When you're in winter's favorite town, the snow-covered mountains surround you. A historic Main Street charms you. And every day brings a new adventure. Welcome to Park City, Utah. Naturally, winter's favorite town. Join the experience at VisitParkCity.com. It's Friday here at Radical Personal Finance. That means live Q&A. Welcome to Radical Personal Finance.

It's Friday. That's my favorite day of the week. My favorite show of the week. That means it's live Q&A. Welcome to the show. This is the show dedicated to providing you with the knowledge, resources, insight, and gentle encouragement so that you can live a rich and meaningful life now while building a plan for financial freedom in ten years or less.

My name is Joshua. I am your host. And today I do my best to answer your questions. Again, my favorite show of the week that I record whenever I can arrange the logistics of an internet, stable internet connection and all that to allow me to record audio. This is a live Q&A show, so very much akin to talk radio.

You receive it very soon after I record it with basically about a one-hour tape delay. Friday shows are open to patrons of the show. That's one way that I screen the number of callers down. Instead of having, you know, 50 or 100 people call in on a day, then it usually comes down to about four or five.

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For today, we go to Mark in Washington. Mark, welcome to the show. How can I serve you today? Hey, Joshua. Thanks for having me on. For sure. My wife and I will be moving internationally in a few months from now, and I was just wondering what you could tell me in terms of a legal or financial situation.

What are the things that I should be paying attention to or taking care of, getting advice on making that switch? For example, I know wills are state-dependent. I have no idea what an international will looks like, but I'm wondering about that, if you have advice on that specifically, or if there are other areas more broadly from a legal, financial perspective that I ought to be paying attention to as we move.

So you are moving outside of the U.S., and you and your wife are U.S. citizens. Is that right? Yes. My wife is in the process of completing the citizenship process. She will be before we move. Got it. Okay. So both of you will be U.S. citizens, so that makes things a little bit simpler.

And you intend to be gone for an extended period of time? Do you think you'll ever come back to the U.S.? We think we'll be coming back to visit family and friends every so often, every couple of years is what we're expecting. But we are transitioning as a permanent move.

At least that's our thinking for an extended period of time. Okay. I would take this if I were doing it. There are a lot of different things involved. So you mentioned wills, but here's how I would approach it if I were moving abroad for an extended period of time.

The first thing you have to look at is what are the disadvantages of your being a U.S. resident? And in your move abroad, will you pick up any advantages from changing residency and/or changing citizenship? So a simple example from a financial planning perspective, if you're going to be out of the country, I forget the exact number, but it's something like 300 and something days a year, then you can be exempt on the bulk of your income from paying U.S.

income taxes under certain conditions. Under some of the, what's it called? What's the act called? The Foreign Earned Income Exclusion Act or something? Exclusion Act. Great. Is that the proper name of it? Did I make it up properly? No, I think it's around $100,000 that you're excluded. You don't have to pay taxes on.

Exactly. So if you look at your income, for example, if you're a U.S. citizen and a U.S. resident, if you look at your income and you're planning to be abroad on a basis that would satisfy the requirements of that act, again, do you know how many days it is, Mark, from your research?

Is it 300 and something? It will be. So a little bit of background, I've lived abroad in this country before, and the residence permit we would be under does qualify as having your tax residency outside the U.S. So by multiple tests, we, at least the last time I was overseas, did qualify for the Foreign Earned Income Exclusion Act or Earned Income Exclusion Act, I think.

So we should be meeting those tests. Good. So as long as your income is planned to be below that number, then that's probably the simplest thing. You retain all of the benefits of your U.S. citizenships, whatever they happen to be, you retain the benefits of your residency, we'll get to residency in just a moment, and you can avoid U.S.

income taxes. Now, if you anticipated that your income were to go up substantially, you were starting a business, you were involved in some kind of activity where you had major earning potential, then it would be well worth your time to consider renouncing your U.S. citizenship and transitioning your citizenship to another country.

So famously, John Templeton would be one of the famous ones who, when he was a noted investor, he moved to the Bahamas, and he lived in the Bahamas, he renounced his U.S. citizenship, and that saved him, of course, tens of millions of dollars of income taxes. And the United States is, as far as I'm aware, the only country in the world that believes that just because you're a U.S.

citizen, the United States is entitled to their pound of flesh that's due to them in the form of taxes from your activities abroad. So if you are going to earn substantial amounts of money, then it's well worth your consideration to renounce your citizenship and move abroad. And you want to do that before you – if you have any sense that that may happen, then you'd want to do that in advance.

But I'm not getting the impression that your move is that you're planning to earn millions of dollars over the next couple of years. Is that right? I would not expect so. There should be a raise, there should be an increase, but I would think it would be a long time probably, or if not ever, crossing that threshold number, unless that's what's lowered.

Right. Okay. So then in this case, then I think it's – go ahead. Related to that, actually – no, I'm sorry. I'm wondering if I am not paying U.S. taxes, am I still eligible for a Roth IRA, or do you have to be – I know you have to earn wages for that, but if the income is excluded, is that still eligible?

Do you know? I don't know. It's an interesting question. I don't know. Yeah, I don't know. So if any listener knows, come on by the blog post for today's show and answer in the comments, but that is an interesting question. And I couldn't guess one way or the other.

Okay. But I would pursue it if it were a possibility, but I couldn't guess. So let's go – so for the sake of this conversation, let's assume that you're going to retain your U.S. citizenship. Now we then get to the question of residency. What do you – in terms of what are you going to do with residency?

You mentioned a foreign will. Well, if you're moving abroad and you're planning to be abroad for a significant amount of time, then you may choose to put yourself under the jurisdiction of that foreign country. But there you have to weigh, is this a country that I want to have – do I want to be under their jurisdiction?

Does that help me? Or is this the type of country where I'd really prefer to do my own thing? Just because you're moving abroad doesn't mean, I think, that you automatically have to set up all of your residency to fill abroad, specifically for financial planning purposes. And here we're going to get into a difference between visas, residency permits with various countries, passport requirements versus your personal financial affairs.

If I had an established life in the United States, I owned a little bit of property, I had accounts, I had family, I was a U.S. citizen in a normal situation, I would keep – for the purpose of my financial life, I would keep my U.S. residency intact while I moved abroad.

And the way that I would do that would be very simple. There are a number of states that are very popular, and you can research this with the RV community. But there are a number of states that allow you to officially register with that state as your state of domicile without having to physically reside in that state all of the time.

And the popular states, the three most popular states are Florida, Texas, and South Dakota. They each have various advantages and disadvantages, but each of those states, Florida, Texas, and South Dakota, is very popular in the RV community. And there are a number of mail-forwarding companies that work in those states, that live in those states, that allow you to use those states as your domicile.

So you can move officially with the U.S. state from where you live now to what's called a commercial mail-receiving agency in those states, a CMRA, a commercial mail-receiving agency in those states. And there are a number of RV clubs that advertise this as a standard part of their services.

The benefit of moving to either Texas or Florida is largely that you can avoid state income taxes. I can't remember what the state income tax is in South Dakota. But you can move your domicile legally to Florida or Texas and become a Florida or Texas resident. With those states, you can – and all of the RV assistance companies will walk you through this – but you file an official paper with the courthouse in that state and register your legal address with that state.

So you become, for all intents and purposes, a resident – I'll use Florida because I'm familiar with Florida, of course, being a Floridian – you become a resident of Florida. That gives you a legal address that you can use to file paperwork with the U.S. government if you need to do passport paperwork, passport applications, things like that.

It gives you an official address that you can use for vehicle registration and for any kind of financial work. It gives you an official address that you can use if you care to be involved in the voter registration rolls. You can register to vote in that particular state. And that gives you a fully legal address that you can use for all of your purposes.

Now, of course, there's no residence there. You just have a mailbox in some random building. But it gives you a legal address. And then, of course, as mail forwarding services, they will collect your mail that is sent there. They will – depending on what you want – they'll forward it on to you.

They'll scan it. And they have different services that they offer. That's less important today with the easy proliferation of online access that most of us enjoy for most accounts. But it is still important for things like filing tax paperwork, filing passport locations, and things like that. So if I were you, what I would do is I would move my domicile, my official registered domicile, to one of those commercial mail receiving agencies – again, South Dakota, Texas, or Florida – and I would use that address for all of my government interaction as my official legal address.

What that gets you is that gets you the ability to retain your U.S. domicile and your U.S. residence, which now we can move to wills. Do you intend – after you move abroad, do you think that you will own any significant value personal property that's physical property? Not overseas.

Okay. So in this context, there's less of a need for a will if you don't own any physical personal property. Do you and your wife have children, or do you think you'll have children? We do. Okay. So the biggest – We have two. Okay. So the biggest benefit if you have two children is for – as far as the biggest need for you to have a will – is to use that will to establish guardianship.

If you and your wife died while you are abroad, would it be your intent that your children are returned to the United States to live with their guardians? Most likely. Most likely, yes. So under those circumstances, I would keep my U.S. domicile and my U.S. residence, and I would have my will filed in my state of domicile, primarily for the intent of having – of establishing guardianship for my children.

And then if my wife and I died while abroad, our children would be returned by – whoever is around there, our children would be returned back to the United States. And then my will would be used to indicate my guardianship for my children. So the key for you to remember is that the will only governs what's called probate property.

And probate property is property that doesn't involve a beneficiary designation or an account titling designation. So you can accomplish your – you can accomplish the transfer of your property in the case of your death for non-probate property through either account titling or beneficiary titling. If you have an IRA, then you just simply say, "So-and-so will be the beneficiary of it." If you have a – if you have an account, a bank account or some piece of property, you can establish joint ownership or joint ownership with rights of survivorship or a transfer on death arrangement.

And then all of that property bypasses your will. So the big thing for you would be to use your will to establish the guardianship. In terms of your assets and your family's assets, would you consider them to be significant at this point or do you expect them to be significant in the future or are they relatively minor?

They're relatively modest now. Our savings rate is pretty high. So – and the investments I've made have done quite, quite well. So we would expect in a few years' time for them to be significant and over the course of years, substantial. But right now, they're relatively modest. Have you established already any kind of trust arrangements for your children to be the beneficiaries of your assets and/or your life insurance policies?

No, we have a – no, we have not. And that's in part part of the question is because we – the move is so soon, we didn't feel like we – we just figured we want to make the change that's going to make sense long-term rather than do something for a couple months and have to switch around again.

So that's in part what has spurred the conversation. Okay. So I don't know how to help you with the logistics of what you can get done before you move, what you can get done from abroad, et cetera. But the first thing to figure out is what is going to be your official state of residence while you are abroad.

Now, obviously, you're not physically going to be there. But for the practice of your legal work, you probably don't want to be under the jurisdiction of the foreign government. Rather, it's better for you to maintain the legal situation that you're familiar with. So you figure out what state you're going to have as your domicile.

And the reason is because your – whatever your state is, your domicile, that's the state in which your will needs to be established and properly written to the terms of that state. Now, once you've established that, then I would recommend go ahead and – go ahead and at that point in time put in a – put in a new – go ahead and establish a new will.

And in that will, put trust provisions in the will. And the trust provisions that you should add are – trust is an option where if you and your wife die simultaneously, if you and your wife die simultaneously, then a trust is established. It's called a testamentary trust. And that trust is written according to the terms of how you want the property to be dispersed to your children.

And so what I usually would recommend – your children are young, right, at this point? It sounds like. Yes. So with young children, what I would recommend is that you establish a guardian and then you establish a trustee for – to manage the assets with them. What I like to see is usually the guardian to be a co-trustee with another trusted family member and establish in the trust document a level of – whatever level of freedom you want that trustee to have in dispersing the money.

If you have a functional family, then I personally – my opinion is if you have a functional family that you have a high degree of confidence in, I like to see a high degree of freedom given to the trustee to manage the money for the benefit of the children in whatever way they see possible.

And what you can establish with your attorney is establish the opportunity for them to have basic money coming out for their – usually it's called HEMS, health, education, maintenance, and support, just the basic levels of support that they need. You can establish that the trustee has the authority to disperse funds for educational expenses and then you can establish a time or multiple times at which the full balance of the money in the estate becomes available to them.

And it's important to do the planning right because if you have a couple million dollars in term life insurance, you're not just dealing with say $200,000 which could be easily exhausted between maintenance and college. You're dealing with a few million dollars which is substantial. And so what I like to do is to encourage you to establish that testamentary trust that would be handled for your children, file that in your will, and then that trust is what should be placed as the beneficiary of your 401(k) accounts, of your investment accounts.

That trust should be the beneficiary of your life insurance policies. And then you have a very simple financial life. If you and your wife die, your children are returned to the United States. The guardian is established. The guardian does have to go before the court to be officially approved.

Remember that guardianship under a will is not guaranteed to be carried out. It's likely going to be carried out, but the judge always has the final say in establishing the guardianship of your children. But then your trust is established, it gets funded, your co-trustees then can manage the money and take care of your children for you.

All of that is much easier under the U.S. system than trying to figure out a new foreign system as a foreigner. Yes. Does that answer your question? Is there anything unclear? Do you want to ask any follow-up questions? That's great. That's great. That is very helpful. I know you've got the ballot in your registry.

Would you have something equivalent like that for law and lawyers, attorneys, something like that? I would dearly love to have it, but I don't. Here's what I would do. I would love to have something like that, but again, I don't. Here's what I do. The best way I know of to cut through the mumbo-jumbo of billboards and people advertising is to use a legal association.

Look up your local bar association and look -- Mark, you sound like you're relatively young. Are you on the younger side or the older side? I'm on the younger side. That's my 30s. Good. Perfect. That's a perfect stage to be in. If you're in your 30s and you're on the younger side, what I would do is I would look up my local bar association for whatever major city is near you.

In the local bar association, they will have a trust and estates division, and probably on the website, they will list an attorney who is involved or a couple of attorneys who's involved in that trust and estates division. They may also have a young lawyers association. The best way I know of to get this done is where you have decent legal work, especially if you're going to write up a custom trust, where you have decent legal work done by a legitimate attorney.

You're not just trying to figure it out yourself with a self-help legal guide or a kit on a CD or whatever. It's to call either somebody on the young lawyers association or somebody in the trust and estates division and explain to them, "I'm a young father. I have modest means, but here's what I'm looking to do.

I'm going abroad. I'm looking to establish a simple will and a simple trust. I wonder if you can refer for me a young lawyer who would be able to do that properly for me but would be not extremely high-priced." Often, if you ask for that referral, sometimes the person will say, "Hey, I'll do it for you," and there's a good chance that if you're finding them in the bar association, that they're perfectly qualified.

Or if that's not their interest because not all trust and estates attorneys want to work with a young couple on an under-$1,000 case. They want to work with somebody who's wealthy often. They'll refer you to somebody who will appreciate the business. I think in this, you'll frequently be working with a young lawyer in their 30s who also has a couple of young children.

If you can explain that, what I've encouraged people to do is just ask the attorney, "What do you have set up? Can I just copy what you've done?" What I've encouraged a lot of the younger trust and estates attorneys that I worked with when I was a planner was set up a simple package for young parents and just resell it again and again.

In my opinion, usually you can get in and out for under $1,000. If you ask them to do it and just say, "I don't need anything too custom," you can get in and out for under $1,000 with all of your documents well squared away, including a good testamentary trust and your other ancillary documents.

So, you make some phone calls, but that's how I would approach the problem. Okay. That's very, very helpful. Thank you. Thanks for calling in, Mark. Mark, you had another question? Go ahead, please. Yes. I just listened to your episode on why this estate planner is not fit for his kid's college, which was really helpful and really challenging.

It made me think in new ways. I just want to ask one further question with that. So, my wife and I are Christians. We would love for our kids to be able to go to a Christian school. But one thing that I've kind of seen the political leaves, California a couple years ago tried to require that colleges in California be LGBTQ affirming to receive federal funds.

And so, one thought I have is I'm just wondering if accreditation is going to be on the line for some of these Christian schools that would not be so affirming. And it's my understanding that the ESAs are only used for accredited schools that can receive federal funds. So, am I correct in saying that would be a risk factor that I also need to be looking at in making that choice of investment?

Yes, absolutely. Well, off the top of my head, I cannot remember if ESAs are only for accredited schools. Did you verify that yourself? So, I looked into enough to say that I wasn't sure what it meant. I know that there's places where you can use it for homeschool or private education up through college, and that did not appear to me to be accredited in a fashion.

It did need to meet the state's local definition of school. But what I was unsure of was a way to clarify the meaning of that for a college. It did have language about an approved school or something to that extent, the exact technical language. It didn't say accredited. But that was the point of confusion is, does it require accreditation?

I know, like Bob Jones lost accreditation because they didn't, they had something about interracial dating or something like that. And that's not the school I'm thinking about. But just, you know, there's a little bit of precedent to say that the government can kind of step in on some of these issues.

And we would just would not want our money tied up in a place where, you know, if we wanted to send a Christian school, we wouldn't be able to because they lost accreditation or couldn't get federal funds or, you know, something of that kind. So, let's start with the first most important things, and then we'll get to the financial.

And this is very important to me that we never start with finances, but rather we figure out what we're trying to do and then make finances fit them. So, first and foremost, I think most Christian schools are not worth the money. Most Christian schools are give a really bad education and they don't do a very good job on the Christian side.

They're basically secular schools, just kind of dipped a little bit in some light Christian water, but there's not a whole lot to it. Now, I have a few exceptions, but I think most of the time they're overpriced and they under deliver and they really don't deliver a superior product.

Now, there are a few that are exceptions, but although I'm with you, I think there are values, there are benefits of being involved in a Christian school. The biggest environment, sorry, the biggest benefit I see for children who are going to Christian colleges and universities is there's a higher probability of them being around other Christian young people, which means there's a higher and better pool in the dating marketplace for them to potentially meet a spouse.

That is really the best benefit of a Christian school, but from an educational perspective, many of them are really, really bad and they deserve to blow up and go away instead of doing a bad job. Now, that I've offended most of the people, I just really think it's true and I get so tired.

I get really tired of Christians doing bad work and then people paying extra money just because it has the name Christian when you actually dig into it and you start digging into, okay, let's see who the professors are. Let's see what they're teaching and you start reading their papers, you start reading their articles and you think, wait a second, this person's, this is not Christian.

This is just baptized secularism. It's absurd. So, there are exceptions for that and so that's my thing number one. I get annoyed with Christians wasting tens of thousands of dollars on a bad education when it's a whole lot cheaper to send your kids to be involved in the clubs so that they can reach that dating pool marketplace rather than wasting the money on the education.

I'd rather see people get an online, because my children, I don't know what college will look like, but today I'd rather see my children get a college degree from just some online school that can be done cheap and fast to get the degree so they can check their box that, yes, we've got the degree and we'll access the dating pool and the pool of qualified mates a different way that's cheaper than tens of thousands of dollars.

Number two, I do expect that it would be my guess that in the coming years that many of the Christian schools, especially in California, will lose their ability to operate based upon non-discrimination rules. I really think that is a good, I think that's a good likelihood that that will happen.

All of the political movement seems to be very firmly opposed to the Christian schools being able to continue to operate. And I think it's important to analyze it carefully and to understand that people who are very much crusading for LGBT acceptance and the sexual liberty of people to express that, they view this as a moral absolute right.

And so you come down to a tension between freedom of religion or religious freedom and sexual freedom, and in this battle it's one or the other. There is no middle ground in this issue. I see no way that there's no place for compromise. And this has been happening for the last decade, and I expect the next decade to continue because there's no place of compromise between these when you actually analyze the positions.

So in terms of a peaceful settlement, I don't see how there is a peaceful resolution. And so for a university like Biola in California, they very, you know, a good Biola, I like some of the stuff that they do. They have some good professors that I study some of their materials, but they're fighting for their life in terms of being able to operate and exist in the legal environment in California.

So if or when the law changes, and I would expect the change, then an organization like a Biola or like other Christian universities, they're going to have to leave or they're going to have to compromise their reason for existence. So which many choose compromise. That's been the trend. But there we just get back into the world of bad Christian schools that deserve to blow up.

Their enrollees fall apart, and Bob Jones is struggling, even though it's got this famous name, enrollment is not high. So those universities, I think the biggest opportunity for them is to go into a different setting. And they need to go, Biola has done a lot with this, but they need to go to a virtual model, and they need to move their campuses.

If they want to have a physical campus, they need to move it to another place. So I think there'll be many opportunities there in the future, but I affirm your analysis of the situation. I don't see how in a state like California a decade from now, unless there's some major change, I don't see how a Christian university can exist as a formally approved, authorized entity.

I don't see how that's going to happen. Third, let's talk about money. As far as I'm concerned, good riddance, because many of these universities are taking money from the state, and this leads them to try to follow all of the things of the state. I don't care about accreditation.

I care about quality. Accreditation doesn't mean quality, but frequently a lot of these universities, because they're so concerned about being eligible for aid, financial aid, etc., they lose on a lot of these things. They sacrifice their principles in order to try to toe the line. Same thing with many church organizations, etc.

They're so worried about their tax-exempt status that they do everything they can to fit along with the state. Well, come on. Enough with the state. Start standing up. Dump your tax-exempt status. Stop all this nonsense, and actually start standing for what you believe, and stop bowing a knee to Caesar just so you can get Caesar's money.

You take Caesar's money, you're going to follow Caesar's rules. Just stop taking Caesar's money. Now, my understanding of the ESA and 529s is that it doesn't relate to accreditation. It does relate to eligibility for federal student aid programs. I don't know what the Title IX and Title IV stuff would be as far as if a school loses eligibility.

I don't know what would happen, but I don't – I'm not too worried about it. An unaccredited school, I think, could still be eligible for a federal student aid program. There are many of those that are available. If there are not – let's say we're 15 years from now.

If there are not, I think there will be plenty of schools that even though they move out of California or they move from another place, they'll still figure out a way to be qualified for those federal student aid programs so that the money can be used. So ideologically – that's why I went in the order of ideology and then moving on to – from ideology to kind of practicality.

It just seems like a foolish use of money for me to spend lots of money on a bad education. But the good schools will figure out a new plan and there will be options available. So I still don't think that the prioritization of a lot of these accounts is the right move.

But if you have extra money and you can use an account, I think there will be solutions available. In the long run, if there aren't, you take the money out, you pay the penalty, or you transfer it to another family member who can use it and you just pay cash out of pocket for it.

Is that helpful? That's helpful. Part of what I'm just trying to decide is do we do index funds and just pay long-term capital gains, 15%, and have the flexibility to do anything? Or is it worth the tax savings because we have a 16, 17-year time horizon now for our little kid?

So do we take the tax savings but have the limitations that come with that? So we're just trying to wrestle through that and that's helpful advice to think through another part of the political scenario on that. Calculate your tax bracket. As a young father, I am not going to allow my children's lives to be sacrificed on the altar of tax savings.

So I would rather have the money available for things earlier. I'd rather have them use it for educational opportunities that are not related to college, things that happen much earlier. This is my issue with Christian parents. So many Christian parents think, "Well, if I just send my kid to a Christian college, everything will be fine." No.

If you're waiting until a Christian college will do it, guarantee the child will leave because it's a rare young adult who can stand up to the withering fire of a well-informed... Anyway, I'm going too ideological here. But it's a rare young adult who can arrive at the campus of a college if they haven't already thought through the difficult issues, if they haven't already been prepared for them.

The Christian college doesn't save it. I went to a Christian college. I went to a Christian high school. I got plenty of classmates that have nothing to do with Christianity. And in fact, it did more harm than good because they despise so many things of Christianity. And so instead of dealing with things on the merits of the truth claims of Christianity, they're all angry at the hypocrites and the liars and the cheats and the abusers that were sheltered in the Christian community, and they want nothing to do with it.

So I think it's better to spend the money early. And then if you have extra money, I think it's fine to pay for college. But still, why spend $80,000 on a mediocre Christian education when you could spend $10,000 on a mediocre college education and free up $70,000 for a Christian college?

Or $70,000 for a business or down payment on a house, etc.? So much of this Christian education marketplace is so mediocre that there's no point in propping it up. It's better to let it die and blow away and actually do something that matters. You could tell I've thought a little bit about it.

So I wouldn't worry too much about the ESA thing. I personally would rather have access to the money, rather have it available for and not sunk into it. I don't think the ESA is a bad move, but I think the ESA is best funded with assets that may have major increases in value.

You have such a small amount of money that you can put into it. We're talking small dollars for most people. I wouldn't establish an ESA and fund it with normal, traditional investments. I would use an ESA for a speculative, high-opportunity investment myself. Good. I wish you all the best, Mark.

It's not easy, but I applaud you for taking the time to think it through. John, welcome to the show. How can I serve you today? Thanks, Joshua. I've really enjoyed your podcast. I've been listening for a while and appreciate you spreading the good word. I know you like talking about finance, but that's the question I have for you today.

The question I have today has to do with ownership of policies when it comes to life insurance policies. I've talked to a lot of different people, and I'm kind of confused as to should a spouse have co-ownership or cross-ownership of each other's policy. We've had a situation where we didn't do that, and it's created some problems in a divorce situation, as you can imagine, when that wasn't done properly, when the policy was written.

I'm wondering about your thoughts about that. This one is interesting because there are multiple dimensions to it, and I'll walk you through those dimensions. Before I do, John, is your question primarily just in terms of the theory of it, or do you have a specific application that you need help with?

I think it's more just the theory of it, because I do see pros and cons of doing it both ways. Even leading into, should spouses be listed as extra insureds or additional insureds on each other's policies, or is it really just better to set up policies for each person individually rather than getting any potential discount the insurance company might be offering to stay on the same policy, if you know what I mean?

Right, right. Okay, so let me walk through just a quick little bit of life insurance theory for listeners for whom this is a new area. In a life insurance policy, in an individual life insurance policy of really any kind, it could be term life insurance, it could be whole life insurance, it doesn't matter, there are a total of four parties that are involved in the policy.

And these four parties can all be the same person, or they can be four different entities or people. So the first party is the insured. This is the person on whose life the policy exists. This is called the insured. So this is the person when they die, that's what triggers the policy to go into force, that's the insured.

The second person is the owner. The owner is the person who has all the legal rights of the policy, rights to make changes to the policy, rights to change beneficiaries, change amounts, rights to cancel the policy if it has cash value to take cash value out of the policy, etc.

That's the owner of the policy who has those rights. The third party involved is the payer. Usually the payer would be the owner, but it doesn't necessarily have to be, but the payer is simply who is the person or entity that's responsible for paying the premiums. That's the least important for this conversation.

And the number four is the beneficiary. The beneficiary is the person who receives the money at the death of the insured. Now, this can be all for the same people. I can buy a life insurance policy on my life, so I'm the owner and the insured. I can pay the premiums, I'm the payer, and I can establish myself, which of course would be my estate, as the beneficiary of the policy.

I could also buy a policy on my life. I can own it because I bought it, I'm the insured. I can pay the premiums, and then I can establish my wife as the beneficiary of the policy. If I'm going to buy a policy on somebody else's life, I need to have, at the time of the policy's inception, I need to have what's called insurable interest, which means I need to have a connection with somebody either by marriage or by family relationship or by a financial relationship.

So I can't just go and, you know, John's calling in from California, I can't just buy a policy on John's life and say, "I think John's going to die soon, I'll buy a life insurance policy on his life." I have to have, when I buy a policy, I have to have an insurable interest.

Husbands and wives are always assumed to have an insurable interest in each other's lives. So I can buy a policy on my wife's life, I can own the policy, I can pay the premiums, and I could be the beneficiary of that policy. I could also buy a policy on my children's life.

With approval, I may be able to buy a policy on a sibling's life or on a father's life, a parent's life. And then if I have a business relationship with somebody, let's say I'm partners in a business, I could be able to buy a policy on a business partner's life.

But I have to demonstrate that I would suffer loss, financial loss, if they died. At the time of policy inception, of course, the insured has to give assent and give permission for me to buy a policy on them. I can't just buy a policy on someone without them knowing about it legally and also practically.

They're going to have to do a medical exam, so they're going to know about it. So the question among husbands and wives comes down to, to keep it simple, who should own the policy on whose life? And here there are legal implications, there are tax implications, and there are practical implications.

The practical implications, in my experience, are probably some of the biggest things that happen. Most people want to just have a policy on their life, and they want to be able to sign the paperwork for the policies on their life. And so when I was in, when I sold life insurance, most people would just choose to buy a policy on their life and make their spouse the beneficiary, because it was simple, it was easy.

You could sign your own papers. Sometimes, if I always met with one spouse or the other, that person would be the owner of all the policies. So as an example, I own the policies on our children's lives, between my wife and me, and I do that simply for practical considerations, so that if there are changes that need to be made to the paperwork, I can sign the papers, and we don't have to get me and my wife together in front of the agent to sign the paperwork together, which can be difficult with family situations, just in terms of who's going to take care of the children, when you want to make a simple change on a policy.

In a healthy relationship, that can work fine for each person to own their own policy. The question comes into play, what happens if there's a divorce, and that's probably the biggest thing, because it puts, especially if there's a non-income earning spouse, usually a wife, it puts her in a vulnerable place, if she only owns a policy on her life and doesn't own a policy on her husband's life.

So if you put a husband and wife, and let's say the husband is an income earning spouse, and the wife is a non-income earning spouse, it's a vulnerable position for the wife, and if the husband divorces her, she can, under the terms of that divorce, request that a life insurance policy be taken out, that she can own a policy on his life.

But if she already owns a policy on his life, then that is an easier situation, that is a better situation, because he can't cancel it. As long as she keeps that policy in force, she's protected. And this is especially valuable if in a divorce proceeding she's subject to alimony, or she's receiving alimony or child support payments.

If the husband dies, those payments might not be made, and that could put her into a financially vulnerable position. And so it's really better, practically, for her protection, for her to own the policy on his life, and then if he's going to own a policy on her life, he can own a policy on her life.

So that's probably the best way to do it in terms of protection. Not everybody loves that way, and practically, in just terms of the practical situation, it often doesn't work out that way. And most people, my experience, many people who are buying insurance policies just don't understand the difference between ownership and insurance, and they want to have the policy on their life, they want to have control.

But it doesn't protect the vulnerable spouse as well if they don't own the policy on their spouse's life. Now, finally, we come into the tax considerations. In the tax considerations, in a life insurance contract, there is never an income tax due on the proceeds, on the death benefit of a life insurance contract.

Life insurance death benefits are always received income tax-free. However, the value of a life insurance policy is included in the taxable estate of the owner of a policy. What that means is if I own a $1 million policy on my life and then I die, my wife will receive the $1 million, if she's the beneficiary, my wife will receive the $1 million income tax-free.

However, the $1 million death benefit is included in my gross estate for the calculation of estate tax purposes. This is not particularly relevant in today's world, where we have very high, relatively high, historically high, estate tax exemption amounts in excess of $5 million per person. But this was very relevant as little as a decade ago, where the estate tax exemption amount was down, if memory is, it was under a million bucks.

I think it was like $750,000 at one point, 10 to 15 years ago. So what that meant is if I owned a $1 million policy on my life, even if I had no other assets, I would automatically be triggering an estate tax payment due to the federal government and possibly also to my state government.

So that was a real problem. And at that time, that was when life insurance trusts were basically a standard recommendation for almost any normal-sized or reasonable-sized, large-sized life insurance policy. That's a little easier today, but it does still come into play, because we have to be very careful with the ownership arrangements and fit those in with the tax arrangements.

And for the listeners of this show, who tend to be pretty affluent, it is important that you recognize this. If you have an estate of, say, $3 million, or you anticipate having an estate of $3 million, which is not hard to anticipate, if you have a few hundred thousand dollars over the course of a normal lifetime of accumulation, you're going to accumulate multiple millions of dollars.

And you also have a few million dollars of life insurance. Even if it's term life insurance, the death benefit value of that policy is included in your estate, in your gross estate, at the time of death. And so you have to look at the tax situation and figure out what is the tax situation of each of the interested parties in a spouse.

And sometimes that doesn't matter. Sometimes it does. Sometimes you need to put the policy into a trust. Sometimes it's fine to be owned independently. But those are the various considerations, and you have to think all of them through when you're actually putting a policy in place. So, in short, the easiest way is usually for each person to own a policy on their own life.

And that's what many people do. It's just easy. They like the idea of being able to own a policy on their own life. The better way is usually to have them own a policy on their spouse's life. Because that way, if they divorce, they're still covered. And the owner, they can still maintain that ownership interest in the policy, and they don't have to fight that out in divorce court.

So that is a better way. But you also need to take the totality of the circumstances into consideration. How did I do, John? Did that help? Outstanding. I mean, that really simplified things, I think, for me and a lot of people, as that question does come up. I'm hoping maybe in a future show or when you have time, you can also address the part of the life insurance industry that has to do with actually qualifying for policies and the things that can come up that can keep you from getting insured or having your policy rated or made more expensive based on your health.

I think that's something that really needs to be addressed out there. Lots of questions for me, and I'm sure a lot of your listeners, when they apply for this low rate and find out it comes back three, four, ten times more expensive than they're being shown on TV and radio ads.

Yeah. Well, let me just talk to it just for a moment because it is helpful. The rates that you're shown on a radio ad or a TV ad are legitimate rates. That company or whatever company is advertising and they're saying, "Hey, you could buy a million dollars of insurance for $40 a month," that's a legitimate rate.

There are a few considerations that come in. The first is what type of policy is being discussed. Usually, of course, it's going to be a term life insurance policy, which is fine because most people should always start with term life insurance. You always solve death benefit needs first with term life insurance because it's the cheapest way to cover death benefit, and that's the primary function of life insurance.

It's usually good to have a term life insurance policy. The second thing you have to look out for is what is the amount of time, what is the term. The shorter the term policy, the lower the rates. Sometimes the rates will be a 10-year term policy. Now, is a 10-year term policy a bad thing?

No, it's a great thing. I would guess that 75% of US American citizens are underinsured with regard to life insurance. For most people, if they would just go and get a 10-year level term life insurance policy of a million bucks, it would be wonderful. It would really help, and that would make many tragic circumstances a little bit less tragic and a little bit easier for the surviving family members.

I love to see people doing that. However, it does come down, number three, to ratings. What are the ratings? This varies among companies. Usually, how ratings work is they have some-- There's what's called a standard rating. Standard ratings are generally not advertised, but they're called standard ratings. Now, above standard ratings are various names for different companies.

Sometimes it's preferred. Sometimes it's super preferred. Sometimes premier. But usually, there are two or three slots above a standard rating that have for the very best health conditions. Then below a standard rating, there are various medical ratings. Usually, these are referred to as table, table one, table two, table three, et cetera, and depending on the company, how low they go.

So the question comes down for each company, what percentage of applicants are approved at that highest rating? Each company has different characteristics by which they judge the health of a person. One company may look at somebody who has slightly high cholesterol, and that automatically bumps them from the super preferred down to the preferred.

Another company may use what's referred to as a point system where, yes, you have a high cholesterol, and that's a minus one point, but you also have a great family history. Your parents died at old ages, so that's a plus two point, and so we'll go ahead and keep you in the preferred or the super preferred rating.

Some companies would have, say, 15% of their applicants be approved for super preferred ratings. Some companies would have 40% of their applicants -- maybe that's a little high -- 30% of their applicants approved at a super preferred rating. Then you get down to the integration of tobacco and other lifestyle avocations, the race cars, de-scuba dive, et cetera, that come into play.

The best thing to do, in my opinion, is recognize that the low rate, the teaser rate that you're being advertised is indeed a legitimate rate, but it may not be a legitimate rate for you. Let the fact that it's low and cheap remind you that for most people, term life insurance is super, super cheap, so there's no reason not to have it, and there's no reason not to have a lot of it.

But as you are putting that together and as you're getting your life insurance portfolio put together, recognize that you'll need to shop that. So apply with a company, but usually work with a broker. If you get rated by one company, apply with other companies. Usually you can use the same medical exam.

You don't have to do the medical exam again, so you can do that, which is nice for most people. And you can apply with other companies without sending in, without coming in with more money, with more money out of pocket. So the way that I did it when I was licensed to sell insurance is I would always take an application with the primary company that I thought had the best rate.

But then if that company didn't come back with the best rate, then I would shop the file. You can get disclosure paperwork that allows you as the customer to authorize this. I would shop the file to multiple companies. And so you go ahead and get quotes from anywhere from a half a dozen to a couple dozen companies.

And they will review the file without a formal application. So once you have the medical results, once you have the tests of your blood tests and your physician results, your insurance agent will take that paperwork, that medical paperwork, and can send it to the underwriters of multiple companies with an authorization form for you disclosing the information.

And then multiple companies will come back and say, "Based upon what you shared with us, here is the number. Here is the rating that we will give to you." And then with that information, you can use that information and actually put together actual numbers that tell you what you need to know to get actual rates.

Because once you know -- if I had a client, let's say they were rated as a standard with company A that we applied with and I got them back and company B said preferred, company C said table one, company D said standard. Now that we know that health classification, we can go back to their rate books and we can run the rates and analyze the actual rates.

And remember this, a life insurance agent, it's their job to figure out a life insurance program that solves your needs and has a budget that reflects on what you can afford. So if you can't afford because you were rated, you can't afford a big, fancy, long-term 30-year term policy or some fancy universal blah, blah, blah because you can't afford it, at least you're better off going ahead and buying a shorter term policy.

Maybe a 10-year term or maybe an annual renewable term or something that solves your insurance need or cuts the amount of insurance down to a premium you can afford. So if you can afford $50 a month but you were rated and a million dollars came back at $130 a month, well, cut the amount of insurance down to $500,000 so you can afford it.

And that will be a lot better for your family if you die than if you don't have any insurance at all. So that's your agent's job. And there are -- I love online shopping. Online shopping is great. But in an online agent, an online life insurance agent is fine.

But a good life insurance agent doesn't cost any more. But this is what they're supposed to do. Life insurance agents earn great commissions for their work. The average commission rate for a life insurance agent will be anywhere from 50 or 60% of the first year's premium to 100 to 110% of the first year's premium.

So if your annual premium is a couple thousand bucks, that's going to be $1,000 of revenue for a life insurance agent. I'll do several hours of work for $1,000 of revenue. Now, it doesn't actually work out in terms of $1,000 of revenue for a couple of hours because an agent has to go through 10 prospective customers to come out with a handful on the other side.

So there's a lot more work involved for all the people who don't wind up buying. But if you are a good customer and you know what you want and you're willing to do it, just go to a life insurance agent in your area, work with a local agent, and have them do their work for you and have them shop.

Don't ever settle with just one quote. If you get raided, remember, when you first make the application for your insurance contract, submit a premium and a check. Sorry, same thing. Submit a check and make the application. That puts the insurance in force on a conditional basis and that buys you several weeks for you to shop for a better deal.

And usually the agent can sit on the file for a couple of days in their office while you're waiting on responses back from other companies before they either have to deliver the policy and you have to reject it or accept it. But go ahead, make the application with the company that you think is the best deal.

Find the coverage by sending in the first month's premium. If you don't accept the policy, it's all refunded to you. And then shop heavily because with different conditions, there will be different companies that will help you get what you need. That's it for today's Q&A show. I love doing these shows.

I would really love to talk to you next week. So please come on by at radicalpersonalfinance.com/patron. Sign up to become a patron of the show. And next week, call in and ask me your question. Radicalpersonalfinance.com/patron so that next week you can be on our Friday Q&A. Have a great weekend, everybody.

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