01:15:40.480 | willing to accept the contract.

01:15:42.760 | And so the way that that happens though is unique, where the insurance company, the insurance

01:15:49.480 | agent can bind the contract if certain things happen.

01:15:53.640 | So you'll go to an insurance agent, the insurance agent will run quotes, they'll talk to you

01:15:56.760 | about different policy designs, things you can do, which by the way, James, go back in

01:16:00.440 | the shows.

01:16:01.440 | I've done some shows on this, but you should buy, at your age, you should buy a type of

01:16:05.440 | insurance.

01:16:06.440 | You should not buy a level term insurance policy in your 30s.

01:16:08.520 | You should buy annual renewable term insurance, also called yearly renewable term insurance,

01:16:14.240 | because it's more flexible for the longterm and it's cheaper now.

01:16:18.200 | When you get to your mid 40s and 50s, that's when you start buying level term insurance,

01:16:21.600 | but when you're younger than that, buy yearly renewable term insurance.

01:16:24.840 | So you go to the insurance company agent, the insurance agent goes over some different

01:16:27.720 | policy designs.

01:16:28.720 | You say, you go through some calculations to try to figure out how much insurance you

01:16:31.720 | want, how much you can afford, et cetera.

01:16:34.000 | And you come to an agreement.

01:16:35.000 | You say, all right, insurance agent, I'd like to buy a million dollars of life insurance.

01:16:41.240 | If you'll do three things, you can put the contract into force right away.

01:16:45.520 | And those three things are a filled out, completed, signed application, an insurance application.

01:16:51.960 | The second thing is a payment for the first month's premium.

01:16:55.760 | And then the third thing is a medical exam or whatever medical underwriting requirements

01:17:00.840 | are required by the company.

01:17:02.800 | Once those three things are done, where you've given payment for the contract, you've given

01:17:07.600 | a medical exam and you've filled out an application.

01:17:10.520 | Once those three things are done, the insurance contract goes in force on a conditional basis.

01:17:16.240 | What it means is basically the insurance company stops the clock from the time that those three

01:17:22.120 | things are done and then they go into underwriting.

01:17:25.280 | So if you do those three things and then you die, you get in a car accident the next day

01:17:30.400 | and you die, unless your car accident was due to some fraud or something that you didn't

01:17:39.440 | disclose, it has to be materially connected to the cause of death, then the insurance

01:17:45.560 | company will still pay.

01:17:47.120 | Now the underwriting process takes anywhere from a few days to a few weeks to months.

01:17:52.480 | I had some that were six months of underwriting because of, okay, they got to get this doctor

01:17:56.440 | record here and your records are all over the place and they need this one, et cetera.

01:17:59.880 | If you have a very simple medical history, it's fast.

01:18:02.000 | If you have a complicated medical history, it takes a long time sometimes.

01:18:05.440 | And so the insurance company will finally say, "All right, we're willing to issue the

01:18:08.800 | policy and here's what it is and we'll issue it at this rate."

01:18:12.440 | And so let's say you apply it at standard rates, but they charge you table two.

01:18:15.920 | They'll send out the policy with table two rates on it and the insurance agent will get

01:18:19.560 | it.

01:18:20.560 | Then the insurance agent has to come and deliver it to you.

01:18:22.520 | Now at the time of delivery, he'll go over any changed premium rates or any costs or

01:18:27.520 | anything associated with it.

01:18:29.200 | And then he'll deliver the policy if you choose to accept it.

01:18:32.120 | If you accept it, you have in most states what's called a two week free look period.

01:18:37.020 | For any reason, two weeks after you accept the policy, then you can return it and you'll

01:18:45.360 | receive all your money back.

01:18:46.760 | So it's basically a no risk application for you when you're going through this process.

01:18:54.220 | So get with an insurance agent and go through some options, whatever they think you do is

01:18:59.160 | the best.

01:19:00.160 | Then go ahead and apply and bind the coverage so at least you've got the coverage started

01:19:04.320 | on that date.

01:19:06.200 | Then if something happens during underwriting and you find out it's going to be expensive,

01:19:10.920 | the insurance agent will start looking around and will try to get some quotes from other

01:19:13.600 | companies.

01:19:15.000 | And there are a couple methods the insurance agent will use.

01:19:18.280 | Sometimes they'll submit what's called an informal inquiry, which means the insurance

01:19:22.120 | agent will have you fill out a form that just simply authorizes the agent to release your

01:19:25.540 | medical information to a number of different companies.

01:19:28.400 | They'll send it right to the underwriters, the underwriters will look at your medical

01:19:30.880 | information and say, "Alright, well we like this, here's what we think we can do, of course

01:19:34.800 | we won't give a solid answer until we get an application, but here's what we think we

01:19:37.400 | can do."

01:19:38.400 | And so they can collect quotes and do it that way.

01:19:40.880 | Sometimes you'll go ahead and do multiple applications.

01:19:43.520 | And so the insurance agent might bring you two or three other applications and say, "Alright,

01:19:47.440 | we're going to apply to company A, they rated you, so we're going to apply to C, F, and

01:19:52.480 | G over here and see if we can get a better offer there."

01:19:56.480 | Because you don't have to accept all of them, you just want to see what's the best rating.

01:20:02.200 | So when you work with an agent as well, it's better for you because you can get coverage,

01:20:07.000 | at least on a temporary basis, through that process while they're working their way through

01:20:11.320 | trying to figure out how to get their best rates.

01:20:16.560 | Are there bad life insurance agents out there?

01:20:18.400 | Of course there are.

01:20:20.160 | Is there a seedy side to the industry?

01:20:21.680 | Of course there is.

01:20:22.680 | But I think that a lot of that stuff was really overplayed.

01:20:26.960 | And most life insurance, what I've just, all this long speech, this is life insurance agent

01:20:31.720 | 101.

01:20:32.720 | You work with a guy who's been in the business for two months, he knows all this stuff, and

01:20:36.400 | he'll work your way through.

01:20:39.680 | So get your insurance and there's a little bit of knowledge to get you started.

01:20:44.280 | Thanks a ton, Joshua.

01:20:47.240 | Hope that cough feels better.

01:20:49.880 | Indeed.

01:20:50.880 | Thank you very much.

01:20:51.880 | All right.

01:20:52.880 | I've got two written in questions from patrons that I'm going to answer here and then we

01:20:56.320 | will be done for today.

01:20:57.960 | Oleg writes in and says, "Joshua, I won't be able to join the live Q&A, but I do have

01:21:01.480 | a question if you have time to answer it on the show.

01:21:04.400 | What would you do with $300,000 in cash that you want preserved as a liquid asset for a

01:21:08.280 | possible future business opportunity, one month to three year horizon?

01:21:13.280 | High yield savings, 2%.

01:21:15.040 | Vanguard prime money market, see the latter, 2 to 2.6%.

01:21:18.920 | It may be acceptable to lose up to 10% of the cash if there's a good possibility for

01:21:22.320 | a much better return."

01:21:28.020 | This answer is very simple.

01:21:29.020 | I'll make it fast.

01:21:30.520 | I'm not aware of anything that would be acceptable under those parameters of potentially losing

01:21:35.360 | 10% of the cash for a higher return.

01:21:38.520 | Basically you need cash or a cash equivalent.

01:21:40.840 | And so high yield savings, fine.

01:21:43.480 | Vanguard prime money market, see the latter, fine.

01:21:46.880 | I would just consider buying just straight T-bills.

01:21:48.840 | $300,000, just go to straight, just buy straight T-bills.

01:21:52.440 | Do it at, sometimes you can do it if you have a brokerage account somewhere, ask them.

01:21:59.080 | Especially now that many of the big companies have eliminated commissions, you can just

01:22:03.160 | simply fund a T-bill account and buy T-bills directly through your brokerage or go to Treasury

01:22:07.480 | Direct and set up an account there and just buy T-bills.

01:22:11.240 | T-bills are the gold standard.

01:22:12.940 | That's what I would do.

01:22:13.940 | I wouldn't take any risk with it if there was a possible future business opportunity.

01:22:17.460 | I think it'd be silly to try to chase half a percent.

01:22:20.020 | I mean, what are we talking about?

01:22:21.380 | Let's do some math here.

01:22:22.380 | So $300,000, let's say we're chasing 50 basis points, half a percent, $1,500, a bunch of

01:22:30.780 | shenanigans going here, going there to try to get an extra $1,500 over a year.

01:22:35.500 | When you're talking about a one month, a three year horizon on $300,000, if it's a three

01:22:40.380 | year horizon and we're trying to get an extra 50 basis points, we're talking an extra $4,500.

01:22:48.780 | If it's a three year horizon, maybe there's something better, but if it's truly one month

01:22:53.180 | of three years, I wouldn't take the risk of losing my business deal for that.

01:22:56.660 | So I would put it straight into T-bills.

01:23:01.300 | Kevin asks, "Joshua, my question is in the realm of total returns versus dividends, but

01:23:06.220 | not on which one is best, etc.

01:23:09.580 | Another investing podcast interviews many folks from the world of high finance.

01:23:14.140 | It's abundantly clear these folks look down upon the plebes who like dividends.

01:23:19.020 | One in particular was the founder of Morningstar who didn't use the words, although his tone

01:23:23.580 | was crystal clear.

01:23:25.540 | Is this dislike of dividends taught in advanced finance schools like the CFA or CFP?

01:23:31.660 | Am I missing something glaringly obvious?

01:23:34.380 | Any fool can know.

01:23:35.380 | The point is to understand."

01:23:36.500 | Albert Einstein quote.

01:23:37.500 | "Please help me understand."

01:23:42.140 | I guess, so most of the time, I want to get this right, so let me be careful with my words.

01:23:55.620 | Many people who are basic, simple people do see dividends as different than total return.

01:24:08.580 | And for anybody who's unfamiliar with these words, basically the idea is companies are

01:24:13.220 | supposed to make profits and then the idea is they pay those profits out to their shareholders

01:24:17.540 | as a dividend.

01:24:19.500 | So you can look at the dividend rate of a stock or you can build a stock portfolio,

01:24:23.540 | a dividend portfolio that you're going to live on the dividends, which means you never

01:24:26.740 | share, you never sell any of your shares.

01:24:29.620 | You just simply spend the dividends that are sent to you in the form of a quarterly check.

01:24:34.940 | Total return means, well, if you want $1,000, you can get $1,000 based upon $1,000 of dividends,

01:24:42.140 | but you can also get $1,000 simply based upon the stock price going up and then you sell

01:24:47.140 | a share or a few shares in order to take $1,000.

01:24:50.860 | That's the same $1,000 in your pocket, the same $1,000 in your pocket.

01:24:56.340 | So when you look at total returns, usually it's a combination of those things.

01:25:00.780 | And it's interesting when you look at the companies that pay dividends versus the companies

01:25:03.780 | that pay total returns.

01:25:06.380 | And so I think most people who haven't thought it through, who haven't worked it through

01:25:10.860 | probably do tend to think that dividends are simpler because they like the idea of not

01:25:15.620 | selling their assets.

01:25:17.860 | Now it's my opinion that actually planning a dividend only financial plan is a really

01:25:22.380 | powerful plan.

01:25:23.380 | It's a really powerful mental structuring of your affairs that you never want to spend

01:25:27.820 | principal.

01:25:28.820 | You only want to spend profits and that's really easy to do with dividends.

01:25:31.940 | It's one of the reasons why I like real estate so much.

01:25:35.820 | If an investor buys some rental houses and you tell them you can live on your rents,

01:25:41.580 | but you can only live on the rents and you can't put mortgages on these properties, you

01:25:45.740 | have to have them paid off, you now have a built-in budget that somebody can follow and

01:25:49.980 | they can budget their affairs and you know they will never be broke because they only

01:25:54.260 | are living on income.

01:25:55.260 | They'll never spend the capital, never spend the principal.

01:25:58.060 | I think that's really powerful.

01:25:59.760 | The problem comes into stocks because when you look at returns, some of your best performing

01:26:03.420 | companies often don't pay dividends.

01:26:06.260 | And I think there's a really good argument for that perspective.

01:26:09.440 | Why would I want a company to pay me a dividend right now if they can reinvest that money

01:26:14.620 | into growing their business?

01:26:16.260 | I'm investing in the company because I want them to grow the business, so why should they

01:26:20.020 | send me shares of the profit when they can grow the business?

01:26:23.660 | I think that's a good argument.

01:26:25.140 | I think there's also a good counter-argument though that dividends represent actual profits.

01:26:29.680 | And there seem to be a lot of companies who are so good at chasing growing business that

01:26:33.780 | they never get around to making all that much money.

01:26:36.660 | I worry about this with some of the companies that are very prominent in the US stock market

01:26:41.560 | right now.

01:26:42.700 | And I wonder, is this a scam?

01:26:45.100 | These companies that just seem to get bigger and bigger and don't actually make very much

01:26:48.940 | money, they're not proving that they're actually profitable and yet the share price keeps going

01:26:52.980 | up and people keep buying it?

01:26:54.340 | That was something that was at the core of the dot-com bubble and the dot-com burst was

01:26:57.820 | simply that everybody said, "We're going to get huge selling pet food online and selling

01:27:02.520 | all this stuff," but the companies didn't make any profits.

01:27:04.980 | But the stock prices got pumped up, pumped up, pumped up, pumped up because there was

01:27:08.000 | demand for them.

01:27:09.320 | And so it looked like everything was working but they weren't actually profitable.

01:27:14.140 | So there's a balance there that's correct.

01:27:17.900 | I'm not aware of anything being taught in CFA or CFP.

01:27:23.820 | There's nothing that's explicitly taught that would account for that.

01:27:27.200 | If your analysis is true, if you hear this nose turned up high-mindedness among high-finance

01:27:35.500 | professionals, if that's true, my reason as to why it's true is this.

01:27:42.980 | The companies that pay dividends are boring.

01:27:46.300 | They're in boring businesses.

01:27:47.940 | They're old, they're developed, and they're boring.

01:27:50.700 | And the companies that generate profits via total return with increasing stock prices

01:27:55.220 | are exciting.

01:27:56.220 | They're new, they're growing like crazy, and they have tremendous opportunity in the future.

01:28:02.380 | Now, again, I'm not sure your assessment is true.

01:28:05.860 | If it is true, though, that's why it is.

01:28:08.080 | It's a whole lot more fun to think about Tesla or Apple or Amazon, these companies of the

01:28:13.140 | future that are growing like crazy, have these huge increases, et cetera.

01:28:19.020 | This is exciting world of finance versus boring old utility company, boring old Coca-Cola,

01:28:28.300 | things like that.

01:28:29.300 | So that same interest that people have, if there's one stock that probably more people

01:28:35.860 | have, it's some company like Apple.

01:28:37.260 | You feel like, "Hey, this is great.

01:28:38.500 | It's a great business."

01:28:39.740 | I was stunned to see somebody did a write-up on the Apple AirPod business.

01:28:45.580 | And I don't pay much attention to that world, but I was just stunned.

01:28:48.540 | They were talking about how revolutionary a technology as simple as the Apple AirPod,

01:28:53.100 | the wireless earbuds that Apple came out with.

01:28:55.820 | And they said if that business alone, just the revenue from that business were its own

01:29:03.980 | standalone company, it would be the 19th largest company on the US stock market.

01:29:08.520 | That's how revolutionary that is.

01:29:10.820 | And I've often been disdainful of Apple in the past, but man, my respect is increasing

01:29:18.380 | because what they seem to be really good at doing is taking these things that seem very

01:29:21.540 | simple and making a bazillion dollars off of them and doing it in a very reliable way.

01:29:25.860 | I'm listening to the biography of Steve Jobs right now, the Walter Isaacson biography,

01:29:34.860 | and I've just been so interested in thinking about it.

01:29:38.860 | It's pretty remarkable.

01:29:39.860 | So that's my best guess.

01:29:41.300 | If any listeners have a better guess, then come on by and tell me.

01:29:44.340 | It's an interesting question.

01:29:45.820 | But for practical purposes, I'm convinced the total return argument is the way to go.

01:29:50.940 | But yet for planning purposes, I can't get away from loving just spending profits, just

01:29:56.740 | spending dividends.

01:29:58.020 | And I'm not financially independent to the point where I can just live on the income

01:30:02.380 | from my portfolio.

01:30:03.380 | But I'll tell you what, as much as I like to pride myself on being a clear thinker and

01:30:09.260 | saying, "Oh, I'm not going to make things emotionally," I find the dividend story really

01:30:15.380 | compelling.

01:30:16.380 | I really do.

01:30:17.380 | I find it really compelling.

01:30:21.460 | Just the idea of just living on dividends.

01:30:23.420 | Now tax efficiency is the other thing.

01:30:25.460 | Dividends are not tax efficient, whereas gains are.

01:30:28.180 | So we can tell a lot of stories to complex discussion, and I think the key is to come

01:30:31.540 | down on an individual.

01:30:33.020 | But I love the simplicity of you can't outspend your principal.

01:30:38.360 | You just live on your income.

01:30:41.300 | That to me is a lesson that we all can use today.

01:30:45.940 | I can guarantee you this, if you were to ask my wife that question, she would much rather

01:30:53.140 | be a dividend investor.

01:30:54.220 | My wife looks at stocks as basically fake money.

01:30:58.900 | It doesn't actually exist unless it's creating income.

01:31:04.180 | And she's not stupid.

01:31:07.740 | It's her way of looking at it.

01:31:08.780 | And I like that.

01:31:09.780 | It makes sense to me.

01:31:11.360 | And so if you gave her the choice of saying, "How would you like to figure out your budget?

01:31:15.660 | Would you like to use this sophisticated analysis that's taking into account total market return,

01:31:20.380 | selling some shares over here, taking some dividends as income, and then some shares

01:31:25.340 | over here as income?

01:31:26.700 | Or would you like to just have enough money that you can just live on the dividends, knowing

01:31:30.380 | that that way you can totally ignore the share prices and just ignore them and live on the

01:31:35.420 | income?"

01:31:36.420 | I'll have to ask her that.

01:31:37.980 | When I get finished recording this show, I'll ask her.

01:31:39.780 | But my bet is she'll take the income.

01:31:43.140 | It's hard for people to make that transition of going from living on an income their whole

01:31:46.260 | life to spending money and then trying to figure out how to be confident that the money's

01:31:51.980 | going to last for the rest of their life.

01:31:54.340 | When somebody is an accumulator and a saver to all of a sudden now be a deaccumulator

01:31:59.460 | and a spender, that can be difficult.

01:32:01.840 | And so if it helps someone to feel more comfortable just living on dividends, I'm not going to

01:32:06.220 | fight it.

01:32:07.220 | Thank you so much for listening to today's Q&A show.

01:32:09.820 | If you would like to join me on next week's Q&A show, go to patreon.com/radicalpersonalfinance.

01:32:14.260 | Patreon.com/radicalpersonalfinance.

01:32:15.260 | Sign up to support the show there and you will gain access to next week's Q&A show.

01:32:21.420 | If in the meantime, go to radicalbooklist.com, sign up for my reading list.

01:32:26.340 | It'll be a good reading list to guide you through 2020.

01:32:28.560 | One thing you can do, read more, learn more, read more.

01:32:31.780 | And my reading list will set you on the right track with a good overview, with some really

01:32:35.300 | useful concepts that will set you right for how to build financial freedom in 10 years

01:32:41.460 | or less.

01:32:42.460 | Have a great weekend, everybody.

01:32:43.460 | I'm going to be back with you on Monday morning with an exciting announcement.

01:32:47.180 | Be back with me early Monday morning.

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