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You can support at any level and I thank you for that. Today on the show, let's continue our life insurance series and I'm going to teach you today how life insurance policies actually work. This will be a framework that you'll be able to use in the future as you're making your choices and with this framework in your mind, you'll be able to look at any life insurance policy and understand the advantages and disadvantages of it.

Let's go. Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheets. Thank you for being here. This is episode 180 of the show and yes, we're continuing with life insurance. But I think you'll like it. This is actually take two of this show. Already recorded the show and wasn't happy with it.

So we're redoing it and I think that means that it is going to be awesome. Or awesome at least is the goal. I'm going to deliver on it. You know what? None of this hedging around that I often do. This show is going to be awesome. I promise. It'll be awesome.

Now, time to deliver. Before I get into life insurance, I thought it would be interesting. I'm just going to share a few minutes, just a little bit of personal background, a little behind the scenes stuff on the show. I don't do this a lot but I will this week.

Those of you who listen to the show every day when it comes out, you'll notice that it's been a – I mean this is actually Friday at 4.20 PM as I'm sitting down to record this show. And this show was on the topic list to be Wednesday's show. This is April 17th as I record and it will be released today on April 17th unless I flub it and have to re-record it like I did yesterday.

But sometimes it's very easy to feel all alone and I'm going to share a little bit of the challenges of my week so that you don't feel alone with whatever you're going through. Oftentimes especially in the world of public personality and media, the people that are engaged in delivering media, you often might think, "Oh, it's all easy and perfect." And you see finely tuned shows and you never get any behind the scenes impact.

I'll just share a little bit of behind the scenes with you. So this week was tax week and I've been behind on my taxes for the last couple of months but there have been thing after thing after thing. I'm not asking for pity. I'm just sharing almost as just some chuckles.

If we were friends, sharing a little bit about the entrepreneurial journey. But I hadn't filed my taxes earlier than April here and it's been on the list, been on the list. I've been needing to get it done, needing to get it done. But as with everything, as an entrepreneur, you're pretty much juggling everything and there's always something that's more important.

There's always something that's more important. Even the last few weeks, knowing that this was coming up, I needed to get it done but how other projects are more important. I'm not generally a last minute type of guy. I'm pretty much – I've never filed – I don't think I've ever even filed in April.

Usually it's February or March. You get all the paperwork together, get the accounting straightened out and get things done. So I'm not the type of person who habitually procrastinates till April 15th. But just in terms of running the day to day operations of Radical Personal Finance and my family and life, it just kept getting pushed back.

The big challenge of the last month or so was launching the new website and that was on a timeline because my web developer, the person who was helping me with the actual programming of the site and all of that, he was – and his wife were expecting a baby and I knew that when their baby came, he would be out of work for a while just because taking home, taking care of mama and baby.

So I needed to get that done and you never know when the baby is going to come. So I had to press and press. That was why the site was launched half finished. It's still half finished and thankfully – because I'm able to improve things but I wasn't able to handle the launch of the site.

So I needed to get that done and that took priority over taxes and anyway, thing after thing. So finally this week, Monday, I still hadn't finished the taxes and of course I could have simply filed an extension and that would have been simple to do. I knew the basic numbers so I was able to take care of the tax payment without being behind and I could have filed an extension.

But I really wanted to get things done. I've never filed an extension. I wanted to get it done. So Monday, I sat down to get things done. Now even though – the other reason I'm sharing this is even though I talk a lot about finance and I talk about accounting, it doesn't mean that I'm always able to keep everything in my life perfectly done.

I do a pretty good job but I'm human. What's the old joke about the cobbler's children are the ones that run around with no shoes and I get behind on catching stuff up just like anybody. This last few months and this last year has been very challenging with closing – associated with my financial planning practice, I had three distinct business entities that were operating as part of that.

I had to close those down, launching new business entities and my accounting system had just fallen behind. Again, how do you keep things going? So I knew that I had a lot of work to do and my accounting system needed to be more robust. I knew what needed to be done but pushed it back, pushed it back, pushed it back.

So Monday and then Monday turned into Monday and Tuesday and then Monday and Tuesday turned into Monday, Tuesday and Wednesday and it took me three solid days of sitting down and working from morning till night to get all of my accounting properly finished and get my books properly wrapped up and to get things detailed because I'm a stickler for detail.

The details are where all of your good tax planning is and I had the details. I had the rough outline. I just didn't have all the details sorted out and get all the returns taken care of and for the first time in my life on April 14th, at 4 o'clock, I printed out the return.

I sat down. I signed it, had my wife sign it and I put it in the envelope and I walked down to the post office at 4 o'clock on April 15th, Wednesday afternoon. I couldn't believe it. I was so ashamed of myself because you always chuckle when you drive by.

I personally have often chuckled in the past. You drive by the post office and you see the lines there on April 15th and I think, "What's wrong with those people? I thought they'd be ahead." It's a good dose of humility for me that here I was on April 15th at 4 p.m.

trotting it down to the post office. That was the tax adventure and it was good. Of course, again, I could have filed the extension. I had that ready to go in case I needed to just simply file the extension and do it in the future but I wanted to get it done and I was able to get it done.

So then Thursday, I got up and got ready to go and was getting ready to record the show and had some fires to put out with things that one thing turned into another, turned into another. Then I sat down and I recorded the show and I was most of the way through it and it just wasn't working.

It's the content I'm about to deliver to you on life insurance and the challenge is I'm going to describe some concepts that are very simple to grasp visually if I could draw with you but you're listening to audio. I try to keep this show very audio friendly. I don't want you to always feel like you have to go back to the computer and look something up.

I know that if you're listening to me while you're on a treadmill or driving to work or doing whatever that it's better if I can describe something verbally and it just didn't work. So finally, I just scrapped it. It was late at night and I had friends coming over and so I didn't get the show out.

Then today, I had planned to go ahead and I've got all the topics lined up. I just got behind on the recording. So I had planned to record two or three shows a day and go ahead and release them because I feel like I'm not keeping my side of the bargain of producing quality content consistently this week.

And then the neighbor is pressure cleaning. One of the challenges that you never hear until you start recording a podcast, you never hear all the sounds. I never knew there was a railroad tracks near my house until I listened to my podcast. I'm like, "What's that train horn in the background?" I never knew my dogs made so much noise until I listened to my podcast.

I'm like, "Man, my dogs won't stop making noise." And you never know that there's yard guys in your neighborhood until you start recording a podcast. One of the challenges I have with my production is every Wednesday, the yard guys come and the same set of guys do the houses on all sides of me, my neighbors on either side and my three neighbors across the street.

And so the entire day, they go from one house to the next to the next to the next to the next and they got the blower blowing and blowing and blowing and blowing. And the noise is amazing. So I have to be careful with my Wednesday schedules and recognize that and not be planning to record a show during the time of the yard guys.

Well then today, there is the pressure cleaning and the guy is doing pressure cleaning my neighbor's pool deck. And so I look and I look, "Okay, he's making good progress." And so finally, I hear it shut down. So I sit down to record the show and I hit record and I launch into my intro.

And then all of a sudden, it fires up again next door and he starts doing the driveway. So here it is at 4.30 in the afternoon for the first time. It's been quiet enough for me to sit down and record the show. And that's the situation we're in. So it's 4.30 on Friday and I'm recording the first show for this week.

So I hope you can laugh with me. Joshua is learning. Now, I'm in that classic stage of my entrepreneurial journey where everything is just kind of slightly out of control constantly. I've learned to be mentally okay with that. I'm a bit of a perfectionist to try to control everything but I've noticed that perfectionists rarely make good business people.

And most of the excellent business people that I've known just seem to get comfortable with some level of chaos. And that's been a challenging lesson for me to learn is to be comfortable with some level of chaos. But it's been good for me. But I'm also in that stage where it's just been a challenging few weeks and I had to sit down and say, "What's been working?

What's not been working? And my time management has not been effective the last few weeks and that's all right. I'm learning." So I just share these thoughts with you to encourage you that please don't ever think that when I come and share the thoughts I share with you, please don't think that I'm anything but exactly like you.

We're all about the same. And sometimes my life gets away from me and things get behind and I keep getting the show where I want it to be and everything's ahead and then all of a sudden life happens and things change. So I'm building out the systems and I'm building out my own personal habits and learning as I go and I'm excited that you're here sharing the journey with me and I hope you can just consider this little chat among friends.

Thank you all for listening. I love sitting down and creating these shows for you and I hate it when I get behind but you know what? Sometimes life happens and I don't think that it's not possible to do – it's simply not possible to do everything. There's always enough time to do the most important things.

There's never enough time to do everything. So prioritization, this is actually my Achilles heel. Sometimes I don't prioritize effectively and I know the priorities I probably should have but then I don't follow through and so I'm learning. So that's what's behind the show and so here we go. Let's get into the content.

Let's talk about life insurance and I've been systematically building these shows about life insurance in a way that I hope will give you the background that you need to feel confident in your own personal decisions. And the last show that I did on life insurance, we talked about how to decide how much life insurance you need and that's the very first place to start.

Do I need life insurance and how much? Now once you know how much life insurance you need and then you're going to quickly need to go and be able to sit down and figure out, "Well, what do I buy and then where do I buy it?" which is a whole other challenging question.

But what do I buy? And the challenge that we face is that very few people in our society actually know anything about life insurance. And it's tough to – life insurance is extremely complicated in many ways and so it's really, really challenging. So what I want to give you today is not going to be a practical recommendation on what to buy.

This is not what to do. This is a little bit of a theory behind how life insurance policies work. And I believe if you understand this theory, you'll be able to get a little bit closer to being able to look at a specific type of policy and understand what it is, how it works, and the advantages and disadvantages of it.

And then I will – in future shows, I will give specific recommendations on what to do but you need this as background. So let's talk a little bit about the history of life insurance. I want to tell you how life insurance policy design came to be, how the modern world that we have came to be over the years.

Insurance as a concept has been around for a very long time. Historians have been able to date it back to at least insurance, not specifically life insurance but to at least 2000 BC in China and then back to ancient Babylon about 1750 BC as far as the concept of insurance with traders and merchants basically providing protection for themselves.

Life insurance goes back to the 1700s, the early 1700s. The first company that was actually formed to offer life insurance was established in London in 1706 and it was called the Amicable Society for a Perpetual Assurance Office. And then ultimately that came over – the concept came over to the United States and it was developed of course internationally but I'm most familiar with the history here in the United States.

In its simplest form, the entire concept of insurance and specifically life insurance rests on the idea of risk pooling. The idea is we all share – with life insurance, we all share the risk of dying prematurely. We all share the guarantee of dying but we all share the risk of dying prematurely.

And so the idea is if you can work together and share that risk among a company of people, then you'll be able to mitigate the effect on any individual family. So that's the entire concept behind insurance. The initial most – the concept of insurance really applied were originally primarily worked out in fraternal societies and workers' guilds where people came together and said, "OK.

If one of our member of our society dies, then the rest of us will go ahead and support their family with a certain amount of money." And the first types of insurance policies were what's known as assessment insurance. Assessment insurance is – the closest example we have to this in the modern world would be those of you who live in condominiums or places where you have homeowner's insurance and you from time to time might be assessed for a group cost.

Hurricane comes in, blows off the roof and you got to replace the roof on the condo. The condo has insurance that covers some of it but then they send you a bill and each of you that are residents of the condo owns – owes $1,000 to the association. So you're assessed a cost.

This was how life insurance originally was – in its most basic form was run, that a group of people would come together and they would say, "Well, we've got – there are 300 of us in our fraternal society and if one of us dies, then all of us will kick in a dollar and we'll split that dollar out and we'll send that to the person who dies to their family." That was the original basics and that was a – originally was what's known as a flat assessment, meaning everybody contributed the same amount.

Over time, they started to collect these a little bit in advance so they would go ahead and collect the dollar from everybody in advance so that the next time somebody died, then the money was available and they didn't have to go and ask everybody for money at that point in time.

But quickly it came – became apparent that the flat fee, the flat assessment model didn't work quite as well because obviously the older people were dying at a quicker rate than the younger people and so the younger workers would find themselves putting in a lot more money than the older people did and the older people were benefiting from it.

So over time, that led to the concept of changing it to be – to graded assessments where instead of everybody putting in a dollar, then the younger people would put in a lesser amount and the older people would put in a higher amount. Now in its first form, this was done on an initial basis and so if you entered into the society or into the workers' guild at say the age of 20, perhaps your fee was 60 cents.

But if you entered in at 40, perhaps it was a dollar and if you entered in at 50, perhaps it was a dollar 20. But then once you entered in, your assessment would be the same on an ongoing basis. Well, this didn't actually work out quite so well because the numbers – even what happens in a group of people that are pulled together, even if the average age of the population stays the same, the number of people that are dying continues to increase based upon the way that the body of – the mortality statistics work within a body of insured people.

So that led to the concept of premiums increasing over time. So under this model, you would enter in let's say at the age of 20 and you would pay 60 cents – let's just say per year, 60 cents per year. Then at the age of 30, you would be paying 70 cents per year and at the age of 40, you would be paying a dollar a year and it would go on and on.

You get the point. But this type of structure leads and led to a real problem and the problem is – has a couple of different aspects to it. The first problem is it places a real – there's a real benefit for the younger people to be involved in the pool because their rates are really low and they have a need for it.

But there's little incentive for the older people to be involved in the pool because their rates are going up and they have less of a need for it. This opens up the door for an insurance term that's called adverse selection. Usually the pool would experience adverse selection because the people who were older that were healthy were likely to say, "You know what?

My premiums are going up. I just don't need the insurance. I'm a pretty healthy person. Why do I need the insurance?" They were likely to withdraw and stop paying money. But the people who were sick and likely to die, they're the ones who are likely to continue paying their premiums because they know they're sick and they need the insurance.

That's called adverse selection. Adverse selection is a big deal for insurance companies. It's a big deal in life insurance. It's a big deal in every aspect of insurance. This incidentally is exactly the reason why with the recent changes in the United States with the law regarding health insurance that when – that the reason why the government requires and forced everyone to buy health insurance was because without that enforcement mechanism there was no possible way for the insurance companies to insure everybody.

So the politicians wanted to force the insurance companies to insure everybody and to not be able to deny somebody based upon the state of their health. But from an insurance company, that creates adverse selection. That means that the healthy people are very unlikely to buy insurance and the unhealthy people are very likely to buy insurance.

And frankly, that's the situation that we have currently as the penalties start to increase and the government levied fines start to increase. Even still, many people who are healthy might choose and say, "Well, it's cheaper for me just simply to be uninsured and I'll just pay the fine," whereas the people who are sick are likely to say, "I'll go ahead and get the insurance." That's adverse selection and it's in every insurance market.

Insurance companies have to guard very carefully against it. It's a big deal in life insurance. So this was the development of how life insurance policies started to come about. Along the way, some advanced mathematical techniques were developed and there emerged the concept of actuarial science. And the actuarial science is essentially specifically applied to life insurance is where you're able to look and figure out across any given population at what rate do the people who are in that population die at specific ages.

And so then you can start to predict and start to assign some actual numbers. Because what you find is these numbers are not consistent over time. It's not a linear progression. You don't, let's say that the risk of dying is, let's just say the cost of covering the risk of dying is not 30 cents at the age of 30, 40 cents at the age of 40, 50 cents at the age of 50, 60 at the age of 60, and so on.

It's not a linear progression. It might be that the risk of dying at 30 actually costs 11 cents, but then at 40 it's 20 cents, and then at 50 it's 48 cents, and then at 60 it's 78 cents, et cetera. It goes on and on because the risk gets exponentially geometrically higher as time goes on.

So that's the concept behind life insurance. They started to develop risk tables and they started to come out with new types of insurance that were based upon this general population and these tables of how likely different people were to die, which leads us to the modern world that we live in.

Nowadays, there are published tables. These are known as the – what are they called? The commissioner standard tables. Those are from 1980. I think the next one is from 2001 is what everyone is using now. But these are the tables that most calculations are based on. For example, the social security payout tech calculations are considered basically these insurance tables.

The annuity rates go back to these tables. These are the commissioner standard tables that are practically used. Each life insurance company actually has their own tables and they probably are likely to use their own tables in figuring out their own life insurance policies. But there are standard published tables that you can look at and use for various purposes.

Once you have those tables, then now you're able to sit down and start creating policies. I'm going to describe to you two conceptual policies. You can actually buy these policies but two conceptual policies as a way of understanding almost two different ends of a spectrum. These two conceptual policies is at one extreme, yearly renewable term, and at the other extreme is level premium whole life insurance.

I'm going to describe these to you so you understand the need for different types of life insurance products. Let's start with yearly renewable term. The concept of yearly renewable term is essentially this. You can buy an insurance policy from an insurance company where they guarantee that each year they will renew the policy for you.

That's what yearly renewable means. They'll guarantee the policy, yearly renewable, it'll renew it every year, but the rates will adjust every year depending on your age. So they're guaranteed to renew it for you but the rates are going to adjust each year. This is in some ways actually the simplest type of insurance.

This is a pretty good type of insurance. If you could just simply buy this policy and the rate's adjusting every year, then what happens is you're able to pay for the cost of the risk of dying at any specific year. So at the age of 20, that's a great – I mean it's super cheap because the odds, statistical odds of your dying at the age of 20 are relatively low.

And then as your age increases over time, it becomes much more difficult to handle. Picture in your mind a graph and we're going to do a simple chart. It's going to be an X-Y axis and on the bottom picture – on the X axis, the bottom horizontal line, picture that going from the age of zero to the age of 100.

And then on the Y axis, the up and down axis on the left, that's going to be the cost of insurance. And string a line directly from zero, zero to up at 100, 100 and a direct 45-degree line. So you can see this line increasing in your mind at a one-to-one ratio.

For every unit of increase in age, there's a corresponding unit increase in cost. Can you visualize that? Now that's what – it would be nice in some ways if life insurance went like that, but that's not how life insurance works. Rather, life insurance is a geometric curve. So the way it actually works is take in your mind that diagonal line increasing from the bottom left to the upper right, ventrally grab it with your hand and pull it down and to the right.

And that stretchy shape where it's growing very slowly at the beginning and then it's growing increasingly, increasingly faster, that stretchy shape is actually how life insurance rates work. So it's a geometric curve. Life insurance does not have that one-to-one increase. It doesn't correspond. There's not a one-to-one relationship between each year, one unit of age and the corresponding unit of cost.

Rather, it's very slow in the beginning and it's much more quickly as time goes by. So you can see the problem that you face is let's say at 20, the concept of yearly renewable term where you're paying exactly the cost of insurance for a 20-year-old, that concept works great at the age of 20.

But if you start to go on, it gets much more expensive. And imagine for the sake of the example at the other end of life, imagine that you're 99 years old and you're going to buy a $100,000 life insurance policy. Well, if you come to me and you say, "Josh, I want to buy a $100,000 life insurance policy from you, how much would I need to charge you at the age of 99 to actually be able to make that contract with you?

How likely are you to live past the age of 100?" Well, it's possible that you're going to live past the age of 100 and so I probably wouldn't have to charge you $100,000 for your $100,000 policy. But my gut is that I'd probably need to charge you somewhere in the $90,000 range because if I made that deal with 10 people, it's likely that a good number of them are going to die between 99 and 100.

Now we could go back and check the mortality tables and the mortality tables would tell us exactly what that number is. But it's going to be – my point is the cost for your $100,000 policy in that one year is going to be much closer to $100,000 than it is to be – than it is close to $1.

It's going to be far at the end. And so this raises a real problem that as you age, you can no longer afford the cost of insurance. That's fundamentally the problem. So how do we solve that? Well, we could solve it if we could figure out how to charge you a higher premium in the beginning of your life so that we could charge you a lower premium toward the end of your life.

That's where the concept of level premium life insurance comes from. So if you wanted to buy a $100,000 contract from me, what if I said to you, "Well, I can't – instead of paying just this exact same – the cost each year depending on your rate, so it starts at say $20 a year when you're very young and it increases to almost $100,000 a year when you're older, what if I just said, "Well, let's just level these premiums out and so I'm going to charge you $500 per year.

Well, let's start. I'm going to charge you $1,000 per year from age zero to age 100 and then I'll pay – and you're just going to pay this level amount and I'll go ahead and give you the policy." We could do that and that was what was developed was the concept of level premium life insurance.

This was very, very important that it was developed because without the concept of level premium life insurance, you wouldn't have any modern insurance product. Level premium life insurance allows you to bring in stability and it allows the insurance company to set aside and create a reserve fund. So let's ignore the rate of interest that we could earn on savings for a quick moment and let's just talk about this.

You come at age zero or your parents come at age zero and say, "Josh, well, we'd like a $100,000 policy. So we're going to pay you $1,000 this year." I take that $1,000 and I set it aside on the shelf. Then you come in year two and you pay me $1,000 and I set that aside on the shelf and you come in year three and I set aside $1,000.

Well, after 100 years of $1,000 coming in each year, I'm going to have $100,000. Then you die at age 100. I can go ahead and pay that $100,000 out to the family. Then ideally, because we get into the concept of risk pooling, if you die at 30, I might only have $30,000 but I'm going to have more money from someone else that dies at $110,000 and they actually pay me $110,000 and I can pull it together.

You can immediately see my math breaks down with these round numbers because I would actually need to collect more than $1,000 because statistically, the entire population is not going to live on average to age 100. But hopefully you can at least just follow the verbal logic picture. This is fundamentally how life insurance works.

Now if you add in another dimension, it really starts to work and that dimension is money that can be earned on – insurance is called the float. The float in an insurance company is the difference between the premium dollars that you've taken in and when you're going to incur the liability that you've got to pay the money out.

So if I agree to insure your house from the risk of fire, you might be sending me premium dollars for 10 years and then finally your house burns down. Well, I get to use your money for 10 years and make money on it before I have to return to you the money.

That's called float and it's very useful. Insurance is a wonderful business because you can use it to basically create money. People are giving you the money. You're taking it, investing it and you could take that float. This was a major part – some people, if you study one of the most famous investors, Warren Buffett, this was a major part of his financial strategy.

It was buying and using insurance companies and then having access to the float, the money that they have where they're collecting premium payments before there's a corresponding liability that they have to pay the money out. Even still, General Rhee is a huge part of his portfolio and a huge part of Berkshire Hathaway and they have massive insurance interests in many different types of insurance.

But the simple point for today is just that you can take the money and you can invest it. Now, I can figure out some rate of return. So let's say that in my simple example that doesn't actually work out mathematically, you give me $1,000 at age zero. I can take that and let's say I invest and I earn 5% on it.

Now I've got $1,050 and you give me $2,000 – excuse me, you give me $1,000 in year two and I add that to my investment. Now I've got 1,100, 2,100, a little bit more on my money. So my money grows over time and I start to create extra money and that builds my reserve fund.

So this reserve that I have to keep in case you die and the interest that I'm earning on it is fundamentally how an insurance company operates. So in a level premium life insurance policy, then you're overpaying in the beginning and you're putting in more money than technically the cost of insurance is.

The insurance company is taking that money. You're investing it, earning interest, and they're setting aside a reserve in case you die. Depending on the amount of that reserve, then they are – that's what the – that's the whole business of insurance is how much is that reserve that they're managing to pay out and cover their liabilities that they owe.

So this creates an interesting reality because the insurance company is never actually on the hook for the full $100,000 liability because in the very first year, if you've sent in $1,000 to start the policy, they're on the hook to pay you out $100,000 but they're only at risk of $99,000.

So they're never on the hook for the full $100,000. This reserve is what backs up the policy. It's what backs up the claim for the policy. Now they've got to figure out and they've got to match the reserve fund to the liability when it's going to be paid out.

So we're sticking with a level premium. Let's talk about a whole life insurance policy that historically, the number that used to be done with the 1980 tables and previously was that all life insurance – whole life insurance contracts would what we call endow at the age of 100. So mathematically, the insurance company would match the amount of the premiums plus the interest in the reserve fund to the face amount of the policy, the actual amount that the insurance is for at the age of 100.

So in a simple way, they would collect premiums – in my $100,000 example, they would collect premiums from you every year. They would invest that money and mathematically, it will perfectly equal out at $100,000. The cash value of the policy of all whole life policies, the cash value of all whole life policies would exactly match the death benefit at the age of 100.

And this is the first time we're bringing in cash value. We're going to come back to that in just a second. Now today, it's actually age 120. But if you ever look at a whole life insurance illustration, what you will see is that the cash value and the death benefit perfectly match at age of 120 or 100 depending on when you bought the policy.

That's what we call the policy endowing. In fact, if you live to the age of 101 – my grandmother is 100 years old. On her 100th birthday – and I actually haven't asked her. I don't know if she had any whole life insurance. I don't think she did. But on her 100th birthday, if she had any older whole life insurance policies that were using those tables, then her whole life insurance policy would actually have sent her a check for whatever the amount of the life insurance policy was at the age of 100.

Incidentally, this is why the tables have been extended to the age of 120 because this is a real problem if your life insurance policy pays you out while you're still alive. And so you don't want this to happen. But that's why – among other reasons, but that's why the ages are age 120 now.

There is – there are types of life insurance more popular in the rest of the world than in the United States called endowment contracts where they actually pay out at a lesser age. And so historically, you could buy a life insurance policy that would endow at the age of 70 or that would endow at the age of – in 20 years and it would go ahead and pay out the death benefit.

We'll come to that in a later show, a little bit at the end of today's show when I talk about the types of life insurance and on a later show. So interestingly, this is where you bring in the concept of cash value. And the key that people don't – often don't understand about permanent life insurance products is that the cash value is simply a claim on the reserve fund of the insurance company.

So the idea if you arrive let's say at the age of 60 and you have a life insurance policy that is worth – is going to pay out at $100,000, the insurance company might have accumulated $60,000 in their reserves by that point in time. Well, that $60,000 is your cash value.

So if you cancel the contract and you say I no longer want to own this life insurance contract, the insurance company will send you the cash values. The cash values represent the reserves of the policy that have been set aside and you'll get the $60,000 back. Now the actual amount of the cash values will vary because we got to bring in some other factors.

For example, you've got – they'll vary based upon what was the rate that was used, the discounting rate that was used by the company. The company is saying we're going to invest your money at 4% versus we're going to invest your money at 2% versus we're going to invest your money at 6%.

That will make a dramatic difference in the amount of reserves held by the insurance company. And depending on the assumptions in the policy, if the insurance company is setting it aside at 2% versus 6%, that will correspondingly make a dramatic difference in the amount of the cash values that are in the policy.

It's also going to make a difference what are the expenses of the company and we'll come to these – some of these factors in just a moment. But there are all these factors that actually influence what's the total amount of the reserves and what's the total amount of the cash values in the policy.

Now if you understand these two basic concepts of how insurance policies work, yearly renewable term which is a policy that is for a term of one year every single year and it goes up and you just pay whatever the rate is for one year's worth of insurance each year.

So that's at the one end. And on the other end, you understand a life insurance policy with level premiums for your whole life. Then you can start to pull from that different types of policy designs and you can change various factors that are going to change the premiums. Now the most obvious one is how much insurance do you have.

So twice the amount of insurance, a $200,000 policy should cost double what $100,000 policy does. And incidentally, with most insurance companies, it does. It's an exactly linear process with the exception of what's called a policy fee. So some insurance companies, most insurance companies will charge a policy fee. So for each insurance contract, there may be a policy fee.

It might be $50. It might be $100, something like that. But for every contract, there's a policy fee which covers the annual mailings, things like that. And then it's exactly based upon the amount of insurance. So twice the amount of insurance is exactly double the premium. If you take that policy fee out, it's exactly double the premium for half the amount of insurance.

So that's an obvious factor that will change what the premiums are. But the other things that will change it is how long does the insurance last. An insurance policy that's enforced for a very short period of time will cost much less than an insurance policy that's enforced for a very long period of time.

And then another factor is how long do you pay the premiums. And you can start to manipulate these factors and understand different costs of different types of life insurance policies. You can have a policy that is enforced for a very short time period and you pay premiums for a very short amount of time, just on a one-time basis.

The best example of this is some of you who are older should remember when there were actually kiosks in major US airports that – where you could actually buy life insurance for your forthcoming flight. This still exists in some parts of the world. I've never seen them myself in the US airports but I know they exist.

So you could – you're getting on the airport – on an airplane in Topeka, Kansas and you're going to fly to Dallas, Texas. You could trot over to a life insurance kiosk and you could buy insurance where if your plane were to crash on the flight from Topeka to Dallas, then you could – then your family would receive money.

Incidentally, this type of insurance is still in existence. You just don't buy it at a kiosk but it's part of your major credit cards. This is – most of us know if you buy an airplane ticket with a major credit card then – and you die on the airplane, then your credit card company will pay out a certain amount of insurance to your family.

Usually it's something like a couple hundred thousand dollars and you might need a platinum card or a card with certain benefits but this is – so it still exists. We just don't buy it from a kiosk anymore. It's just buy it with your credit card when you swipe or put in your numbers for the ticket.

That's the shortest period of time that frankly I can about imagine, a two-hour flight and a one-time payment and your cost of insurance is going to be pennies. That's why it's included for free as the – as just one of your credit card payments. The credit card company does have to pay an insurance company for that.

Usually it's a reinsurance contract or they at least have to calculate it for themselves but the cost of an airplane going – the risk of an airplane going down is so infinitesimally low that it's – there's just – they don't – there's very little cost to it. Now, you could also have – so that's a short time period and a one-time payment.

You could also have a very long time period of coverage and a one-time payment. There's an insurance product that you can buy that's called single premium life insurance. This is a single premium whole life insurance. The way this works is you can make a one-time premium payment and you can have a life insurance policy that's in force forever.

It's an interesting product. There are – from a tax perspective, you need to plan carefully here and I won't get into the details but this is known as a modified endowment contract and it changes the way that the taxation works on life insurance policy. We'll cover taxation in depth on a different basis.

But you can actually say, "Joshua, how much would I have to pay you today for a $100,000 life insurance policy?" And there can be many excellent ways to do it. Incidentally, the taxation does not change for the death benefit of a life insurance contract like this. So if you buy a $100,000 policy, let's say you're 30 years old, maybe the premium for that is going to be something like $40,000.

And so you write a check for $40,000 and you immediately have $100,000 of life insurance in force. If you die, that $100,000 goes income tax-free to your family under US tax law just like every other life insurance policy does. It's just that if you cancel the policy and you take the cash values out or you borrow the cash values out, that's where the taxation changes on a policy like that.

But single premium life insurance is a fascinating type of insurance product. It had an interesting niche and has had an interesting niche in the insurance business the last few years, but with very low interest rates that are available in the open market, there have been fewer and fewer places for wealthy people to park sums of money and get a decent rate of return.

Well, single premium life insurance policies, the way they work is depending on the contract and depending on the company, you can recoup all of your cash values guaranteed within a relatively short period of time, a few years. And then those policies are growing based upon whatever crediting rate the life insurance company is crediting to their single premium life insurance portfolio.

Oftentimes these will have a different crediting rate than other types of insurance contracts because of the extra portfolio risk that the insurance company faces of this concentrated income. That was way too wordy. Ignore that if it didn't make sense to you. I'll cover that in a future show. I don't want to get into the details.

But the point was you could buy – let's say you bought a $100,000 policy. It cost you $60,000 cash today. But you're guaranteed a $100,000 life insurance contract. Your immediate cash values in the policy may have been $56,000. That covers the agent commission and the underwriting expenses for the company.

But after three years, you're guaranteed to have your $60,000 in your cash values. And now from then on, it's growing. Let's say the insurance company was crediting you a few years ago when I was actively working in the market. The insurance company might have been crediting you at 5 percent or 6 percent on your money over time.

But you're looking around and you can't buy a CD at half a percent. So it was for the right sets of dollars, for the right person, the right circumstance. It was kind of a neat opportunity because if you could do with having the money locked up in a life insurance policy, it's kind of cool.

There was no downside to it. And as life insurance agents, one of those nice situations where there's no potential downside to the customer as long as you've worked through the tax things and you know the taxation that you're going to incur when you take the money out and you've calculated it to be an alternative – what are the alternative uses of the dollar?

It was kind of a cool situation. So that's called single premium life insurance. Very, very, very, very, very small niche. That's not the type of thing – it's not appropriate for life insurance coverage for a general family. But it could be a useful place for somebody to park some money within the context of life insurance contract.

Now on the same hand, so that's long period of time coverage. That's whole life. It's enforced for your whole life and it has a one-time payment. That's single premium life. Now you can also have a long time period of coverage and a long period of payments. So traditional whole life insurance, it works exactly like at level premium whole life insurance that we talked about.

In insurance lingo, this is historically called ordinary life. An ordinary life insurance policy is a life insurance policy that's enforced for your whole life and it has level premium payments that don't change throughout your lifetime. So you have a long period of coverage and a long period of payments, the payments you pay throughout your entire lifetime.

And by manipulating these options, you can design any number of policies. So you can have – you can shorten up the time period and shorten up the payments and you can have five-year level term life insurance or what's one of the most popular life insurance products on the market today, a 10-year level term life insurance policy.

You shorten your period of time up to 10 years and you shorten your period of payments up to 10 years. And if you wanted to keep the time period at 10 years but you wanted to shorten your period of payments, many insurance companies will allow you to pre-fund a policy.

And essentially you open a bank account with the insurance company. You put in your premium payments. So you could almost – you usually couldn't do it as a 10 years. Some companies would be five years, seven years, eight years restriction on this. So you go ahead and just basically pre-fund 10 years' worth of premiums.

You make a one-time premium payment and then you pre-fund the policy at 10 years. So you can have 10 years of coverage and a one-time payment or what's most normal with a 10-year level term insurance policy. You could have 10 years of payments and 10 years of coverage. You could have 20 years of payments, 20-year level term life insurance, 20 years of coverage and 20 years of level premium payments.

You can have life insurance that's enforced forever, so a whole life insurance policy. But you can have different payment periods that – so you can fund it for 10 years. You could pay 10 years of premium payments and the policy would be enforced forever. You could pay 20 years of premium payments and the policy is enforced forever.

You'll hear in – these are not popular in today's insurance market but you historically had things like what we would call – in the lingo, it's called 10-pay life. It's 10 payments for a whole life policy, 10-pay life or 20-pay life, 20 years of payments for a whole life insurance policy enforced for life.

Or you would have life paid up at 65, which means you make the premium payments every year through 65. The insurance contract is enforced forever. It's enforced for your whole life and/or you have life paid up at 90. You had what's called extraordinary life. All these insurance lingos, they're all referring to different variations of how long is the contract enforced and how many years am I paying premiums.

That's the – those are the variations that are changing. Back to the yearly renewable term, you can still buy yearly renewable term. I will do an entire show on this of why I prefer that young people buy yearly renewable term instead of level term life insurance. I'll do an entire show on it with numbers and as examples and all of that in the future.

But simplistically, the way these policies work is you can have the policy through an age. So earlier when I was describing how a yearly renewable term contract work, I led you to believe that you could keep this through the age of 100. The problem is that if the insurance company offered that deal, it results in adverse selection.

That same problem that they figured out a century ago with the assessment policies, if you got into a situation where you're 70 – you're 60 years old, you've got incredible health but you're looking here and saying, "Man, my life insurance is getting so expensive," then I don't want this anymore.

I'm in great health. That's a problem because the only people that look down and say, "I'm 60 years old. Man, my life insurance is getting expensive but I really need to keep it," are the ones who are sick. So all yearly renewable term contracts that are commercially available with the exception of some variations of group policies will be based upon cutting off at an age.

So it might be yearly renewable term insurance to the age of 60 or to the age of 70 or to the age of 80. In those later years, the premiums are going to be very, very high but you can't keep them in force up through the age of 80.

You can't keep a term insurance product in force through the age of 100. All term insurance products are in force for a specific amount of time, a specific term. That's why they're called term life insurance. So there are ways to manipulate these variables and you can create an insurance policy by manipulating these variables that meets the needs of the specific financial scenario.

I'm specifically avoiding talking about variations of universal life insurance but universal life insurance, I'm aware of it. We'll talk about it in detail another time but hybrid is basically a hybrid between term life insurance and whole life insurance. So there you can actually get even more flexible where you can – with universal life insurance, you can be very flexible on your premium payments.

One of the major benefits of universal life insurance is you can – instead of having an inflexible, unchanging premium which is what a term insurance policy will have or a whole life insurance policy will have, with the universal life insurance policy, you can change the premium on a yearly basis.

In some years, you can pay more premium in. In some years, you cannot pay a premium at all. This comes with a massive amount of risk and universal life insurance policies have bit a lot of consumers on the butt because they just simply were not – they didn't – people don't – universal life insurance is an incredibly complicated product and the vast majority of people don't understand it properly and in my opinion – I don't know the percentage.

I don't know if it's the majority or the vast majority of policies but they're underfunded and there are some real conflicts of interest between the agent and the client that will often lead to them being underfunded. We'll cover that when we do a universal life insurance show. But it's – but universal life insurance is a very valuable product because it comes with a lot of flexibility on this amount of the time that the policies enforce and also the amount of the premiums.

So in the right hands, in an expert's hands who understands how the contract works, it can be a very valuable product. It can be especially useful for funding because of the flexibility. It can be especially useful if you're using a life insurance contract to fund a deferred compensation plan of some kind.

But by varying these options, then that's it. That's what we change. So how long does a policy last? How long do you pay premiums? Another factor though that changes these numbers is what happens to the amount of the insurance? So you can have life insurance policies where the amount of insurance is level.

You buy a $100,000 contract. As long as you have the contract, it's going to pay out $100,000. You can have life insurance policies where the amount of money is increasing. You can have increasing coverage and that can be on term insurance policies. It can be on whole life insurance policies.

Every year it grows by the rate of inflation for example. $100,000 this year, it's going to grow at 3% every year. You could do that. You can also have insurance policies where the amount of coverage is decreasing. The best example of coverage here is when you buy a house and you take out a mortgage and that mortgage is filed with the courthouse, you will quickly receive in your mailbox dozens and dozens of solicitation letters from various life insurance companies offering you protection from your mortgage to pay off your mortgage if you die.

These are often a type of insurance that's called decreasing term life insurance where each year the amount of the coverage decreases as you pay off the mortgage. That's a perfectly valid approach. Usually you're going to want to shop them a little bit more than just buying them directly from whoever mails you.

But if your only purpose in having an insurance policy is to satisfy a liability in case of your death, then if your mortgage balance has dropped from $100,000 to $90,000, you don't need any more than $90,000. So you can buy a decreasing term life insurance contract. Now there are some other actual assumptions that are used by the company that will affect the price of the policy.

These are the assumptions that are invisible to you, the consumer, but these will affect if you're buying term life insurance. They will affect the price of the term life insurance that you pay. They will also affect – if you ever wonder, why don't all companies pay the same? It's these factors I'm just about to mention.

But if you're buying some sort of permanent life insurance product, especially a product that has cash values associated with it, these will dramatically affect the amount of the cash values that are in the contract. And so these simplistically – this is basically what is the mortality rate of the risk pool.

So in any body – let's say you have a thousand – in the insurance business, we call them insureds. You have a thousand people who are insured by the company, so a thousand insureds. At what rate are these people dying? Is this a group of triathletes who are very healthy and none of them are fat and none of them smoke and they're just – they go to their doctor every year and they wear their sunscreen so they don't get their skin cancer, if that's even true.

And so is this a very healthy group or is this a group made up of a bunch of 400-pounders who are smoking three packs of cigarettes a day? So depending on what the actual rate of people dying is within the risk pool, that will affect the cost of the contract and/or the benefits of the contract.

That's why if you smoke, your rates for your term life insurance – and here's a little bit of industry tidbit for you. If you smoke, the rates of term life insurance are usually two to three times what they are for a nonsmoker for term insurance, two to three times what they are for a nonsmoker.

Interestingly, for whole life insurance or various types of permanent insurance contracts, it's not anywhere near – at least many of the scenarios in the past I get rusty because I'm no longer in this business. But in the past I've done this comparison. It's nowhere near two to three times the difference of cost and because whole life insurance contracts are always based upon a guarantee of paying out, whereas term life insurance contracts, the vast majority of term life insurance contracts never pay a death benefit because they run out.

People outlive them. So if you smoke, that affects the price of the policy. If you're overweight, that's why there are different grading mechanisms. If you have a certain type of medical condition, you have high blood pressure, you have diabetes, you had a heart attack, then you're going to get graded a different amount and that's because you're going into a risk pool into which there's a different mortality rate and you've got to be charged appropriately for the insurance company to be able to handle that.

Insurance companies, this is an area of competition among companies. Excellent underwriting or somewhat loose underwriting can lead to various companies helping – it can lead to long-term results. So this is why I feel very strongly that you're going to be best served if you can find a life insurance agent who is accustomed to working with many companies and especially someone who has access to a broad number of companies because there are some real competitive advantages of different companies price different types of medical conditions differently.

Some companies – for some companies, tobacco use is a big, big deal and for some types of policy design. For other companies, you can get better rates. For some companies – for example, in the past, I always enjoyed smoking cigars. Well, some companies will give a cigar smoker a slightly higher rate.

Some companies will give cigar smokers exactly the same rate. Some companies, you can smoke five or ten or 12 or 15 cigars a year. Some companies, you can smoke three cigars a day but as long as you're not smoking a cigarette, you're in good shape. So you need an agent who has the expertise to be able to say, "Ah, I had a client one time who owned a cigar shop and so this guy smokes cigars like crazy." Well, how much – how many cigars is he smoking every day?

With some companies, his rates are going to be double or three times as much because he's going to be getting put into tobacco classifications. But there are a few life insurance companies that I could use where we could go in. You could write a term insurance policy and he's going to pay exactly the same rate as everyone else.

So companies will compete with one another and some of them feel like, "You know what? I can accurately – I can accurately underwrite the risk of heart attack. So I'll go ahead and accept somebody who's had a heart attack in the past." But other companies say, "No, I can't accurately do that." Some companies develop very healthy pools of insurance and this is good if you're an insurance company because you've got lots of healthy people paying you money and so they develop that and that can be a real advantage.

So if I've got someone who's very healthy, then in the long run, I'm going to make sure they're with a company where that is very valued. So if you kind of – I feel you need to work with somebody on life insurance who doesn't just work with one company.

This is the real disadvantage that a lot of people who write life insurance for example had some friends who – their primary business is property and casualty insurance but then they write a little life insurance on the side with their one company. It's a real disadvantage to working with that.

It's not that it's necessarily bad but you're better off served if you can work with somebody who has access to a lot of companies and you also want somebody with some expertise. I had one case I was extremely proud of that – one of my more proud ones was I met – was referred to somebody.

I met with them and they said, "Listen, we would love to have" – this was a life insurance case. "We would love to have life insurance but we've talked to like three different agents and nobody can find us insurance." That was because the husband – I was working with the wife in this case but the husband was in his 50s or 60s and had a quadruple bypass surgery a number of years previously.

I said, "Well, give me a shot." The way those things usually work, those types of engagements work is you enter into a process of medical underwriting prior to applying for insurance. So you get authorization from the client to release their medical records and I worked with a specialty broker who was a high-risk broker and this specialty broker was excellent at placing very difficult cases.

So you order the medical records and then you send the medical records off to various underwriters at different companies. There's a real level of expertise in this market and you package them up and you send them off and we were able to get an offer on life insurance for this client who was just a few years out of a quadruple bypass heart surgery.

Now the client chose not to accept it because the rates – even though we got an offer and everyone else hadn't even been able to get a single offer from an insurance company but because we were able to get an offer but even so the rates were still too high and it just wasn't worth the premium dollars versus the risk.

But I was pretty proud of that. It makes you feel good as an insurance agent when you've had three or four other agents that haven't been able to find coverage and you're able to say, "Look, here I've been able to find – I've been able to get you an offer." So at least you could get some insurance coverage if you want to.

Incidentally, this is one of the major people have asked, one of the big questions people are asking me to answer is, "Josh, talk about term insurance versus whole life insurance." You do enough work as an insurance agent and you start to work with enough people like that and you start to recognize that life doesn't always go as planned in the sense of, "Well, I'm just going to buy a 15-year level term life insurance policy and in 15 years, I'm going to be so rich that I'm self-insured." Life happens and you've got – especially as an insurance agent, you've got to make sure that you're always keeping a couple of things forefront.

One of them is cost and another one is flexibility. You need a financial plan that is very flexible because there have been a number of situations. Just consider this. You're working with a young family. A young family, everything is going great. You say, "We're going to buy this 20-year term life insurance policy." I've been in the situation.

There's real, real examples. You're going to buy a 20-year term life insurance policy. That's it. After 20 years, you're going to be fine. The kids are going to be growing out of the house. After all, you're having two point – we're under two now. I think we're about two kids.

You're going to have 1.8 children and you've got them now. You've got a three-year-old and a one-year-old. So Johnny and Sally are going to be grown and gone and out of the house and you're going to have all this money set aside because you're going to just pump money into the buy term, invest the difference sales pitch.

You're going to have all this money set aside and the markets are going to be great. You're going to be super rich and you're not going to need insurance anymore because you're going to be a millionaire in 15 years. But then all of a sudden, things start to conspire and here are the things that happen.

You find out that Johnny has got autism and it's severe autism or Johnny slips and falls while he's diving and now Johnny is mentally incapacitated. So now all of a sudden, you're planning horizon. Instead of being able to launch Johnny after 20 years, you're now in a situation where Johnny is going to need help for the rest of his life and now as a parent, you now have a child with special needs and not only do you have to plan for the rest of your life but you have to plan for the rest of Johnny's life.

Now in addition to that, the stress of having a child with autism drives you and your spouse apart and you wind up divorced. So now because you're divorced and you're going through the turmoil and the stress there, I'll pick on dad. So dad starts eating too much. Dad cheats on his wife because he can't handle the stress.

Mom's all worried about Johnny and dad just goes and finds a, how do they call it in French, a paramour on the side, a mistress on the side. That drives the relationship apart. The divorce destroys the finances because now you have mom and dad trying to maintain separate households and they're trying to take care of a child with special needs.

It destroys the finances and then the destruction of the finances and the destruction and the stress of caring with a child with special needs, dad starts eating Krispy Kremes on the way to work every day, picks up smoking again, which he quit when the kids were born, but he picks up smoking again and all of a sudden dad runs into some medical issue or gets diabetes and now 20 years later you need life insurance and you can't get it but you're poor because you had a special needs child and you invested all your money in trying to help your child get well again and you can't get insurance anymore because you've got diabetes and your A1C levels are through the roof.

Even they've done that and that's tough. When you're a financial planner trying to help a family in that situation, that's tough. So you've always got to keep these things when building financial plans and right now I just talked to you financial planners. Make sure that you are keeping flexibility forefront in your mind.

You need to build flexibility. You don't just account that everything's going to go great. The other thing I could throw into that scenario, I meant to, I forgot, I got all excited with my example, but all of a sudden you go through a period of time from 2000 to 2015 and you've got the so-called lost decade and you faithfully put your money into the index fund every year and you're sitting there in 2010 with the same amount of money you had in 2000 because by the time you pulled out your fees and your commissions, all of a sudden now you're at exactly the same situation where the dividends weren't enough to make it grow.

So this is real life. This is real life financial planning. So yes, it's good to start with an actual outline of what you're going to do, but build flexibility in. Plan for things not to work. There's a reason you carry a spare tire in the trunk of your car.

There's a reason why you don't leave at the last minute. You leave early. You account for traffic and your financial plans have to account for that as well. So we're talking about it another day, but that's one of the reasons why I'm so passionately anti-level term life insurance for young people.

Young people need to have renewable term life insurance because it builds flexibility and what can happen is, I mean, in essence, in 30 more seconds on this topic and I'll get off of it, but with yearly renewable term life insurance, you've got choices. You don't automatically lose your insurance in 10 years.

So you have the choice to be able to continue your insurance for a very long period of time. Like all of my term life insurance is called term insurance to the age of 80. I've got from now through the age of 80 at which I can keep the insurance.

Now the rates get very expensive in about your late 40s and 50s. I don't plan to keep the term life insurance until that time, but I'll tell you what, if I need it, I'm glad to have it. If I'm still healthy at 45 and I need life insurance, I'll just go ahead and buy a cheap 10-year level term life insurance policy at that point in time and then I'll get my cheaper deal and I'll drop the term life insurance.

But if my wife and I have two kids and our second one is a baby girl and she's expected this in June, what if all of a sudden I find out in June that I have a little baby girl that's born with Down syndrome? All of a sudden my world and my financial plan gets completely changed.

Completely changed. So one of the other things that's very valuable to me about my term insurance is I can convert it from term life insurance to various types of permanent life insurance and whole life insurance any time between now and the age of 60. So that gives me the option if I were to sit down and say, "Wow, now all of a sudden instead of me just planning for the financial future of my wife and me, I've got to plan for the financial future of a child with special needs.

Now I've got another arrow in my quiver, so to speak. And if in the meantime I've gotten sick or fat, fatter, and I need to buy – I can't get insurance at good rates. I've got it all locked in while I was young and healthy and in good shape." So I got a little bit off on a tangent there but hopefully it's helpful.

New financial planners, plan for flexibility. There's a real balance. You need to get a good deal on your money. You need to get cheap pricing. But you also need to have flexibility and you've got to hold these things together. And I don't believe myself with most things in finance that the very cheapest is the most important.

I learned a lesson. I've got two car accidents – three. Somebody backed in it. I haven't had many car accidents in my life but I had a pretty scary one. It was a couple of years ago. My wife and I – my wife was pregnant with our first child and we were driving up 95 in the rain and we hit it.

There was a turn in the road and there was a massive puddle of water. It was a construction zone at the bottom of it and we hydroplaned and it bounced back and forth across the barriers at 60-something miles per hour. My tires were in good shape. But until that time, I never appreciated the importance of replacing tires at an early age.

But I'm not running tires till the point where they're zero. Some things in life, you get to the point you say, "I'm not running my tires until they're bald. I would rather spend a little bit of extra money in tires to make sure I have good tread on my tires and that my family is going to be safe than take the risk of saying I've just got to milk this thing for all it's worth and run the risk of hydroplaning and instead of everyone being fine, thankfully, me killing myself or killing my wife or killing one of our kids.

I mean, how do you live with yourself after that? It's very, very difficult. Very, very difficult. So let me get back to my outline and let's wrap this show up. I got a little sidetracked but I hope it was helpful for you. So there are some factors that are specific to the insurance company that affect the policy and here's where I'm at in my outline.

The policy designs that affect the cost of a policy is how long does the policy last, how long do you pay premiums and then what happens to the amount of the insurance? Is it increasing? Is it decreasing? Then here are some of the assumptions of the company. I was talking about mortality rate of the risk pool.

That was where I got off track there. But the second one is what are the company's expenses? So what are the actual internal costs of the company? How much do they pay their CEO? How much do they pay their staff? How much do their buildings cost them? This is a big deal.

And incidentally, this is where you get into the question of how is the company organized? Is it a stock insurance company or is it a mutual insurance company? In the insurance world, this is a big deal. With a stock insurance company, the company is owned by the stockholders, which means one of the expenses of the company is the profit that's being paid to the stockholders, the owners of the company.

In a mutual insurance company, there is no profit paid to the stockholders. Rather, everybody who owns an insurance policy owns the company. This is why I try to do all of my banking with – if I could, with a credit union instead of a bank. I kind of have a hybrid right now with USAA.

I bank with USAA primarily and I also have a local credit union. But USAA does a great job and they're owned by – it's a mutual insurance company owned by their policy owners and the banking side feeds the insurance side. So I get that into my dividend on my car insurance every year.

But if you're banking with a big bank, especially one of the big – what Clark Howard called the big monster mega banks, man, quit. Go find a local credit union because you can cut out. You might own Bank of America in your portfolio but there's a cost. You're always going to be paid a lower rate of interest on your deposits and you're always going to pay a higher rate of interest on your loans simply because you have to pay the stockholders of the company.

Well, credit union, you don't have that problem. Same thing with insurance. So if I can do – I can't find a mutual insurance company from a homeowner that will write homeowner's insurance for me in South Florida. But if I could, that's a big factor. It's not the only factor.

You still got to price it and you'll find anomalies in the market. Same thing with insurance. It's not automatic that you choose a mutual life insurance company instead of a stock life insurance company. But there are anomalies and your agent needs to send you in the direction of wherever you're best served.

But it's a big factor. Then the final of the internal factors that affect an insurance company is what are the actual investment returns that are earned on the reserves? How do they invest the reserves? This can go in various directions. Maybe they invest very conservatively and that's a good thing.

AIG, they're investing insurance company reserves. It didn't work out so well with them. I'm referring to 2008 with all the credit – the CDOs and the credit default swaps that they were – CMOs and then the credit default swaps that they were investing in. But the rate of return that they actually earn on their investments is going to dictate what the costs of the insurance company are.

Incidentally, this is why one of the biggest challenges of the last five years with the historically low interest rates that we've been, it has had a major impact on insurance companies because insurance companies generally are forced to invest much more conservatively than many other people. Because they have liabilities, they have to pay out claims.

They have to keep – they're actually legally required by law to keep their money invested in a much safer way, much less volatile way, usually that leads to fixed income. Well, with the fixed income investment rates, just in the zeros, that's very challenging for those who are in charge of operating an investment portfolio for an insurance company.

So this is just the tip of the iceberg with life insurance and these are some of the reasons why it's so difficult to get a straight answer from someone who is an expert on insurance and you say, "Well, what should you do?" These are just some of the factors affecting life insurance policies.

It's so difficult. It requires such a level of expertise to actually accurately compare insurance contracts and to accurately compare insurance companies. That's why in general with mainstream personal finance advice, basically your advice is just buy some cheap 10 or 20-year level term life insurance because for a good life insurance agent, they can understand these factors.

They've hopefully done their homework and they can really serve the client. But for an unethical life insurance agent, you can take advantage of people all over the place and many life insurance agents have, which is why the life insurance industry has such a horrific reputation. It's very difficult to get a straight answer on these things from an expert because there's a lot of factors.

I've just covered the basics. I'll go over policy design ideas in a different show and go over each type of life insurance. But there are essentially five basic types of life insurance contracts. There's term life insurance. There's whole life insurance. There's universal life insurance. Then there's what are called endowment life insurance.

Endowment policy is not common anymore in the United States but still common elsewhere in the world and annuities, which are a subset of life insurance. They really are life insurance even though they in essence work exactly the opposite of life insurance. The purpose of life insurance policies is you take a steady stream of payments and pay out a lump sum at death.

The purpose of an annuity is you take a lump sum and you pay out a steady stream of payments until death. But annuities are only possible based upon life insurance tables. So you take those five basic types of life insurance contracts and then you add on all these other words.

Are we talking about a traditional life insurance policy, a portfolio-based policy? Are we talking about a variable policy? Variable has to do with what is the investment contract. You say, "Well, should I own mutual funds inside my life insurance policy?" That's variable life insurance policies. Then you get into, "Is this a fixed contract or is this an indexed contract?" The worst thing is, "Is this a fixed indexed contract?" And then you play with all of these payment options.

You pay limited pay, pay it up at a certain age, ordinary life insurance, single pay, and you get to add in the modified endowment contract rules and you wind up with literally thousands of different various permutations of life insurance. That's why we have the modern life insurance world. There's a very simple – don't get too caught away with all of that for right now.

Think back and don't lose track of what I explained at the beginning of today's show. Yearly renewable term, level premium, and the mathematical constant is that the risk that's borne by the insurance company has to be met based upon the premiums that are being pledged by the insured. All of the factors I just went over are just simple mathematical manipulations of that general concept.

I hope you found this enjoyable. I don't know if it was an awesome show but I feel a lot better about it than yesterday. Yesterday when I recorded this and I erased it and did this one that you just heard, I was trying to go over those charts and it just didn't work.

Hopefully this was a little bit more effective. I hope you're enjoying this approach. I've never in my life found anybody, any financial commentators who's done what I'm doing here. I'd learn all this stuff the hard way myself. This is the conversation I never was able to find. But I'm trying to – this is life insurance 101.

This is what you learn when you go get an insurance license. It's not actually that complicated. Maybe I'm making it sound more complicated than it is. But hopefully this will give you a little bit of insight to start to understand the insurance contracts that are on the market and the different ways that you can use them and some of those aspects of it.

So that's it. I hope you've enjoyed this show. Happy Friday to you all. I hope you have a great weekend and I will get this out here on Friday. We should be back next week. I've had different people recommend that I just stop even trying to do daily shows and I've thought about it.

Maybe I should promise you three shows a week and do more and we'll see. I'm thinking about that. I think the major problems with the production show right now are just all me and on my own personal systems. I'm working it out. I'll share them with you and I'll share with you my solutions.

But I just thank you for listening. It means the world to me that so many of you take the time to listen. I think I'm out of things to say. If you enjoyed this, if this has been helpful for you and if you are a patron of the show, thank you so much.

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