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That's FijiAirways.com. From here to happy. Flying direct with Fiji Airways. Today's live Q&A episode of Radical Personal Finance is sponsored by HelloFresh. Visit HelloFresh.com, enter the promo code RPF30 to save 30 bucks off your first week of deliveries when you subscribe. Again, RPF30@HelloFresh.com. Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge, skills, insight and encouragement you need to live a rich and meaningful life now while building a plan for financial freedom in 10 years or less.

My name is Joshua and I am your host. On Fridays we do a live Q&A show. Stay tuned at the end of the show for a quick announcement on that. But on Fridays that's where we go to the phones and I answer your questions, do everything I can to go back and forth and provide a little bit of commentary and insight into your specific personal financial questions.

These Friday Q&A shows are open exclusively to patrons of the show, people who voluntarily sign up to support me and support the work that I do financially because it's valuable to you and to your life. If you'd like to become a patron of the show, you can sign up for that at RadicalPersonalFinance.com/patron.

Thank you to the about 250 of you who do that. I greatly appreciate your patronage and your support. It helps tremendously. And I have found that these Friday Q&A shows are fairly popular. But if you're not a patron of the show and you want to have access to a Friday Q&A show, please stay tuned and listen towards the end of the show and I'll share with you one short-term change that I am going to be making.

So let's start off with Ken in Ohio. Welcome to Radical Personal Finance, Ken. How can I serve you today? Hey, Josh. Thanks for taking my call. I'm a long-time listener, first-time caller. I don't know if this is going to be too complex or not to go through, but I can't seem to find anybody that I trust more than you to answer this question, if that sounds right.

Well, let's give it a shot. I'll tell you if I know something and I'll tell you if I don't, I promise. I'm pretty sure you're going to know the answer to this. So my financial advisor, he's advising me to transfer my emergency fund and additional savings I have for my upcoming girls going to college.

They're going to be going to college in 2021, actually 2020, 2021. So I'm kind of planning ahead. And he thinks it's better for me to have all my savings, the cash that I have, all the stuff that I get penalized for in the FAFSA, to have it in a whole life account, cash value, whole life with paid up additions.

And his concept is if you create this account, you can overfund the account and then use it kind of like a savings account that you can take and pull away money anytime you need it. So if you need to buy your new car because of the money you've saved up, you can just pull the money out of the account.

It's safer than having a stock or a bond fund. It won't go against the FAFSA, so we would possibly be eligible for more funding when the kids get ready to go to college. I've got term life insurance, and that makes sense to me. This whole thing about cash value with paid up additions, I just can't wrap my head around it and I can't explain it to my 14-year-old.

So I need somebody else to tell me whether or not this is a snake oil salesman trying to sell me something or if it's something that really would be a good benefit for me going forward. Well, you hit on one of my favorite rules of money management. If you can't explain something to your 14-year-old, you probably shouldn't do it.

I actually think that's a legitimate great rule of thumb to stick with. You should be able to explain what you're doing with money to your 14-year-old. If you can, then it's probably a good idea and you understand it well enough to pursue it. But you should be very, very careful and very hesitant.

So in your question, there are embedded two different approaches. One is technical and more of the financial product, kid the plan that you described, work the way that you're describing it. The second is more, how do I interact with this particular advisor? Are they giving me good advice, et cetera?

Let me deal with the second one first just because I'm curious and because it'll be a little bit faster. Have you worked with this advisor in other things? What types of business do you have with this advisor and have you worked with them with other areas of planning as well?

It's actually a new relationship that we just started. It's actually the company, I guess I probably shouldn't give the name of the company, but it's working to help set up the college and picking the right colleges for the girls and kind of giving us an ACT prep and just kind of working towards that.

And he's kind of getting this whole package together to make the best plan going forward for our...basically for the next nine years, how do we prepare for college and while we're in college and then getting out of college. So it's a new relationship probably within the last two to three months.

Everything else he said seems to be above board and I totally understand it. And this is the only one that just doesn't make sense. When he explains it to me, he makes me sound like this is the greatest thing since sliced bread and then I get home and I go, "Man, it doesn't make sense to me." Right.

So this is really interesting because I had a couple of friends of mine who were working in this area. Let me describe the business model and see if this does fit. What I'm hearing is this person is not a traditional financial advisor, for example, with a brokerage firm, et cetera.

They're a college advisor and you've contracted with him to provide advice for you on where to go to college, how to prepare your children for college. And as a component of that, he's talking with you about strategies of how to pay for college effectively. Is that right? Exactly. Good.

Okay. So this is actually a business model that I actually was interested in because I think that this kind of service is a really unique offering in the financial advice. It's kind of – let's just lump it in under the financial advice space. It's unique because it's very specialized knowledge and it's uniquely valuable.

I was actually attracted to the business model because it's such a marketable business model. Many aspects of financial advice, it's hard to know how to market a service proactively. But when you can proactively market to somebody like you who has children who are a few years away from college, it's really, really good.

And I applaud you actually for working with somebody on this. There are a ton of planning opportunities that I've seen where advisors like this can help you to do good planning. It's going to make a big – can make a big difference in your life and in your children's life.

So as this relates to finances, some of these firms – it's my understanding that some of them encourage their advisors to become licensed in life insurance to be able to implement what you are talking about and some of them don't. So from your understanding, this particular advisor doesn't represent any other financial products other than just these types of life insurance products designed to solve kind of this college need.

Does that seem accurate? Yeah, to my knowledge, that sounds pretty accurate. OK, good. So that just helps me to understand what we're working with and I'll just tell you kind of the short answer. I don't think it's a scam. I don't think it's runaway. It's not something that I think is just an automatic, "Oh, we've got to run away from this," nor do I think that this is – I think you should always tread carefully.

If you can't explain it to your 14-year-old, you shouldn't do it. I'll give you some more thoughts from my experience as well. But this is unique because this particular advisor does have competence and experience in this aspect of college financial aid planning and that's different than most of the times where I hear about the intense marketing of whole life insurance, which is usually from a bank on yourself or – that's the biggest brand name in the space, the bank on yourself advisors who are not just focused on college.

Question, does this particular advisor – are they certified with any of the college-level college – I forget the name of it – with one of the college training certification designations? I don't know that. Look at their business card. Look at their website at some point and just check to see.

There is a – like a credential that's trying to be established in terms of this college planning and it would be good to see if the person has it. All right. I don't see that. I'm looking at the business card. I don't see that on there. I'm looking at the business card.

I don't see that. So in short, it's not – I don't immediately run away but I also do tread cautiously. So what I'm understanding is this advisor has represented to you and said in a few years, you're going to be filling out the FAFSA and would it be accurate to say, OK, how much money do you keep in cash on hand that he's going to be worrying about?

What kind of dollars are we talking about here? He wants to take over about $200,000 to start to do the – or actually to pay up and basically pay for the whole thing pretty much in one lump sum. And then we'd be funding it probably another $24,000 a year after that point going forward.

So $200,000 and what he's saying is on the FAFSA, the – what is it? The Free Application for Federal Student Aid, if you list this $200,000 as a cash asset in the bank and you list it as an asset, that will affect your – that will affect your eligibility for – your children's eligibility for other financial aid.

But if you hold this money within the context of life insurance policy, because it is not a listed asset on the FAFSA, it will save you – it will help your children to get qualified for more aid. Is that accurate? Michael Munger That's exactly where he's going with it, yes.

I think that's accurate and I did a show – I'll try to find it in a moment for you on some of the other – on college planning that will give you some of the other categories that often aren't talked about. And I recommend to you that you go and you listen to that past show.

So I just paused and looked for it. I think it may be episode 357 which was an interview with Brad Baldridge which was called Taming the High Cost of College, Understanding the Landscape of College Tuition, Financial Aid, Loans and Your Choices with Brad Baldridge. Episode 429 I discussed should I use whole life insurance as a college savings plan.

So those would be a couple of episodes to look at. I've done some others on college as well. So the FAFSA – what this particular advisor is describing to you is not inaccurate. What they're describing is that you can use – that these assets are not reported. What's usually unsaid and what I would ask – what I would encourage you to kind of ask this advisor and see, are there other things other than life insurance which are also unreported?

So for example, retirement assets, assets that you hold in a 401(k) plan or a 403(b) plan or just a simple IRA plan, these are also assets that are not reported on the FAFSA – I believe that home equity, equity that you have in your primary home, I believe that's not reported on your FAFSA.

I think that there is a difference between the FAFSA here and the CSS financial aid profile that's used by some colleges and universities that can be reflected as well. Life insurance is one of those – life insurance is one of those assets as well. So the first thing that I would do if I were in your situation is go and download the FAFSA form and read it for yourself and read it and see all of the assets that are listed and think through the assets that are not listed.

Because so often when you're trying to answer a financial question and say, "Should I do something or should I not do something?" The major thing that you face is the lack of the alternative choice, which the question you're asking me is, "Am I getting bad advice and am I getting screwed?" A lot of times the way that people get screwed is the alternative choice is omitted.

Something is held as, "This is the only way for you to do what you're trying to do," and the reality is it's not the only way for you to do it. It is a way. And so you should know that yes, life insurance would have that effect, but there are other potential ways for you to do it as well.

Are you tracking with me so far, Ken? Yeah, I'm tracking with you. We actually sat down, we talked through several of those things as far as alternate choices, and he also said that an annuity would be another one of those other things. The home equity, sometimes, sometimes not. It depends on which type of school it is, whether or not that's qualified.

We've already been down the road of the retirement assets. I'm pretty much maxed out as far as what I can put there. So this is kind of my last peg that I can use, I think, on the other alternate choices. Good. Okay, so I'm becoming increasingly encouraged with the quality of the advice that you're receiving.

That's a good sign, because if you're getting these choices, if they're doing this analysis, going over your options, these are signs of a competent advisor. So I'm increasingly encouraged. Now let's talk to your specific question about a life insurance policy. Today's awesome show is being brought to you, Radicals, by HelloFresh.

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On whose life is this advisor recommending to place the policy? Mine. Okay. Okay. And how much of a face amount of contract are they considering? There's two parts, or three parts to it. The first part is a 20-year term for $1 million, and then the cash value whole life would be $200,000, and then the paid-up additions would be up to $40,000 per year that you could add.

Okay. And so the idea is that you could put $40,000 per year in for five years in order to get your $200,000 into the contract? Yeah. I don't know if it was for five years, but I thought it was more than that, actually. I thought it was $40,000 per year as long as I wanted to keep on adding it.

But he said if you can't go over the $40,000 the way it was written, otherwise it'll turn into a modified endowment contract. Endowment contract. Modified endowment contract. Yes. Okay. So let me explain the basic. Do you understand the basic concept of how life insurance contracts work? They accumulate cash value.

You could take loans against them, or you can distribute the proceeds, et cetera? Yeah, I've seen that. I've seen the charts where it usually takes about 10 years before you even break even on what you've put into it. That's right. And so is that the so-called break-even point? How many years is it on the contract that you've been illustrated?

It depends on how much you put into it, but it's right around there. I think it was right around the 10-year part, because based on what I think one of your shows you talked about, the increase in net value, which was the non-guaranteed assumptions, but that's the column that you're obviously looking at.

Well, you're definitely going to get this, even though it's not guaranteed. And what company is the illustration run with? Lafayette Life Insurance Company. I guess that's Western Southern. So there are a couple of companies, of which I believe Lafayette is one of them, that they kind of specialize in some of these types of contracts, that they'll work and they'll work with some of the options for these types of programs.

I have not done the research on their illustrations or their – I haven't done the research and I've never purchased a policy from them nor have I ever sold a policy with them. So I can't speak personally to that. The basic design can work. And essentially, the contract that you're describing, where it has – internally to the contract, it has a million dollars of term insurance and $200,000 of whole life insurance.

And then over time, will those paid-up additions convert some of the term insurance to whole life insurance? Is that the way that the contract works? Yeah. The way he explained it to me is the paid-up additions are in addition to – he says every time you put additions, once the whole life is fully funded, they actually build little Lego blocks for best term and you keep on adding those and there are like many whole life policies that keep on getting added on to the policy as it continues to grow, as you continue to do the paid-up additions above and beyond the $200,000.

And those are the ones he's saying I can take out if I need to buy a new car or if I need to have my emergency fund because I need to replace my roof or something like that with those funds. So it's an accurate statement. So let's just start with kind of the beginning.

I'll try to explain simply how it works. You can purchase a life insurance contract in a one-time lump sum for the sake of simplicity. And let's say that you wanted to purchase a contract. You have $200,000 of cash and how old are you, Ken? Forty-five. Okay. So you're 45 years old.

You're a 45-year-old male and you have $200,000 of cash. You could go to a life insurance company and say, "I would like to give you this $200,000 and in exchange, I'd like for you to give me a life insurance policy and tell me how much money that would be – how much you'd be willing to insure my life for." Chances are – I'm hopeful I'm close on this, but they would give you a policy for let's say something like $400,000 of a lump sum contract.

And in that context, they would actually guarantee you that you would have let's say something like $180,000 of guaranteed cash value right away. And so you can purchase this contract as a one-time payment for a one-time premium and you would get a high amount of life insurance death benefit and you would get some amount of cash value.

Now in what's called single premium life, which is what I'm describing to you, the commissions are relatively small. And so the idea of losing say on a $200,000 lump sum, the idea of losing $15,000 or $20,000 in expenses right off the bat would be about expected and that would be money that you would not have access to.

So that's your immediate loss. So if you cashed out the policy, you bought the policy on day one and then you cashed out the policy on days – a week later, you would be out $20,000 out of pocket. On a policy like I'm describing, a single premium life, usually in say – depending on the rates that are credited to it, et cetera, usually in three or four years, you could be back in positive territory with regard to your – all of the money would be made back up.

The commissions are paid. The policy inception costs are taken care of and you'd be back whole with your $200,000 in cash value. And so you could do that to the point where you say, "OK. I've got – five years later, I've got $210,000 in this contract," and you continue to have your $400,000 or $500,000 of death benefit that is in force.

And that's a pretty good deal. That's called single premium life insurance. And this describes conceptually how the policy works because it shows you that when you put a lot of money into a life insurance contract, there's going to be a whole lot of money in the contract. This is different than term insurance.

With term insurance, you're just buying death benefit. And so your premium is very, very low because you're only buying death benefit and you're only buying it for a short period of time. With the – when you put a lot of money into a contract, a whole life insurance contract however, you wind up with a certain amount of money in the cash value.

If you put a ton of money in, you wind up with a lot of money in the cash value because the risk for the insurance company is very, very low. So they have a high reserve in the contract. Now, the problem of course with single premium life insurance is you lose out on your advantageous distribution of the money on a tax-free basis by taking a policy loan.

And that's what we're trying to avoid by having a contract and you immediately lose that with single premium life. So what he's describing to you is accurate. You do have a contract and when you put paid up additions into the contract, you're basically sending lots of extra money to the insurance company and saying, "Hey, here's some extra money for you to put into the contract." When you do it, the advantage is you can bypass some of the costs of the insurance and you can bypass some of the costs of things like commissions, which is the biggest cost on a life insurance contract.

And so instead of a say 50 percent commission rate that gets paid out on a normal premium payment that you make into a life insurance contract, there's only a very tiny commission rate of maybe a couple percent that the agent receives on paid up additions. And so this makes a policy much more efficient and allows you to get a lot of money into the contract in the short term.

So it is very conceivable that a well-designed policy where you put $40,000 into it for – I kind of can't imagine a contract of only $1.2 million, a face amount, would accept that money beyond a decade. He's probably got it timed to where it would mech out in a decade or so.

But if you put $40,000 into a contract for a decade, it's very conceivable that at that point in time you could have $450,000 of cash value in it and you could have $1.2 million, $1.5 million of death benefit. So that can work. Now the question is what can I do with the money?

Make sense? Are we together so far? Okay. Yeah, yeah, definitely. So when you go to distribute the money from a life insurance contract, there are a couple of ways that you can do it. Either number one, you can cancel the contract. At any point in time with a whole life insurance contract, you can cancel it and you can just simply take the money.

So you could walk away and let's say that for sake of comparison, let's say you've put in $400,000. That's called your basis. That's the total amount of the premiums that you've contributed to the contract. Let's say 10 years from now your policy is scheduled to have $475,000 of cash value.

That's your cash value. And your death benefit at that point in time would be $1.3 million. So if you walk away from it, you'll receive back your $475,000 of cash value. You'll give up the death benefit. You'll receive your basis out tax-free. You would receive $400,000 of basis back tax-free and you would receive the balance of $75,000.

You would receive that back as ordinary income and it would be taxed to you as ordinary income. So anytime you surrender a life insurance contract, that's the way that the money works. That's the way that the tax works. You understand that? Yep. Now, another option that you always have with a whole life insurance contract is to be able to take out a policy loan.

And a policy loan, because it's a loan, it's an advance of the death benefit, a policy loan, as long as the policy stays in force, a policy loan can be received income tax-free. And the reason is that it's an advance of death benefit. Any life insurance contract, term insurance, whole life insurance, any contract of any kind, when a death benefit is paid out, will pay out that death benefit free of federal income taxes, free of any income taxes.

So if you die and you have a $1.3 million policy in force, your family gets $1.3 million of cash. Now, let's say that on most policies, you can usually borrow out of a policy up to about 90% of the cash value. So if you had $475,000 of cash, you could take out a $400,000 loan against the contract.

That loan, if you die, would be repaid by the policy. So instead of your family receiving $1.3 million for the death benefit, they'd receive $1.3 million less, the $400,000 loan, they would receive a $900,000 check. You can take that loan out. It's not recognized as income. You can do anything that you want with it.

You can spend it, you can use it to pay for your car, your college, all of those things. And you don't necessarily have to pay it back. As long as the policy stays in force, you don't have to pay it back. Now, here are the two things that happen to the money.

You will pay an interest payment on the money. And the interest payment will vary depending on the company and depending on the way that you choose, whether you choose a steady interest rate or an adjustable interest rate. And so every year there will be an interest payment due on the $400,000.

And the reason is this was a company asset, a reserve amount in a life insurance policy. But now they have loaned the money out. From the company's perspective, they loaned the money out. And so there needs to be a return. And then also depending on the company, however, if you're going to pay an interest payment, depending on the company, depending on the way that they recognize the loan on their books, they may also grant a dividend payment on that loan.

So there will be a cost to the loan, but the net cost will probably be pretty small. The net cost of this can often be as little as 2% or 3% by the time you take in the difference between the amount of interest payment that you're paying and the amount of interest that the company is crediting to you in the loan.

It can be a very small number. So you can keep that loan on the policy for a very long period of time or for a short period of time. This is how people who represent life insurance as this particular financial tool, this is how they do it. And so they're saying, for example, bank on yourself very classically, pay yourself the interest on the money and you can take the money out and you can use it for things that you want to.

And you'll receive the interest now in the context of your life insurance instead of paying it to a bank. As long as you have a large amount of money in the policy, this is my opinion, as long as you have a large amount of money in the policy and as long as you have a relatively low usage from the contract, the contract can stay healthy and the plan can work.

Where I get nervous is if the plans are pushed to the extreme and you're taking out a $420,000 loan on a $475,000 policy and you're taking it out without any plans of paying it back within a couple – within a few years. Then I think basically the contracts start to blow up.

They start to get out of hand and they have to be managed carefully. So as with anything with life insurance, it's a crazy complicated idea, which is why you can't explain it to your 14-year-old, but that's fundamentally how it works. So that's probably the question. Since he's talking about these paid-up additions where I can continue to pay into the policy and then use that almost as a savings account, he was talking that, "Hey, you put in – this year you only have $5,000 to put in an addition.

That's great. Next year you only have $1,000. The next year you have $10,000. And then the following year you need to pull money out." He goes, "That's fine. You can pull money out at any time and you'd never have to pay it back." Yeah. And so that's the kind of language that is often used that makes me nervous.

And in a sense, it is technically correct. As long as the policy dividend rate is being paid out and it's substantial, as long as those interest payments are covered and as long as the policy stays in force, you don't technically ever have to pay the loan back. However, if something changes, if there are – there's a significant decrease in dividends or if you stop paying premiums or if interest rates – well, if interest rates rise, dividends would follow.

But if there's a substantial change, then the policy can start to be – the policy can start to be on thin ice. I can't actually explain this verbally. If I had an insurance license, which I don't anymore, and if I were selling life insurance, which I don't, I would be sitting with you and I would show you and I would illustrate a couple of different scenarios.

And here's why this is very important. Back in the '80s, a lot of life insurance policies were sold under very optimistic assumptions. And in the illustrations that you have seen, there will be some kind of assumption that has been made as far as what rate of return is this policy earning on its cash values.

If that assumption turns out to be right, everything will function as has been illustrated to you. But if that assumption turns out to be wrong, then things will change. Life insurance illustrations are not guaranteed pro forma representations of how something will function. They are illustrations of how something would function under certain circumstances.

So that's where it's impossible for someone like me to comment on it until or unless you see what the actual assumptions were. So back in the '80s, a lot of people were buying life insurance policies and the dividend rate that was being assigned as crediting to the policy might have been 12%, 13%, 14%, 15%, which is insanely high when compared to the historical return of life insurance.

Remember always that life insurance, when the company is investing your premiums and you're using the life insurance policy that's drawn on the company's general portfolio, the vast majority of that portfolio is invested in fixed income securities, which are always going to have a lower rate of return than something like stocks.

Life insurance companies have to invest their money very, very conservatively because they have major draws on the money, major potential draws on the money. They have to have the portfolio set to make big payments out when they pay out death benefits. So because of that, life insurance portfolios will generally perform more like a fixed income fund than they will like a stock fund in terms of long-term rates of return.

And so many life insurance agents sold these policies and represented them at 12%, 13%, 14% interest rates. And then all throughout the '90s and then the 2000s, interest rates plummeted. And today, they've been historically low for historically long. Well, those policies started to blow up. And by blow up, I mean you needed to write big premium payments.

A lot of them were sold using the terminology which is now banned in the industry called vanishing premium, where it was sold under the idea that you can purchase this contract, you can pay the premium, but then over time, you won't have to pay the premium anymore. The premium will vanish.

And if everything had performed as it was illustrated, that would have worked. But because interest rates declined, that didn't work. Now, in today's world, it's much safer because the companies, generally, as long as it's an ethical company, they are going to make sure that those illustrations are run at something close to today's rates.

And today's rates are historically low. And so it's unlikely to have those major changes in the policy. And so you're much safer with your illustration. And I've kind of gotten off in the ditch with my explanation. I forgot the question that you asked. Go ahead, Ken, with your response and follow-up question, please.

No, you pretty much hit it. With the paid-up additions, being able to take the money back out, something you've been saving for a new car, whatever the case is, and not having to pay that loan back. And that's where reading some of the stuff online is just, I read about it imploding on itself because of the interest is going to the bank, not necessarily the interest paying back into your account on these loans.

And that's where it kind of gets a little bit fuzzy for me as far as how I can, every year put in $40,000 up to that amount or whatever the case is, and then just take the money out and not have to worry about paying it back. That's kind of where the question came.

Yeah. And so when I have looked at this issue, I have never personally become confident with this language of never paying it back. I hate to hear that because I feel like that's an overstatement of the circumstances. It's not that it couldn't technically happen. And here's again where we fail for lack of numbers, we fail for lack of an illustration program that we could actually run some scenarios on and demonstrate.

It's not that I couldn't design a contract where I would never have to pay it back. For example, I own some whole life insurance policies, have some for me, for my wife, I have them for my children. I have cash value in those policies. I could take out a small portion of the cash value in one of my policies that's fairly mature.

I could take it out, I could spend it on whatever I wanted to spend it on, and I could technically never have to pay it back. As long as I continue to pay my normal premium payments, I could never pay it back. That policy would accrue interest, that policy loan would accrue interest throughout my entire lifetime.

Remember, of course, that I could only just pay the interest payment or I can have the policy itself, the cash value, pay the interest payment. And I could technically never pay it back. That doesn't mean that it's a good thing for me not to pay it back. And that's where this – the kind of the gap between advisors and consumers often comes into play.

As an advisor, I would look at that and I would say, "Is this cheap money?" Because basically what a life insurance loan is, it's a personal loan that's secured by the collateral of a cash value life insurance policy, which is very, very safe collateral. And so I just look at that and I say, "Is this a good, cheap source of money?" Now what's very flexible about a life insurance policy and using cash value as collateral is I can always get the money right out of the contract.

But I could also get money from other places. And so there have been times when I've done analysis on life insurance policies and working with people, sometimes your best bet is just to owe the money to the insurance company. Sometimes your best bet is to go down to the local credit union, take out a personal loan there, and then pledge some of the collateral – pledge the life insurance contract as collateral to them and sometimes you'll get a better deal.

So this is where I think the bank on yourself and the kind of the sales language that you're hearing I think is a little bit overstated. Not that it's completely wrong, not that it's technically wrong, just that it's exaggerated beyond my personal comfort level. So I would ask – here's how you solve it, kind of to get practical and try to help you with your practical question.

I would ask this particular consultant to model and illustrate for you a couple of things. Have him illustrate for you – in the illustration software we're doing – have him illustrate the scenario on – let me pause for a moment. When you do an illustration, the illustration software will demonstrate the premium payment that you're making into the contract and it will demonstrate the cash value that's projected in the contract, the death benefit that's projected in the contract, and the amount of any policy loans that you project in the contract.

So I wouldn't expect you – if you did purchase this particular contract and you put $40,000 per year into the contract, you wouldn't do that for the rest of your life, right? No. In fact, to add one more little wrinkle into all of this, my goal is to retire in 10 years.

So the money that I'd be putting into here is kind of like my bridge loan is, but the way I'm kind of thinking in my head, I can't get at my 401(k) or IRA until I'm 59 and a half, so if I want to retire at 55, I need to find a way to get from 55 to 59 and a half.

So that's kind of where I'm trying to plan for that gap right now, and that's where this money would be. So my thought would be in 10 years, I'd want to start pulling money out for living expenses because this would get me to 59 and a half when I could start pulling out of my other retirement account, if that makes sense.

Yeah, I would be nervous about that. If I were an advisor and you were telling me that, I would not want you to do that because a life insurance contract is not productive enough for you to pay that out short term. Remember this, so the only benefit you – so the big benefit that you get with life insurance, and we're kind of conflating many conversations here by talking about college, but the big – in your case, one of the potential benefits that you're hoping for with a life insurance contract is the fact that these assets are not required to be listed as use assets on the FAFSA.

What is a benefit? I don't know what the impact of that would be on your children's eligibility for student aid. That's this advisor's job to tell you, is this important or not. I mean, with your overall financial profile, is this even relevant or is this not relevant? So that's their job to calculate that.

It's beyond my expertise. But the other benefit of life insurance, the major benefit is the value of having the money and the value of the deferred tax on the growth. You could also say, well, it's a safe asset and things like that. But there are lots of safe assets that you can buy and for a short term – on a short term period, you can put the money in plenty of safe assets.

Other example would be creditor protection. Yes, it's creditor protection, but that – unless you tell me there's a big concern for you, let's ignore some of those. The big benefit you're saying is, well, I want my money to grow. Here's the problem. Life insurance contracts, whole life insurance contracts do not work well for short term financial needs.

The reason is, one, they have too many expenses that are front-loaded. There are too many costs up front to work for short term needs. So for 10-year dollars, for 20-year dollars, 20-year dollars would be the minimum dollars, the minimum time horizon that I'd ever want to be pulling out of a life insurance contract.

For 20-year dollars, I want other – I want CD ladders. I want shorter term things that are more liquid. Now 30-year dollars, 40-year dollars, 50-year dollars, these are great dollars for a life insurance contract. But 10-year dollars are not good dollars for a life insurance contract because there's not enough time for the contract to make up for its heavy establishment costs.

There's too many expenses up front. Just like – think of it like buying a house. Very few people can successfully wheel and deal and sell out of their house every five to ten years and make money. There are too many costs to realtors' commissions, fixing it up, buying new curtains, repainting, replacing stuff.

Like it just doesn't work for most people. Life insurance contracts are the same thing. The second reason is there's not enough time for there to be any substantial growth in money such that the tax savings are actually worth anything. If you put in $40,000 per year and ten years from now you have $475,000, all you've effectively done is given yourself the ability to defer the tax on the $75,000 of growth.

Big deal. Like that's really not all that useful. So for this, for what you're describing, I don't like it. I don't think it's a good solution for your bridge money, not unless the policy were put in place 20 years ago. Now my policies, which were all put in place when I'm much younger than you, my policies could work really well as bridge contracts, as bridge policies.

Because if I were in your solution and I started the policies earlier, 55 years old, and now I'm in a situation where I'm trying to retire at 55, I'll have plenty of cash value. And then in that situation, I can easily use those policies. I can do loans out of the contracts, which I pay in later with other funds if I take them out without penalties, et cetera, and they're really, really useful.

So I love whole life insurance contracts. I think they're valuable components of the whole. But they don't generally work as like the catch-all, end-all, be-all. They work as one asset among many that have unique advantages that can – unique attributes that fit well in an overall portfolio. Wow, that's awesome.

That's exactly what I was hoping to hear from you, is that every time I kind of sat down to look through this, it just kind of got overwhelming as I'm trying to put all these pieces together and nobody was clear enough to give me that picture. So I really appreciate your insight into this.

Thank you so much. Yeah, you're welcome. And then back to you, I want to give you kind of your action step, what you should do with this advisor, OK? I think you're getting decent advice. I don't know this particular advisor's amount of experience, but I haven't yet heard any danger science that would say, "Let me run for the hills screaming." I think you're getting decent advice, a little bit of exaggeration perhaps, but I mean that's not red flags.

It's kind of like the real estate agent saying, "You're going to love the house." Well, the real estate agent doesn't know if you're going to love the house or not. Now here's how you can try to make a good decision. Take a scenario that you think is practical for how you actually want to use the policy and run that.

So for example, you're not going to put $40,000 of premiums into the policy for 30 more years. You're planning to retire in 10 years. So start by saying, "Here's what I want you to illustrate for me. Let's put $40,000 into the contract for 10 years. Then let's put $0 because you don't want to be putting money into a life insurance contract when you're retired.

So put $0 for the rest of my life." Now this is simple to run with illustration software. They can show you $40,000 in for 10 years and $0 for the rest of your life. Then you can look at those numbers. Then think about when you'd want to take money out.

Let's say that – have them illustrate my bridge money. Show me how much money I could take out of the contract for 10 years between 55 and 65 or show me how I would take the money out for my kid's college. If you're trying to hide this $200,000 inside the contract over the next four years, five years before you have to fill out the FAFSA, that's reasonable.

Then illustrate the distribution from the contract for those years of college. I want to pay $15,000 or $20,000 from the contract for this six to eight-year span of my children in college. Then show me what happens with the contract. Then show me putting the money back in. They'll show you with the loans.

Now look down towards the end of your life and have them illustrate the full policy term out to age 120. You'll start to see how those loan balances accrue and how the interest accrues. You'll start to see – because what can sometimes happen is all of a sudden now at age 83, the contract is saying, "Hey, we want a premium payment of $82,000." Well, that's what I mean when I say the policy is blowing up.

Have the advisor illustrate a few different scenarios for you and I think you'll start to feel more comfortable with kind of how it works. Then ask yourself the question and say, "Does this work for me?" Perfect. Okay. Yeah, I like that. Yeah. I'm not running screaming for the hills, but I'm also being very careful.

We're talking big money and you don't want to make a mistake here because the cost of making a mistake is there. So don't do it until or unless you can explain it to your 14-year-old and get other counsel. When you're buying a life insurance contract, get a second opinion.

Find another agent from another company nearby. Say, "Here's what I'm thinking about doing," and have another agent show you what they can do and use the value of the market and good competition. Well, Nassar, you mentioned wanting to make it from 55 to – or wanting to bridge from 55 to 65.

Do you work at a company that you have a 401(k) plan with? Yeah. You're familiar with the rule on a 401(k) plan that if you leave the company you're working at with a 401(k) at 55, you can do so without paying penalty on your distributions from the 401(k) account?

Yeah. Maybe not. So I knew if you left the company, then you would normally switch that over to – into an IRA. You wouldn't necessarily keep it at the company, correct? Yes, except in your situation, you should not move to an IRA. So if you are working at a company and you have a 401(k) with that company, with the company that you're working with, if you retire at 55, anywhere from 55 to 59, if you retire at 55 and if you're still working for that company, then you can make a withdrawal from the 401(k) plan and you won't pay any early retirement penalties, even if you're before 59 and a half.

So that is really important for you to notice, to pay attention to, because with bridge money, what you're probably talking about is how do I get money out of all these accounts without paying penalties. You're not talking to me about how do I pay for it, right? Right. So the first thing that you should be aware of is if you're planning on retiring at 55, you can do a withdrawal from your 401(k) as long as that's the company that you are retiring from.

And of course it will be income and you'll pay taxes on the money, but you're not going to be paying the 10% penalty tax. And that is – that's really valuable for you. And the other thing is the planning opportunity for you is I am 98% sure that there shouldn't be any reason why you can't – yeah, I'm 99% sure that there's no reason why you couldn't put IRA money into the 401(k).

And what I mean is if you have IRA money that's in a separate IRA from an old company and you could go ahead and move it over today into your company 401(k) and then that money would be available to you during that window between 55 and 59.5, that now you could get it out penalty-free.

And so that's really important for you to be aware of. The second thing to be aware of, even if you do have to pay early retirement penalties, it's still better for you to use retirement accounts and just pay the penalties. I did an episode on this and this was something that was new for me.

It's episode 314 called How You Can Get More Money for Early Retirement by Using an IRA or 401(k) Even If You Have to Pay the 10% Penalty. And in essence, what I demonstrated on that episode, thanks to a listener who demonstrated it to me, is I proved that even if you have to pay the 10% penalty, you're still better off putting money in the IRA or the 401(k) and just paying the penalty than you are using an after-tax investment account.

Now that's assuming of course that you can still contribute. So if you're maxing everything out, of course you'd have to use an after-tax option then. But even if you wanted to retire at 55, you're still better off just paying the penalty than not choosing to put it into a retirement account.

Okay. Now, when you're talking about taking it from the 401(k) after 55, retiring from that company, is there a required minimum distribution? There's nothing that you have to set up saying, "Okay, every year I'm going to take this amount." You could actually just take a little bit or you can change the amounts you'd withdraw at that point from 55, 56, 57 type of deal, right?

Yeah. There's no required minimum distributions from a 401(k) account until age 70 and a half. So you can choose at any point in time how much money you need. So you can start off and take a little bit and you could take a little bit more. The key is just simply that if it's a plan that you – it's easy.

If you are leaving a company and this is your employer right before retiring and you're taking money from that 401(k) plan, you avoid the penalty tax and you can pick how much you take out. So this is probably a silly question, but you said right before you retire. What is the official definition of retiring, just the last company you worked at before you quit?

Good question because I never actually – I'm only aware of the rule academically. I've never actually filled out the paperwork for somebody. Yes, I would say it's probably just whatever company you're working with right before you quit. Again, I've never filled out the paperwork, so I don't know exactly kind of how that is demonstrated, but you should be able to find that pretty simply.

Okay. Wow. Worth your time today? Oh, my gosh. Are you kidding me? This is just – this is priceless. Now you've given me a lot of homework to do. And that's what I need. I need to have some direction which way to go. So you've given me all that and a box of chocolate.

So I really do appreciate your help on this. On IRS.gov, if I can remember, I will put here – I'll try to put – remember to put a link in the show notes. But on IRS.gov, they have an article called "Retirement Topics, Exceptions to Tax on Early Distributions." And what you want is called the "Separation from Service Exception." So it's "The employee separates from service during or after the year the employee reaches age 55 or age 50 for public safety employees of a state or political subdivision of a state in a governmental-defined benefit plan." And so that's the separation from service.

I don't know what the paperwork looks like, but it should be very simple for you to find that and just calculate however much money you need in that 401(k) to get you through. And then with that as well, if you had another side business that you're running, would that get in the way because you're making income in another business even though maybe that separate business that you're running doesn't have a 401(k) set up?

Would that kind of conflict with that? I don't think it would conflict with that because we're just talking about here taking distributions from a plan and we're just talking about the benefits. So as long as you're just taking standard distributions, what the IRS calls "regular withdrawals" from the account, as long as you're just taking regular withdrawals from the account, it doesn't matter that you have other income.

It's just simply the income from there and being able to avoid the 10% penalty. So cool. Thank you for calling in, Ken. I appreciate it. Let's go on. I've got one more caller on the line. Oops, I just muted this caller. Let's try again. Welcome to Radical Personal Finance.

How can I serve you today? Let's try again. Welcome to Radical Personal Finance. Hi, Jayeshwar. Hi, welcome. Hi, Jayeshwar. My name is Ram. Actually, I have one quick question. Can I go ahead? Yes, please. Go ahead. Yeah. So I have around the 200K between my rollover 401(k) spouse IRA, Roth IRA, and my non-retirement accounts.

So right now, these accounts are between the Wealthfront, Betterment, and Personal Capital. So actually, I mean, after observing, I mean, since two, three years, I'm just observing kind of returns and how they're managing my accounts and all those things. But finally, at this point in time, I'm seriously thinking moving all these accounts into Personal Capital for a couple of reasons.

The first reason would be, like, I want to keep all my money with one investment firm. That way, they will apply the same strategy across the board. And also, if my account total worth is, like, more than 200K, I think they have a special treatment, wherein they're going to buy my individual stocks and some kind of ETFs, mix and match both.

I know, I mean, the investment management fee is a little bit high, because I'm in my day work. I'm a little busy. I don't think I can follow all those things. And then I can spend a lot of time on this rebalancing and all those things. So what do you suggest?

I mean, is it worth moving all these accounts into one Personal Capital account? I mean, not one account, multiple accounts, but under the same management. So do you have any specific suggestions? I'm a little confused there. So speaking conceptually, there is generally, in my opinion, no reason to keep money with different money managers, unless the different money managers are pursuing some unique, dramatic investment idea.

Let's say you have $200,000, and you want $50,000 to be invested into speculative mining stocks. Well, there you'd have to find, who am I going to invest that speculative $50,000 with? And you'd put your other $150,000 with another manager. But as far as describing wealth front betterment Personal Capital, these are all basically mainstream financial approach with a slight technological twist.

There's not any, in my opinion, there's not any major difference between these. All are pursuing the same fundamental approach. And so as long as in this situation, I see no benefit to having multiple advisors and only cost. The key is to recognize that when you're hiring an investment manager, the amount of money that you have with the manager matters.

And it matters because it buys you lower fees. That's what you're describing when you talk about Personal Capital will give you a lower fee. This is called a breakpoint in the business. You have lower fees, that's in your best interest, that gives you, that saves you money. And it also, frankly, allows you to get better service.

Now most of these are automated or semi-automated versions. But if you have a lot of money, you want to have it in one place because you get better service. Better to be a big fish and get big fish service than to have all your money spread out and get little fish service everywhere.

Okay. That makes sense. And a similar line, because when I do my own R&D, especially average account size with Betterment and Bellfront is around 30, 40K. And when I did my own research with Personal Capital, I think the average account size would be around 100, 150, 200K. So because most of the clients under Personal Capital is around average network would be average account size would be around 200, 300.

So I think my, as far as my requirements, that is one of the key decisions why I'm moving towards this. I mean, I know you are not going to say that don't go or go, but at least that's my driving factor. And when it comes to the fees wise, I know I'm sure Bellfront and Betterment are charging very less, but Personal Capital is charging little high, like 0.8 or something for my money.

But somehow I'm convinced I think it's okay because they have some, like, you know, they have bigger size accounts. There they can perform, I mean, there they can show a lot of expertise, their expertise to manage my account. Yeah. I don't see any problem with what you're saying. You've done your research.

You've thought through the approach. The key is just simply for you to know what you're buying and what you're paying. As long as you know what you're buying and what you're paying, I'm happy. And you will be a better investor by choosing somebody carefully that you feel confident that you like their strategy, you like their service, you like their offerings.

You'll be a better investor because you'll be confident in the decision that you're making. And then that confidence in your decision will allow you to basically stick with it through, to stick with it through the tough times. I personally, my philosophy, the reason why I'm not weighing in and saying you have to choose this over another, I think it matters as far as your choice here matters.

But it's not, doesn't matter nearly so much as all the other important stuff like, am I saving money? You're doing that. Do I actually have investments? You're doing that. Things like, am I actually investing? You know, the actual type of account, your actual asset allocation with any of these companies will drive your, will drive your returns far more than which company it happens to be.

And then you sticking with it, you the investor sticking with the strategy through the crash that's coming and through the boom that's coming, that will make a big difference. So you sound like you're well educated on it. I'm very happy with whatever decision you make. But my concern was only with management fees.

So with respect to these three, personal capital management fees, 0.89, and with respect to betterment and welfare, it is 0.25, 0.25. I mean, that's where I was a little reluctant to move to the personal capital, but you know, you see what I'm saying? I mean, everywhere, whatever research that I did, make sure the fees should be low because it's going to be longterm.

It's going to be really add a good value to your account. Make sure the fees are as much as possible low and all right. So yeah, that's where a little confusion I have. Do you believe that based upon what personal capital is offering to you, what they're saying, them saying, "Hey, listen, we're going to do these things for you.

And here's the benefits you get with investing for us." Do you believe that the benefits are there, that the benefits that they're offering are sufficient and you're willing to pay an extra 64 basis points for that service? Yeah. I mean, actually, pretty much whatever other services that they're providing outside investment management, I don't think a person like me, that is a really value added, right?

Because I'm always, I'm doing my own R&D and I'm following you and listening to all your podcasts and pretty much whatever they're offering, already I know. I mean, I'm not going any other things what they're offering. I'm interested only in investment management because I don't have much time to think about it.

And as you said, like in the panic times, how to manage and to take care of all those things, I need some help. But rest of the things like how to save, how to invest and rest of all things, pretty much everything you are covering. And I'm pretty much following every episode of you, right?

Through podcast. So I don't think they're providing any other value other than this particular item. So I need to be careful. I have to be careful legally because I am not a financial advisor. I cannot advise you to buy or to sell securities. And that's why people like me always have to be careful.

I can't tell you choose this company, don't choose that company. I don't know enough about you even to do it. But here's how you need to approach it. Number one, you've listened to me enough to kind of handle all the other stuff. So now when you're at the stage of saying, I need to choose an investment manager, by what makes sense to you, if you were only focused on the lowest fees possible, which some people are, then all three of these options are still going to be slightly more expensive than what you could go and find a broad market index fund from.

I mean Vanguard has index funds that I think are down and have 13, 15, 20 basis points of cost. So that's cheaper than 13 basis points is half the cost of 25 basis points that you're describing. So you could get cheaper. But I'm not convinced that you should always go for cheaper.

I think that there is tremendous value with certain approaches to financial management. I believe that there is value there. So you've got to look and say, do I, as an individual investor, am I going to get enough value from this particular company here? Now I don't know whether these companies, with their algorithms and the automated management, et cetera, I don't know whether some of these companies can actually deliver on some of the tweaks that they're offering.

I simply don't know that. But you've got to answer it subjectively. You've got to look at it and say, do I get enough value out of this? And here's the thing. You're not stuck. You can leave anytime you want. So you're not going to be stuck in it. You're going to have options.

Any of them are fine as far as I'm concerned. And yes, you should pick, especially now that you've had experience with those three, you should pick whichever one you like the most and aggregate your money there. Any other questions, Ram, before I close out the Q&A call today? That's all for today.

But I was expecting a nice podcast from you about when to go with the investment management firm, like when a fund reached 100K or 200K. So that's the right time to go to a management company or whatever it is. I mean, don't go. At least due diligence. I think I was expecting some kind of podcast around that area.

I don't think you have in the past. So I'm just giving my two cents. Yeah. Well, let me answer the question because it's a fair question. And I think I like to answer questions like that and take them head on. I'll think about that in terms of could I design some useful approach.

But I frankly don't know if there is an answer to that. I really don't. Because I am deeply conflicted over this question of investment management. And I'm deeply conflicted because the data and my experience in the business are actually in conflict. So the data seems very, very clear in terms of choosing investment management.

The data seems clear that you want to deeply focus in on fees and expenses and lower fees and expenses as much as possible. When you are simply measuring things like funds, like mutual funds, there is a very compelling academic case that you should just simply focus in deeply on fees.

And so in that case, I can't argue that. I don't have any data that would say, well, this is definitely the wrong thing. But there is, I'm convinced, a huge value that an investment manager provides for their clients and a personal financial advisor provides. And I used to charge 100 to 150 basis points.

And small clients is up to 170 basis points of management fees on money when I used to manage money. And I don't feel bad about that because I'm convinced I delivered in excess of that value. I'm convinced I could deliver far in excess of 100 or 150 basis points of value.

But I couldn't necessarily prove it to you. And so I try not to make statements of things that I can't prove. But I try to demonstrate those things. And so the challenge is, how do I discriminate among advisors and advisory firms? Some financial advisory firms sell things they can't deliver on.

They sell overperformance. They sell outperformance in certain areas. And I just don't see how some advisors can deliver what they sell. However, there are other advisors who I think can deliver what they sell. And so I don't know the answers. We live in a time of historic change in the financial markets.

Investors are being pressed on fees in every which way. And I think it's wonderful. I love the impact that Jack Bogle, founder of Vanguard, has had on the industry. He has revolutionized the industry. And the market has been running to Vanguard in ways in a historic way. He has won.

And I love that because you see the power of the free market at work. No government entity – I'll give a short political rant. No government entity came in and said, "We're going to establish the fees. If they did that, we would all be paying 400 basis points a year." It was competition where he came in, Bogle came in, and he said, "We're going to change this." And this is changing and revolutionizing the industry.

The major press of tech, Betterment, Wealthfront, personal capital, they're disrupting the industry. And it's great. But it's not everything. And I guess the other thing – the other reason I'm kind of quiet on some of that subject is the farther away I have gotten from the world of money management, the more – hear me rightly – the more silly I think that world is.

It doesn't affect the average person nearly as much as good career decisions, nearly as much as good decisions on housing, on vehicles. And I just – I really want to focus on the things that make the difference, not the kind of the minor things that may or may not make a difference for a tiny subset of the population.

So that's why I haven't focused on it. Yes, I completely understand that, Joshua. I really like the answer. I'm happy for it. I completely, 100 percent agree with you. Awesome. Well, Ram, thank you for calling in. I'm really glad that you are here listening to the show. I love it.

And it especially encourages me when you say, "I've listened to the other episodes, I've listened to past episodes, and I'm putting things into practice." And hey, man, you got 200 grand. That puts you in the top – let me not get the decile wrong. That puts you in the top – probably the top quartile of the American population, which puts you in the top, what, 5 percent of the world probably with that amount of wealth?

And you're just getting started. I can hear it in your voice. Thank you all so much for listening to today's show. One announcement as we go. I love doing these Q&A shows and I've tried to keep them exclusively for patrons because – well, I've just found that to be a good way for me to moderate the number of callers.

So I've tried to do that, but I enjoy doing them. And so what I've decided is next week, next week I've decided to do some Q&A shows. Just one week. I'm not doing it because I really want to keep this as a valuable benefit for the patrons. I need the patrons to sign up and for you to sign up and again, allows me to moderate the number of people.

But if you're not a patron of the show and you'd like to call up and ask me any question, financial planning question, a personal question, anything you want, I'd love to do that. So next week I am going to open up the phone lines and I am going to do – at the moment I'm planning to do at least four, maybe five shows with details on where you can call in and it'll be a live show just like the one that you have just heard.

And this will be open publicly, publicly available. So I'm going to publish in the show notes for today's show, I will publish a link with information with the time and the phone number for you to call in. You'll have to call in during the specific time that I'm recording and the phone number, all those information will be in the description for today's show.

So if you'd like to call into a Q&A show next week, I'm going to do a special series and it's almost celebratory as well as we come up on the 500th episode, a special series of Q&A shows and I'd love to have you participate. So check the description if you're listening on your phone, just look in the description right on your phone or you can come by RadicalPersonalFinance.com and you can look at the description for today's show and you'll find that information.

In the meantime, if you would like to support me and have access for sure, guaranteed access to a show with extensive amount of time with me like these two callers today, come on by and become a patron, RadicalPersonalFinance.com/patron. And remember, 30 bucks off at HelloFresh.com and a promo code RPF30, save 30 bucks on a new subscription to HelloFresh.

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