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That's FijiAirways.com. From here to happy. Flying direct with Fiji Airways. Today on Radical Personal Finance is Friday and like any good Friday, that means Q&A. Welcome to Radical Personal Finance, a 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. I am your host and this is Friday, which means a live call-in show. I take a combination of calls. Sometimes I take written questions. I'm hoping we have some time today to get some written questions and these calls are open to patrons of the show, people who support the show on Patreon.

Never know what they are. It's kind of like live radio, but here we go. If you would like to gain access to one of these shows, sign up to support the show on Patreon. Go to Patreon.com/RadicalPersonalFinance. Patreon.com/RadicalPersonalFinance. I do that just in order to help meter out the call volume a little bit.

Every now and then you never know. If you sign up and follow me in some of the other fun places, if you're on the email list, then that's a good thing to do. Then sometimes every now and then I'll send out an email and say, "Hey, I'm doing a live Q&A." If you're in the Facebook group, then sometimes I pop an announcement in there, "I'm doing a live Q&A." If you're following me in some of those formats, follow me on Twitter @JoshuaSheets or on Facebook in the Radical Personal Finance Facebook group or on the page.

I'll often post announcements there. Again, email list, et cetera. Those are a few different ways for you to get involved. Sometimes I will do a Q&A for people who are following me there. But each and every Friday, the most reliable way to get on a Q&A show is to join on Patreon.

Go to Patreon.com/RadicalPersonalFinance and sign up there. If you'd like to get on the email list, the best way to do that at the moment is to go to RadicalBooklist.com. If you go to RadicalBooklist.com, I will send you my recommended reading list for financial freedom, 12 books. I've had some great feedback just from that list alone.

Several listeners have written to me and said that some of my book recommendations there have, and this is not hyperbole, have changed their life, have helped them in some really meaningful ways. That's another thing you can do. I encourage you to go to RadicalBooklist.com. Sign up there for the book reading list.

You'll get a series of emails with explanations on each of the books that I recommend that you read. It's just a start to start you on your financial freedom education. But there are 12 books on that list. If you begin with those 12 books, I can promise you that your 2020 will be starting off on a very different foot.

12 books there, one book a month, that was a really good habit for you to set. I believe that all 12 of those books will serve you well. I've thought carefully about the order that I even present them to you. I begin with books that most people wouldn't recommend on a personal finance reading list, but that you will really want as you think about your 2020 goals and even consider this next decade.

Now let's go to the phone to begin with Anne in Maryland. Anne, welcome to the Q&A show. How can I serve you today? Anne Reitman Hi, Joshua. Thank you for taking my call. First of all, I want to say that I really love the lyrics of the song for this conference call.

I really want to dial again. J.P. Boyd Yes, and just because the audience doesn't get a chance to hear that, only you heard it. When people call in, there's a funny song when you're waiting on hold for me to show up and start the conference call for the live Q&A.

And so it is very funny. But I'll tell you what, if you want to do that, go to patreon.com/radicalpersonalfinance, sign up and join me on the next call, and then you can hear the lyrics that Anne is alluding to. Anne Reitman Yeah, yeah. I love listening to it. That's why I call so frequently.

So my question is, I would like for you to help me think about liability insurance. It's one of the topics that is very difficult for me to decide on. And I can give you a little bit of information that may be pertinent, and then feel free to ask any other questions that you think are important.

So I have one member LLC, and this is my primary source of income for myself. It's not the only source of income for my household, but that's what I have. And obviously, many people I know, they have liability insurance, and all sorts of insurances. I listened to some of your podcasts about insurances, about asset protection planning, and so on and so forth.

And I can't decide what do I need or should consider, and what do I really not need at all. So let's begin here. Tell me just a little bit about your business. You don't have to give specifics unless you want free advertising, but what kind of work are you doing, and what is the liability that you're exposed to?

Right. So my business is a service business. It's essentially a consulting. In that particular sense, I do not provide consulting that is associated with liability. For example, I do not recommend insurances, or I do not do any regulatory work that has to do with a proper documentation. None of that.

It's more of a, if you were to think about, let's say, market research, that's probably the closest to what I do in terms of liability. So in other people who are in your line of work, do they regularly purchase liability insurance? Are there policies available that are tailored to your marketplace?

That's a good question, because I spoke with several consultants who have been in this business for some time, and what they have is only an umbrella policy for themselves, and they do not have any other specialized insurance. Okay. Do you have a physical business location where your clients come and meet with you, or where members of the public come in to that physical business location?

No. Do you have any physical employees that are actual employees working on premises, or do you just hire some contract work here and there? Only contract work. So the short answer is, I think then, with what you're describing, I would not really pursue liability insurance unless there's something that's specifically marketed to your occupation, and you say, "Wow, this is a perfect fit for me," and I'll explain how I get there.

We begin with a disclaimer. I have never worked as a liability insurance agent. I have spoken to some, but I have never worked in that, and probably if I worked in that business, I would probably be more scared than I am. So you're just getting kind of a knowledgeable layman's perspective on this, rather than a liability insurance agent's perspective.

And I would encourage you, this would be a good conversation to speak with a liability insurance agent over. And that, for anybody, that would really be your first call. Insurance agents are generally, in my experience, very willing to speak to people, and they're the ones who really understand their marketplace.

But now here is my understanding, which will hopefully give you a little bit of insight as you make a couple of calls locally. Let's begin with a philosophy of insurance. Insurance is a wonderful tool for managing risk, but it's not necessarily the perfect tool for managing all risks. Way back in the archives of Radical Personal Finance, just a moment, I'm going to find the show number.

All right, there it is. So back in episode 91 of Radical Personal Finance, Radical Personal Finance episode 91, first published on October 29, 2014, the show is titled, "Do I Need Insurance? A Mental Model to Analyze Methods of Dealing with Risk." In that show, I talked about a model, a framework that you can apply to assessing whether you need insurance to manage a risk.

We talked about the different ways to look at it. There are some methods of risk management. There are some risks that we face that are, if we build a quadrant, we can build a four-part quadrant. On one axis, we'll talk about is the frequency of risk low or is the frequency of risk high?

And then we can build on the other quadrant of our XY graph. We can discuss whether or not the impact of the risk is low or the impact of the risk is high. And then for each quadrant, we will develop an appropriate strategy for how to manage that risk.

And I talk through in that show, I talk about risk avoidance, loss prevention, loss reduction and non-insurance transfers. We talk about how you should handle each of those types of risks. So I'm not going to repeat that show. It's an entire show and I can go back and listen to episode 91 and it'll give you that framework, that mental model that you can use to handle risks.

So when you begin with that, you recognize that insurance is a really good tool for handling some things. And what insurance works really well at is controlling for the risks that are very infrequent but yet have a very high potential damage. And then we look and say, okay, what are the risks that we're worried about?

Well, some of the obvious risks are the things we insure against all the time. So that's why I ask you about, do you have business premises? If you, for example, if you have a storefront that's open to the public and somebody comes in and they slip and fall on a slippery floor because water was left there, well, that can be a risk that you have liability in.

It's a very low, like the low frequency risk, but it's something where if somebody sues you successfully for massive injuries that they've suffered as a result of your negligence and having a slippery floor, that could be a very big financial cost to you. So what can you do? Well, you of course put in place proper structures to make sure that you don't leave a slippery floor.

You wipe up spills, you make sure that there's proper rugs and such at the entrance. Then of course you manage your legal liability. That's one of the reasons that people put out signs. So people put out signs to say slippery floor. That does two things. Number one is it warns someone that the floor may be slippery, which hopefully will help someone to be more careful and avoid the slip and fall, but then it also helps to mitigate the legal risk that it shows that the shop owner is not being negligent, that they're indicating that there could be a hazard here.

How all that works out in court, I don't know. That's not my area of expertise. But something like that is properly insured for. And so you would absolutely, if you opened a storefront to the public, you would absolutely maintain an insurance policy that would have provisions for the liability that exposes you to.

Now in your case, you've done something a little simpler, just simply not have a storefront. So you don't need insurance for that if you don't have a storefront. Similar things would involve dealing with employees. If you have employees, you now are exposed to certain legal risks as a business owner.

Could be the same exact type of things. What happens if your employee slips and falls while they're at work? Well that's where you have liability insurance and that's where you have things like workers compensation plans. What about if your employee alleges that they've been harassed or sexually harassed in the workplace that exposes you to liability?

And so the simplest way to avoid that is to not have employees, which is a model that I like. If you can do everything with contractors, it dramatically limits your liability, makes for a very flexible business. It's a little bit easier, but not all businesses can be built with contractors.

Or you need to insure for those risks. So when you have employees, you put all those proper insurance programs in place to protect you from the liabilities that those employees expose you to. And so in your situation, you've minimized your liability exposure. So then we go down to specific areas of liability.

When I was a licensed financial advisor back in the day, we always carried errors and omissions insurance because the specific professional liability that I was exposed to was if I give a recommendation and I make an error or I omit some material fact and my client suffers a financial loss, then because due to that risk, I need to be protected from that.

And so you buy an errors and omissions insurance policy. And that's standard practice for accountants, for professionals giving professional advice in that context. Other kinds of risk that's insured. In the financial business, there's insurance for broker-dealers where people who are defrauded by the broker-dealer, they have access to the SIPC insurance program to protect people from fraud by broker-dealers or by insurance agents, depending on which insurance, which part of the financial business they're involved in.

Now if you're primarily involved as a consultant giving advice that is a little bit more general, you don't quite have that same risk because you're probably not exposed to that same legal liability. The legal liability for a financial advisor is pretty substantial because you're giving advice on potentially large amounts of money and your clients could suffer significant amounts of loss.

Now it's not that your advice is not unimportant or that somehow they couldn't suffer loss, but I think your liability is much more limited. And it's especially just simply limited based upon some of the legal doctrines involved in that space. Did you do the best that you can? Did you give advice that you thought was right and did the client get what they expected?

I can't on the spot go through all of those, the legal standards that would be used, but I'm not so worried about it with a model that like you're describing. I don't think you have such a significant risk. So the way that I would look at it is I would say first, what are my risks?

And in your situation, you probably don't have many significant risks. And it'd be good of course to speak to an advisor, speak to an attorney and just see if there's any risks that I'm not aware of, but you probably don't have any real significant cases that somebody could make due to liability risk.

Your most likely risks would be things like perhaps breach of contract or fraud, things like that. So if you avoid making fraudulent representations to somebody, if you avoid breaching contracts then you do your best job, you've really minimized most of those risks. I don't think that there is a significant risk that would need to be protected against for a business like you're describing.

And then you get to, well, what other tools are available other than insurance? If insurance is available, you should consider it. But the fact that you didn't come with a specific insurance policy tells me that probably no one's marketing to your industry and I don't even know if it's even available.

So then you get to, well, how can I protect myself and my personal assets? And the simplest solution there is not an insurance policy, it's to use the business structure. Now in this case, the only thing that is concerning, modestly concerning, is the fact that you're involved in a single member LLC, is that right?

Yes. Okay. So a single member LLC does protect you, legally speaking, from some of the risks. And so the idea is if you're operating under a business infrastructure, you're operating a business through a limited liability company, that company has to stand good for any claims against that company. So if you're operating in your capacity as an employee or manager of that limited liability company, and the company does something that's wrong, and somebody sues the company, and they sue the company for $200,000, and they win the lawsuit, then the company assets have to stand good for that particular lawsuit.

And in theory, if the limited liability company operates as it should, in theory, then it should protect your personal affairs and your personal assets from the operations of the company. And as long as you don't have personal liability in your conduct in some way, then that should protect some of your other assets.

Now here's where it gets tricky. That's very easy to teach when we're talking about the value of a limited liability company. But my understanding is that basically, if somebody's going to sue your company, they're all automatically going to name you as an individual as a defendant in the lawsuit as well.

They're going to sue both you and your company. And so most of the way that I would manage risk if I were in a situation like you is to make sure that you're very careful about maintaining a clear wall of separation between the business of the company and you as an individual.

And this is where a lot of people really do break down, especially with a small, closely held company where you're the only person operating in that company. It can be a real danger here for you to be too closely associated with that company. So here are a couple of practical best practices that I think you want to make sure of.

First, anytime you're doing business, it's very important that you always are very clear that this is the LLC itself that is contracting with somebody for the work. You never sign contracts yourself. You always make sure that the LLC and you are a representative of the LLC, that that's who is actually signing the contract.

You make sure that all of your paperwork clearly indicates that they're doing business with a limited liability company and that your name is just simply here and there as a representative of that company, but that everything is with the company. Your website is with the company. All your documents are with the company.

The business card is with the company. I think that it's important to do things like make sure that you have separate email accounts. So you would never send, you don't interact with clients as an individual. You interact with clients underneath your company email account. I think that it's important to do things like have separate phone numbers, separate phone lines.

It's worth it, in my opinion, to carry two cell phones if you need to. One is the company cell phone, one is your cell phone. Don't mix those things because if you're careful about following those simple rules, the money goes into the business account. The business account pays you as the member of the LLC a salary or an income, but everything is carefully, nothing is commingled.

Then you do a good job of building that strong corporate wall and you dramatically minimize the risk that a judge would come along and would be willing to pierce the corporate veil and try to come after you personally. Now the reason I asked about the single member LLC, it's unclear to me.

I do know that when you get to the perspective of asset protection, a single member LLC is not as robust as a multi-member LLC. A single member LLC is the most, is the very best and simplest LLC that you can do from the sheer ease of operations. And so they're great to set up, they're fast to set up, they're easy.

The IRS completely disregards them, they're a totally disregarded entity. So that makes your tax and your business structure very, very simple. But they have a higher exposure of risk and a higher ability to be pierced by a judge than a multi-member LLC or some other form of corporation. So I think that if you were talking with an asset protection attorney and that attorney were giving you advice, what that attorney would like to see is that attorney would like to see some intermediary that is not a single member LLC between you and the company.

Is that worth it in your situation? I have no idea. But we're just kind of going through the theory. The theory is that if you're going to operate as a single member LLC, it might be smart to go ahead and have another entity own that single member LLC and make sure that there are multiple people involved in that other entity because that adds a greater structure to it.

And then the other thing that you have to look at is just simply looking at your personal assets. Are you vulnerable? Are your other assets vulnerable? You listened to my asset protection series. If your assets, let's say that you have a home and that home is in a, you live in a state where you've got significant homestead protection laws, your other assets are in qualified accounts that are protected either by federal law or perhaps IRAs and such that are protected by your state.

You don't have a lot of money exposed so that even if someone did sue you, you'd be very hard to collect on. I think that you make a judgment call and say, "I'm pretty good here." But if all of a sudden you have actually $10 million and that $10 million is sitting in a checking account, then now all of a sudden it becomes worth it to go ahead and add in another corporate layer with multiple members and we want to put a little bit more distance between us and this business that we're operating.

So my guess is, my hunch is you don't need liability insurance for the reasons stated. You're probably fine operating through the business entity, but be a good student and make sure number one, talk to a liability insurance agent. See if there even is an insurance policy that could protect you from any risks that you do have.

Be very, very careful about running your affairs cleanly. Most of the times when a corporate liability structure breaks down, I think most of the time, it's my understanding that most of the time that's due to carelessness by the business operator. So don't be careless. Make sure that your materials are clear.

Make sure your contracts are clear. Make sure it's very clear that you are not doing business as an individual, that rather you're doing business as a representative of this limited liability company. And then think about your personal risks. And if those things are simple and you're good with keeping your corporate formalities, etc., then I think you're probably safe enough.

And I wouldn't worry too much about it. Thank you. Yeah, it seems to me that I do follow all these rules that you recommended to look into. And do you think that... So sometimes I'm not sure whether something can be done even cleaner or maybe I forgot something. Maybe it's a conversation also with my accountant to see if they think that everything looks just like it should be or if I could make it better.

There's an endless... Yes, you should have those conversations. Here's the challenge. You've got to be practical about it. There is an endless amount of things that you could do to make it better. But every step to making it better adds cost and complexity and hassle. So it's a judgment call as to where is the right balance between this is good, this should work and this is smooth and simple and streamlined and this will work effectively.

There's no bright line between these. It's a judgment call. If I were involved in a very risky business, something that had significant amounts of liability and so let's talk about things that would increase. If I'm running a restaurant where now all of a sudden I have massive exposure to the public and I've got a lot of employees, your risks just go way up compared to what you're doing.

So if you're operating equipment, you're running a road construction equipment company with millions of dollars of heavy equipment that could crush somebody who runs into it on the side of the road or that some careless employee backs over somebody behind them. Those are things where the liability just goes up through the roof.

And so your whole profile changes and now everything becomes much, much more important. But from what I'm hearing from your situation, your situation is fairly simple. And so I think the natural limited liability of the limited liability company, that's the goal of an LLC, is probably sufficient. Now I would not keep tons of money in the company unless you need it.

You have to have enough money in the company to need it, but I wouldn't keep tons of assets there. I wouldn't co-mingle my activities in this business with my activities anywhere else. You want to make sure there's clear separation there. You want to make sure that you're just working in one line of business in this particular company.

But as long as you're doing those things, I think you're probably okay. But continually solicit professional advice on the subject. Okay, one last very small point. I actually thought that maybe keeping a sufficient amount of capital in the company is actually a good thing. But now you're saying maybe don't, I mean, again, we don't know what sufficient is or what's ton mean.

But I thought that if there isn't a significant amount of money in the company, then it kind of shows the capitalization of the company and also maybe satisfies the claims of whoever is going after the company. And I thought, okay, if it's very little, then they may not be satisfied and they would want to go after a person and try to find any way to pierce the corporate veil.

You are correct in that. One of the hallmarks, one of the things that judges will look at when deciding whether or not to respect the corporate structure or whether to pierce the corporate veil, one thing they will look at is, was the company sufficiently capitalized in an appropriate way for that company?

So when you capitalize a company, you need to make sure that you capitalize it to an appropriate level for that company. Now, operating a consultancy, that number is probably thousands of dollars, not hundreds of thousands of dollars. But on the other hand, if you are operating something that has a very large working budget, you need to capitalize that company to an appropriate level.

The key is, it just needs to be appropriate. And then as long as it's appropriate for your industry, for the company type, et cetera, then you're good. But that absolutely is one of the things that somebody will look at. You additionally then, of course, would want to keep an appropriate amount of working capital in the company.

If you're going to operate this clearly as a separate entity, this is not your money, this is the company's money. And just like you would always make sure that you have enough money in your checking account to do business, the company needs to have enough money in their checking account to do business.

But if with a consultancy, perhaps your business expenses are a few thousand dollars per month, then there's no need to have hundreds of thousands of dollars in a business checking account. Some thousands or perhaps $10,000 should be sufficient. What I would caution you about is exposing assets unnecessarily to liability.

So one of the principal ideas of asset protection planning is anywhere there is liability, we try to seek to constrain that liability to a structure that doesn't have a lot of assets. And anywhere there's a lot of assets, we try to make sure that that structure doesn't have a lot of exposure.

So the simplest example would be back to the heavy equipment example. If you're operating a business that has a lot of liability and you've got a million dollars of heavy equipment for a road construction company, well, that's a big asset. That's a lot of equipment right there. And you've got tremendous liability that is going to be created by the operation of that company.

You've got liability exposure for employees. You've got liability exposure to customers. You've got liability exposure for onlookers and bystanders, property damage, et cetera. And you've got a million dollars of equipment sitting here in this company. So the simple solution is somebody could sue the company and they could assess the million dollars of equipment as part of what they could collect on.

They may not be able to pierce all the way through to the owner's personal assets, but they could access this million dollars of equipment. And so my understanding, what an attorney would recommend in a situation like that is you would try to segment the liability to a structure with fewer assets and you would try to move the assets into a structure where there's not going to be liability created.

And so instead of the company that's doing the operating company owning all the equipment, you would have a holding company separately owned by a few different people. And hopefully some of those people are not involved in the business. So let's say my wife and I were running a road construction business.

I think we would set up a family holding company that owned equipment. And that's the family holding company that owns all the equipment for business. But then we would establish leasing contracts and that equipment would be leased to the operating company. So now that million dollars of assets are not necessarily exposed to the operating company itself.

Now, we would get good legal advice. My understanding, legal advisors would make recommendations such as having multiple unconnected people involved in the leasing company. That would be intelligent from a tax strategy as well. So my wife and I might be shareholders in that company. My children might also be shareholders in that company.

We would also possibly lease equipment to other companies so it wasn't just simply that this was our only customer. It's fine if it's our primary customer, but we don't want it to be our only customer. And in following those practices, we can now make a really good case that these assets should not be exposed to the liability that's being generated inside the operating company any more than the fact that in our operating company, we go to another big commercial leasing agency and we lease a Bobcat for the day.

Well, the company that's leasing us the Bobcat doesn't have any liability for what we do with the Bobcat. They're just simply leasing the Bobcat to us. So you look at liability and you see how do we constrain this liability inside of a company with fewer assets that are at risk and how do we make sure that in the companies that we hold assets in that we don't generate liability risks inside those companies.

One more example, you do the same thing with employees. One of the big risks is to have is employees. Employees can bring tremendous liability risks to a business operator. And so through a variety of mechanisms, you try to move that employee risk to a structure that doesn't have a lot of assets.

So you see this with employee leasing companies. You see this with using contractors for labor instead of employees. And then you keep the assets tucked aside where you're not going to generate liability inside of that company. So this all has to be done at appropriate scale, but those are the basic principles that are applied.

To your situation, all of this sounds unnecessary as long as you follow good corporate formalities, which by the way, one of the areas of weakness is because LLCs are so simple to create and because you don't have the same requirements of corporate record keeping, of annual meetings, all those things, people often are very lax with that and they basically run the LLC as an alter ego.

I think that creates danger. And I think that if somebody is prudent, you should run your LLC exactly like you run a corporation and keep the same structure, keep the same habits in place because that helps you in the worst case scenario if you're ever in front of a lawsuit.

That's my answer, Anne. Thank you. That's very good. Thank you so much. My pleasure. Anything else? Only if you have one. Go ahead. Go ahead. I've got two other callers on the line, but I've got time for one more. Go ahead. Okay. One more. This probably doesn't matter, but the fact that my LLC is taxed as S corporation, does it change anything in terms of what you said?

Or it doesn't really matter at all because it's only... No, that doesn't change anything. The tax corporation status is simply an arrangement with the IRS and that is independent of these principles, these legal principles that we're discussing. Right. That's what I thought. Well, thank you so much. My pleasure.

All right. We go on now to, it looks like James. James, welcome to the show. How can I serve you today? Hey, Joshua. Can you hear me? Sounds good. Go ahead. Excellent. All right. So this has to go back to a couple of weeks ago when you did the episode, the first episode on your podcast about your dealings with dieting and overweight, being overweight, like different periods throughout your life.

My question about that is, first off, the statement that I can relate in that I am overweight and have been different degrees of overweight throughout my life, but relatively healthy, no chronic health issues related to my weight. I have had trouble getting insurance. And I remember distinctly, I was driving when I was listening to your podcast, you said something along the lines of like, you've always had premium top of the line life insurance.

I might've said health insurance earlier, but I meant life insurance. And I wanted to just ask you to unpack that if you don't mind, because I have a family with a young child and I definitely want to make sure that I have coverage, whether it's through work or not.

And I just want to know maybe what my options were, given that I share some similar physical history as you. Yeah. So this is one of the areas where working with a good insurance agent should solve this problem. So I'm curious, when you have applied for insurance before, did you use an agent?

Did you use a website? What did you do previously? It was always through like, I got a new job, I'm signing up to get my benefits and I'll sign up for life insurance. And they'll say, you know, based off of the information you input about yourself, like we can give you up to a certain amount, like a low amount, like $200,000 or something like that.

Right. Right. And essentially, I kind of just felt like I was not going to get any more insurance from them. And I kind of just took it as like, okay, well, I'm overweight and that's the way things are. But obviously, I want to revisit that. Right. So my other caller dropped off.

So I'm going to give you a little bit of time and I'm going to give you a mini lesson on how you as a young father should go around getting insurance. And it'll be a refresher for others who need this as well. So let's begin with first, personal versus group insurance.

Many people buy life insurance and all of this is about life insurance. Every line of insurance is different. Dental insurance and health insurance and life insurance and disability insurance. These are all unique lines of insurance and there's different advice for each and every one of them. So we're exclusively here talking about life insurance.

When it comes to life insurance, many people buy their life insurance through their job, the way that you have done. First, that is not ideal. And the reason it's not ideal is for is reasons that it's not ideal is these. First, if you buy life insurance through your job, then if you leave your job, you lose your life insurance.

Some policies will have conversion privileges. Sometimes you can take it with you. For the most part though, you can't. Or at least you can't take it with you at a rate you can afford. So for example, some life insurance that's issued through a group contract will be issued as a term insurance policy.

But then when you leave, yeah, you can keep the policy, but you have to convert it to a permanent life insurance policy, a whole life policy. You probably can't afford that increase in premiums. So Joshua's first rule of life insurance, don't buy life insurance through your job. Always buy life insurance through a personal policy that is underwritten for you personally.

Unless you can't get life insurance or you can't get life insurance at a good rate personally, and then you go and look to see if you can get life insurance through your job. There are a few different ways that life insurance policies are underwritten. So you have policies that are fully underwritten.

So if you decide to go out and you contact an insurance agent, you say, "I want to own a million dollar life insurance policy," that insurance agent will underwrite the policy. Insurance agents are actually called field underwriters. It's not really used anymore. But the idea is that the first method of underwriting that the insurance company uses is the individual life insurance agent.

So the life insurance agent is keeping their eyes open when they're in your house for fraud. They're keeping their eyes open for are you telling the truth. And they have a legal duty to the company when they fill out an insurance application that the information on that application is truthful and that they don't have any additional knowledge about any reason why the applicant is reporting information that is not truthful.

But when the company does that, they fully underwrite the policy on a personal basis. And so what they do is they will send a nurse out. They'll do a medical exam. That medical exam will involve a full medical history questionnaire where you respond to all these detailed questions. They will solicit all of your doctor records from any doctor visits, usually in about the last five to 10 years.

But if it's significant, they can go back farther than that. And they'll collect all your medical records. And the underwriter in the home office of the insurance company will read all those medical records. All your medical information will go into a centralized depository of health information that the insurance companies access.

And then the individual nurse will take a current measurement. They'll put you on a scale, find out what your current weight is. They'll take your blood pressure. Depending on the amount of insurance, they will take a urine sample. They'll take a blood sample. If you're applying for several millions of dollars of insurance, there will be a heart EKG.

They'll do an EKG. They'll do a field EKG. When you're underwriting very large policies, they'll bring somebody in, put them on a treadmill, do some of the stress tests and very advanced tests, depending on the amount of insurance. Now, when you're dealing in the million, two million, three million dollar range of insurance, those things are fairly simple.

If you're buying small policies of a few hundred thousand dollars, often it's just a urine sample and a blood pressure. If you're buying very small policies, the insurance agent will do the whole thing themselves. So if I didn't sell much, because I could usually get somebody at least a half a million dollars of insurance, but you never know.

If you sell a hundred thousand dollar insurance policy, they would do a mouth swab. And the mouth swab has some information and I carried a kit in the back of my car, so if I needed to do it right there, I would do the medical history questionnaire and a mouth swab and that's good enough for a hundred thousand dollars of insurance.

But all of those policies are underwritten on an individual basis, where the company has the right to decline the coverage if they don't like it, or they have the right to rate the coverage, meaning they'll charge you whatever you want to be charged, whatever they decide they want to charge you.

And you'll know that eventually, before you accept the policy, you'll know exactly what the rate's going to be based upon the individual underwriting of the insurance company. Now there are other ways, however, of providing insurance. There is a standard of insurance called simplified issue. And what simplified issue means is the insurance company is going to offer insurance policies to a group of people, there usually needs to be an affiliation of some kind, so this is often people all working at a company or all part of a certain group of people, and you just simply have to answer some basic questions, maybe your height, your weight, a little bit of your family history, but they're not going to make you go through the full line of underwriting.

And that's simplified issue. In simplified issue, they still have the opportunity to charge you more, so if your weight is a little bit too high, they'll say, "We're going to increase your premiums because of that." Or if you have a bad family history, "We're going to change your premiums because of that." That's called simplified issue.

And then the third is what's called guaranteed issue, where the insurance company guarantees that we will issue a contract, a life insurance policy, on everybody who is within this affinity group, usually a company. And with guaranteed issue, they don't ask you any questions, they just simply say, "We'll give it to you." Now with guaranteed issue, you can recognize there's a tremendous liability exposure that the insurance company has.

Let's say that I've smoked eight packs of cigarettes a day, my father died of cancer at 42, my mom died of cancer at 43, I've had six heart attacks, and I have four stents, and all of a sudden I'm 41, and I decide that I want to go and get a life insurance policy.

Well, if I just go down to XYZ company, and I come into that XYZ company, and I say, "Hey, here I am. Now you've got to give me half a million dollars of life insurance company." That could destroy the integrity of the group of insureds that the insurance company has.

And so they want to guard against that. Well, the way to guard against that is usually by limiting those guaranteed issue contracts to relatively small face amounts of insurance, usually $50,000, maybe $200,000. It's got to be small. You generally don't get those with millions of dollars. Sometimes, depending on the affinity group, because of the basic characteristics of the group, an insurance company will be a little bit more liberal with the size of the contracts they'll issue.

So you'll see this with things like a bar association, or a CPA group, or something like that. Lawyers and accountants and lawyers, these are often relatively low-risk people, and they're at a fairly low risk of dying. People are usually intelligent. And so if somebody's going to be an attorney, there are lots of attorneys that smoke cigarettes.

But on a class basis, I would bet you five bucks that there are far fewer attorneys who smoke cigarettes every day than there are construction workers, than there are janitors, etc., because the kind of person that becomes an attorney has a different health profile than the kind of person who takes an entry-level job.

So the insurance company knows this, and so sometimes they'll offer higher simplified issue or higher guaranteed issue policy amounts to some of those very low-risk groups. And that's how it works. Now back to you as an individual versus a group. If you can get insurance yourself, you should always buy it yourself.

And the first reason that I already said was that you can take it with you when you leave your job and you can maintain your insurance coverage. The second reason why, or a second reason why, you should buy the policy individually is that you can often get better rates.

Because of the risk that the insurance company faces of the potential for what's called adverse selection, people who know they're sick and they're going to die coming to that company and intentionally getting it, that's called adverse selection. Because of the risk, I've been smoking too many cigarettes today, because of the risk that the company faces, the group policies are issued at higher rates to protect the company.

So sometimes you can save a lot of money as an individual by just simply having a policy that's underwritten for you as an individual versus through your group contract. I've seen that many times where if you're just buying a standard term insurance contract, you can save significant money by buying that policy yourself than through the group.

You don't really get much group benefit as far as, there's not a lot of benefit to the insurance company of taking on those group contracts. They like to have more insureds, they like to sell more business. So there is some ability, they don't have to pay as many agent commissions as they do in the individual side.

So there may be some cost savings, but the risk of adverse selection undoes a lot of those things. So it depends on the person, depends on the company, all of this is highly variable, but you can often save money as an individual as compared to a group. And then also, there's often very little incentive to buy group insurance.

The company that offers you benefits can give you a tax-free benefit of up to $50,000 of life insurance, term life insurance. And so many companies will automatically give $50,000 as a nice group benefit as a tax-free benefit. But anything more than that, you have to pay for. And if the company is paying for it, then that's a taxable benefit to you.

So that's not particularly favorable in many group benefit plans because of the tax structure. That changes when we move into executive benefit planning, where oftentimes a healthy life insurance executive benefit can be carved out. But just for most people who are involved in most aspects of the group benefits marketplace in the United States, life insurance, you're not going to get a lot of life insurance benefits at work.

So always buy it yourself as an individual. And you get the opportunity when you're buying it yourself as an individual to have full underwriting done that takes into account the totality of your circumstances. Now next part of Joshua's lecture on insurance, insurance agent versus website or something like that.

I see no benefit to ever buying from a website versus working with a local insurance agent. I'm not aware of any specific companies, although I have this nagging feeling in the back of my head that there are at least a couple of insurance companies that are now selling insurance policies without commissions, but it's not a meaningful part of the market insurance marketplace at all.

So insurance companies pay commissions to agents who sell their policies. And those insurance commission rates are basically the same no matter who sells the policy. I won't go into the exceptions. Basically it's good enough. So I can sell insurance in two ways. I can be an individual life insurance agent and I can say go ahead and come in and I'll work with you as an individual.

Or if I want to make a lot of money in the insurance business, I simply set up an insurance website. I get licensed agents who work in my insurance agency, but our method of marketing is through a website and through the phone. But you often don't get as experienced agents or as knowledgeable agents in that kind of marketplace as you do with an individual agent, life insurance agent, who's made their career out of life insurance.

When I was doing this business, I was a life insurance agent. I knew far more about life insurance than anybody who would ever be working a phone at a website. And I could bring that expertise to my clients. And so if I sold a policy, you could go to termlifeinsurance.com or whatever, that's just a generic name for whatever website is out there.

And that life insurance general agent would have established an agency, they established contracts with a half a dozen different companies. Might be Banner, might be Prudential, might be AXA, whatever the companies are of the day. And so they would sell those policies. But I had exactly those same companies that I was contracted with.

But the difference was you got the access to the knowledgeable agent versus the sometimes basic, all the telephone representatives, they're knowledgeable enough to pass an insurance exam. But that doesn't mean that they're deeply knowledgeable in the space. And I get paid the same commission as the owner of that agency gets paid.

So why wouldn't somebody want to come and work with me as a knowledgeable life insurance agent instead of working through the website? There's no cost savings that can be gotten by the customer. It's just simply a marketing operation for the company. I don't have any problem with that business model.

But as an individual, I can't make a clear recommendation that you should go and use a website as your primary source of searching for insurance. I don't see the benefit. You don't save any money and I don't think you're going to access as high of a caliber of insurance agent through that system.

The people that would be representatives at that kind of company, at a website-based company, are people who are intelligent enough to pass the life insurance exam. They got to be licensed agents. But they're probably not going to be committed necessarily to the life insurance business. They're not going to be as aggressive.

They're not going to have the incentives to become as knowledgeable as I think an individual agent could be. Now you measure that for yourself. That's my personal experience and I'm biased because of the path that I took. I'm sure there are excellent insurance agencies that are doing most of their business through call-in business, etc.

But with my experience, I don't see any reason to go that route. Which brings me now to the specific answer to your question. One of the things that's important when you're getting insurance is you want the ability to work with an insurance agent who has access to a broad number of companies and who has knowledge of those different companies underwriting standards.

There are different ways that insurance companies underwrite policies. For basic purposes, most insurance companies will have a tier of premiums that they charge based upon something like they have a standard rate, then they may have a preferred rate or a super preferred rate. So standard is here's what a standard person of standard health and standard family history and standard weight, blah, blah, blah, blah, blah, gets as standard.

But then preferred is if you're skinnier or you're healthier or your parents are older or super preferred, everything is in your favor. And then they have what are called their table ratings. It might be table one, table two, table three, all the way down to 10, 12, 15, whatever.

And so you say, "Well, I had a cancer diagnosis eight years ago, but since then everything is good." All right, we're going to give you table one. Your premiums are adjusted based upon where you come in at this level on these tables. Now different insurance companies though have different ways that they arrive at their rating based upon their inside actuaries experience.

And so speaking simply, they basically fall into two different categories. Some insurance companies models will kick you down to a lower rating if you fail one certain thing. So this sounds like what happens to you based upon the underwriting methodology that you went into. They said, "Hey, James has, his heart is great.

No history of heart disease. Mom and dad didn't have heart disease. Mom and dad are still alive and they're 99 years old. James doesn't smoke. That's great. James has great blood pressure. James is totally healthy. He's a little bit fat. BMI over this number. And because of that, because the BMI is over that, that automatically drops James from he's not super preferred that automatically puts him into standard rates.

But other companies use a pointing system, a point system where they'll say, "All right, everybody starts at standard and James's mom and dad are 99 years old and they're in perfect health. So plus 10 points, plus 10 points. James has perfect blood pressure, plus eight points. James has no family history of cancer, plus four points.

James runs. James doesn't drink alcohol, plus plus. But James's BMI is, he's a little bit fat. Okay, minus six points. Total it all up, we came up to 42 points. So that puts James right in our preferred category. 42, you know, 40 points and above is still preferred. And that gives a little bit of wiggle room.

Nobody except the companies and experienced people know each of the different companies structures. So what I prefer that you do is you contact a knowledgeable agent and then you, and you apply with that knowledgeable agent, you go through the underwriting process. And then if you get rated with one company, look to see if there's another company that is willing to make you an offer of a better quote.

And so that way you at least know if you're going to get rated, you know you got rated with 12 companies or 15 companies or whatever instead of just the one company that kicked you out. So back when I was an agent with a big mutual company, that was always what I would do is I would always start with the company, I was a Northwestern Mutual agent.

I would start with Northwestern Mutual and put people and do that and start with that. Unless then if somebody got rated with Northwestern Mutual, I'd take that policy and I would shop it to other companies and see what quotes we got back and then come back and see, well, what were the opportunities there?

And what I often found was a lot of variability in the offers that we would get. And so in one of the reasons is based upon this system of underwriting. So with my life insurance, Northwestern Mutual was one of those points-based companies where they would do it based upon a totality of points.

I had a stellar family history, I had stellar blood pressure, I had stellar, I don't know, cholesterol, all the rest of this stuff. I have no history of chronic disease whatsoever in my family, very high longevity. So even though my BMI was high, I always got preferred, whatever that came up, Premier, I guess it was Northwestern Mutual's name for it.

I always got the best rates because of that. And it was due to some of this inside insurance industry stuff that we're talking about here. So the end of the day, you got to find a company that's willing to make you an offer. But if you shop around, you can get good rates.

And just because you're a little bit fat doesn't mean that you can't get a better price. Now of course, stop being fat if you can, work hard on getting less fat and then go ahead and get it better. And that's also one of the important things that you should do.

So back when I did that business professionally and I would talk to people, you say, "Okay, well this company, you got a preferred rating here, but here's your target. The reason we got a preferred rating," we'd talk to the underwriter, the underwriter would say, "Here's why this person got a standard rating.

But if you can go from standard to preferred, it'll drop your premiums by $40. So Mr. Client, here is my challenge for you. Drop your body weight 40 pounds. And if you can drop 40 pounds, then we can apply for reconsideration in one year, two years or whatever." And that's the other thing is that whenever an underwriter rates a policy, they'll tell you whether there's reconsideration available or not.

And so sometimes with significant, somebody, you're getting a policy for somebody who's had a history of heart attacks or history of cancer, they'll say, "Rating is table one, no reconsideration available." But if somebody has a high BMI, they'll say, "Okay, it's going to be right now a standard rating for now, but reconsideration is available in one year or two years." And so then the person should get the policy because if you are getting rated by a life insurance company, that's a good clue that you need more life insurance because they really want to sell the policy.

And if they're going to charge you more, they're charging you more because the risk of your dying soon is a lot higher. So there's my sales pitch for how to sell rated policies if you're an insurance agent. If you get rated by an insurance company, the need for life insurance just went up.

And so that's why you should definitely buy it if you got rated. Doesn't always work, but it's true and so often people find that persuasive. But then the challenge is lose 40 pounds, keep it off and apply for reconsideration in a year. And when you do that, we can drop you up or bump you up to the next health classification.

Your premiums will drop by $500 a year and now that should give you some additional incentive to lose fat. So that's Joshua's mini lecture on life insurance, James. It's going to be a matter of finding a knowledgeable agent and finding somebody who is willing to put in that legwork for you.

And the same thing applies if somebody has risk factors. Same thing applies if you have a bad family history or bad cancer, etc. The key is to shop around. There are thousands, but realistically there are hundreds of life insurance companies and most life insurance agents that do it professionally are contracted and appointed with at least a couple dozen.

And so you want to work with somebody who's going to shop it around and get you the best deal. And a lot of times this is where competition really can play a role. That was extremely educating. Thank you. Good. I have one more clarifying question because I occasionally listen to Dave Ramsey and he talks about term versus whole and I will admit I don't really understand what I should be having given my situation.

So could you touch on that if you have a minute? Sure. So in general, the rule is very simple. You buy term life insurance for all insurance needs that are temporary. That's what term life insurance is for. And so for somebody in a family stage like yours, the vast majority or the entirety of your insurance need is temporary.

And so you should buy term life insurance. And you always solve as an insurance agent, you always solve for death benefit needs with term life insurance because that's the cheapest solution now. So let's say you go through an insurance analysis and you come out with that you have a need of $1.5 million of term life insurance.

Well, $1.5 million, how old are you James? 35. $1.5 million of term life insurance for a healthy 35-year-old non-tobacco male is probably in the range of $50 to $70 a month, something like that, $50 to $60 a month. So you can buy a million and a half dollars of insurance for $50 or $60 a month.

Not that big of a deal to sign up for, not going to break your budget, etc. You go around and you try to buy $1.5 million of whole life insurance, it's going to cost you 12 grand a year. You can't afford that. So you solve for your death benefit need for your family with term life insurance.

That's first and foremost. Now over time, your insurance need should decline because every year that goes on, you now have more money, you've saved more money and your obligations, your financial obligations ideally will go down. If you have one child and you don't have any more children, then you move to a situation where five years from now, there's five fewer years of living expenses that you need.

So you can drop your insurance at that point in time or as you save more money, if you needed $1.5 million of life insurance but your net worth increased by half a million dollars, then you're in a situation now where you can drop your insurance coverage from $1.5 million to $1 million.

And Dave Ramsey is a big proponent of the idea that you become self-insured. The way that you become self-insured is by having enough money that your family would be okay if you didn't need insurance. And there's nothing at all wrong with that. Can it be done? Absolutely. It can be done.

Now, if you have a need for life insurance that is permanent, that will last for your entire life, then you need permanent life insurance. You need life insurance that never goes away. And what are some needs that would last for your entire lifetime? One example would be something like, I want to make sure that there's money available to bury me.

And so if you know you'd like to have money to pay for a funeral or for burial expenses, then a permanent life insurance policy that will pay out if you die at 36 or die at 96 is nice to have. Now what Dave would say if he were on this conversation is Dave would say, "Funerals don't cost that much and it should be easy for you if you've got a million dollars in IRA when you die, it should be easy for your family to come up with $20,000 for your funeral expenses." He's not wrong.

I think that's true. But I've had some experience to show me that a lot of people don't necessarily always do that. One experience, another example of something that would be nice to have insurance no matter when you die. I had an experience with a client. It wasn't a client that I originally sold insurance policies to.

It was a client that I picked up as a client of the company and I worked with them. And the client's wife got sick and died. And one of the things that really that I noticed that was new for me because I used to preach by term and vest the difference, the very hardest moral quandary that I had when thinking about going into the life insurance industry was could I ever sell whole life insurance.

When I was thinking about joining Northwestern Mutual, I interviewed with a couple of different companies. But I interviewed in the same week with Primerica, which is the current name for the company started by A.L. Williams. A.L. Williams built his career on by term and vest the difference that someone should only buy term life insurance.

And Primerica as a company only sells term life insurance based upon that philosophy. A.L. Williams is like the ultimate expression of the by term and vest the difference. For him it was a moral crusade of watching people be sold far too much whole life insurance and then die without having enough insurance.

And I acknowledge that I think that's happened in many cases and it's a great stain on the life insurance business. But then I interviewed the same week with Northwestern Mutual, which was one of the biggest sellers of whole life insurance of any company out there. New York Life and Northwestern Mutual, Mass Mutual, Guardian, huge amounts of their business are made up in whole life insurance.

And I didn't know if I could ethically sell whole life insurance. So I had that idea. But these clients, I met with them fairly early in my career and it really, the details are fading a little bit at this point, but the clients were wealthy but they had spent a lot of money on his wife's health care and they had spent a lot of money on their retirement and they had assets but those assets were tied up.

And I think it was a rental property, they had spent down their IRAs and they just didn't have a lot of money. And so when the wife died, the life insurance payout, although it was only, I don't know, $150,000, $200,000, something like that, was such a blessing to the husband because he was totally cash poor.

He wasn't poor but he was cash poor. And he was able to use the money to have a big funeral for his wife, which was important to him, and then he was able to use the money to see him through the time for him to go ahead and liquidate the real estate, move out of the big family house and move into a smaller place that would be good for him for an ongoing, for the rest of time.

And seeing the massive blessing of those whole life insurance policies changed me and it made me realize that although I may have the best laid plans, that I'm going to have so much money and I'm always going to keep a liquid burial fund and make sure that I always have liquid assets because I'm going to be smarter than everyone else, I realized that it doesn't always work out like that.

So it would be another example of value of having a whole life insurance policy payout when you die as just simply liquidity. And I would want to make sure if I die and I'm 90 years old, my wife is 90 years old, I would want to make sure that she had plenty of liquidity, that she didn't have to worry about money in the short term.

And there's nothing better than a life insurance payout for that. What the life insurance company will often do, depends on every company, how they do death claims, but they'll send, if I died, they'd send my widow a checkbook. And the checkbook has an account associated with whatever the amount of insurance was.

I have millions of dollars life insurance. My wife immediately gets access to a checkbook with millions of dollars in it and she can just write checks. She can write a two and a half million dollar check to her personal checking account if she wants, boom, all the money's there.

Or she can just write little checks to other people. Now there are other interesting situations that you can get into. Things like creditor disputes. Let's say that somebody has money, but they're in the middle of a creditor dispute because Joshua did something stupid. He went, or he created a big business.

This was going to be his last hurrah. All of a sudden the business failed and now there's $15 million of claims outstanding. And yeah, Joshua saved a couple million bucks when he was old, but now all of a sudden his assets are tied up. Well, the life insurance policy can come in there.

Other scenarios when we get into more other areas of financial planning. Things like buy-sell arrangements where let's say that I own a business with a business partner and our business is worth $2 million. My share is a million dollars, but we want to make sure that if I die or my business partner dies, then we can buy each other out so that neither of us has to be in business with each other's widows.

And so we put in place a buy-sell arrangement and we can go ahead and fund that with a whole life insurance policy. And then the nice thing about a whole life insurance policy when funding a buy-sell arrangement in a business is that we have a guaranteed death benefit at death, but then we also have cash value that accumulates over time.

And that cash value is segregated from the business assets and that cash value is very stable. It grows slowly, but it grows guaranteed. And then that cash value can be available as an asset to pull the money out and buy the business if one of us wants to retire and buy each other out at retirement or due to some whatever our buy-sell arrangement says.

And so the actual scenarios go on and on and on. This is not the kind of financial planning that Dave frequently talks about. This is not the kind of financial planning that's kind of entry-level, you know, 101 planning. It's a little more complex, but those are some of the types of areas where whole life insurance really does shine.

So those would just be examples. Now, in your situation, probably none of that is necessary. Always start, figure out your insurance need. Begin before you ever buy life insurance, buy disability income insurance, far more important than life insurance. Then buy term life insurance. And if you have money left over, consider buying some small amount of whole life insurance if you want some.

Make sure that you're not funding your Roth IRA, not funding your 401(k) to buy whole life insurance. Buying some small amount of whole life insurance, I'm happy for young people to do it as long as they have income and they can sustain the policies. Now after those things are done, you got disability income insurance, you got lots of term life insurance, you're funding your qualified account.

If you still have money left over, now let's go to your investment plan. And then that's where you can start looking at a cash value policy and say, "Does this fit as a component of the investment plan?" The answer is always, "It depends." What else are you going to invest in?

What's the opportunity cost? Do you have things that are better, etc.? That's how I would approach your question. For a young father, you need lots of term life insurance, lots and lots of it. So just get that. But get it with a company that you wouldn't mind converting your term life insurance over to a whole life insurance policy at some point in time as well.

>>Sam: Thank you so much. I think I know where I'm going to seek out a local agent as well. I never did that. I just always assumed that they were more expensive. I've had biases against it. So I'm happy to hear your input. >>Dave: I will accept checks from all the life insurance agents who get business from me.

Go ahead and you can just send Joshua a contribution. But it is true. There's no difference in cost. There's not. And so on this one, for me, it's a big deal. I see no reason whatsoever to, in today's marketplace, 10 years from now, something may change. Because of the success of the no commission mutual fund industry, there have been companies that have been trying to sell no commission life insurance.

But in my current knowledge, if you find differently, email me and tell me that I'm wrong. I'm happy to know that. But in my current knowledge, none of those companies are really making a big difference. And the reason is because life insurance still seems to be something that has to be sold by an agent.

Whereas people want to buy mutual funds, they want to fund their IRAs, et cetera. And so the Vanguard revolution was more doable in the world of investments. But the Vanguard revolution has not happened in life insurance. Now if any listener can start the Vanguard revolution in life insurance and get people insurance at lower prices, great.

But it seems to be the case that most people need to be sold life insurance by somebody who's motivated to come out and sell it to them. And so in order to get people to sell their products, insurance companies pay commissions. And so the prices are the same, whether that commission is paid to an individual or paid to a guy running a website or advertising on TV, et cetera, or advertising on a radio show.

Zander Insurance I'm sure does a great job. But at the end of the day, you don't get any discount by calling Zander versus calling your local life insurance agent. Zander has to make up all of the costs of sponsoring Dave's program and sponsoring all of their advertising and all of their training, et cetera.

And so there's no savings to you. All you know when you go to Zander is you're going to get a term insurance policy. You're not going to get a whole life policy. And so in my opinion, that's very short-sighted. But for those who are deeply convicted of I'm only going to buy term and invest the difference, fine.

It'll work as well as anything else. James, I want to expand this. Thank you, Josh. Yeah, my pleasure. I'm going to give you one more lesson. I want to explain to you how insurance underwriting works so that you can understand your options, especially as you're trying to work through your ratings or potential ratings.

When you go to a life insurance agent and you're talking to a life insurance agent and you say, "All right, life insurance agent, I want to buy a life insurance policy." The life insurance agent can put the policy in force on what's called a conditional basis. And a life insurance contract, let's see if I can remember these fancy words, is a non-alleatory contract of adhesion.

I think I got that right of the technical words, which are meaningless to you. But what it means is that in order for a life insurance contract to be fully in force, both you as the insured and the insurance company have to come to an agreement that you're both willing to accept the contract.

And so the way that that happens though is unique, where the insurance company, the insurance agent can bind the contract if certain things happen. So you'll go to an insurance agent, the insurance agent will run quotes, they'll talk to you about different policy designs, things you can do, which by the way, James, go back in the shows.

I've done some shows on this, but you should buy, at your age, you should buy a type of insurance. You should not buy a level term insurance policy in your 30s. You should buy annual renewable term insurance, also called yearly renewable term insurance, because it's more flexible for the longterm and it's cheaper now.

When you get to your mid 40s and 50s, that's when you start buying level term insurance, but when you're younger than that, buy yearly renewable term insurance. So you go to the insurance company agent, the insurance agent goes over some different policy designs. You say, you go through some calculations to try to figure out how much insurance you want, how much you can afford, et cetera.

And you come to an agreement. You say, all right, insurance agent, I'd like to buy a million dollars of life insurance. If you'll do three things, you can put the contract into force right away. And those three things are a filled out, completed, signed application, an insurance application. The second thing is a payment for the first month's premium.

And then the third thing is a medical exam or whatever medical underwriting requirements are required by the company. Once those three things are done, where you've given payment for the contract, you've given a medical exam and you've filled out an application. Once those three things are done, the insurance contract goes in force on a conditional basis.

What it means is basically the insurance company stops the clock from the time that those three things are done and then they go into underwriting. So if you do those three things and then you die, you get in a car accident the next day and you die, unless your car accident was due to some fraud or something that you didn't disclose, it has to be materially connected to the cause of death, then the insurance company will still pay.

Now the underwriting process takes anywhere from a few days to a few weeks to months. I had some that were six months of underwriting because of, okay, they got to get this doctor record here and your records are all over the place and they need this one, et cetera.

If you have a very simple medical history, it's fast. If you have a complicated medical history, it takes a long time sometimes. And so the insurance company will finally say, "All right, we're willing to issue the policy and here's what it is and we'll issue it at this rate." And so let's say you apply it at standard rates, but they charge you table two.

They'll send out the policy with table two rates on it and the insurance agent will get it. Then the insurance agent has to come and deliver it to you. Now at the time of delivery, he'll go over any changed premium rates or any costs or anything associated with it.

And then he'll deliver the policy if you choose to accept it. If you accept it, you have in most states what's called a two week free look period. For any reason, two weeks after you accept the policy, then you can return it and you'll receive all your money back.

So it's basically a no risk application for you when you're going through this process. So get with an insurance agent and go through some options, whatever they think you do is the best. Then go ahead and apply and bind the coverage so at least you've got the coverage started on that date.

Then if something happens during underwriting and you find out it's going to be expensive, the insurance agent will start looking around and will try to get some quotes from other companies. And there are a couple methods the insurance agent will use. Sometimes they'll submit what's called an informal inquiry, which means the insurance agent will have you fill out a form that just simply authorizes the agent to release your medical information to a number of different companies.

They'll send it right to the underwriters, the underwriters will look at your medical information and say, "Alright, well we like this, here's what we think we can do, of course we won't give a solid answer until we get an application, but here's what we think we can do." And so they can collect quotes and do it that way.

Sometimes you'll go ahead and do multiple applications. And so the insurance agent might bring you two or three other applications and say, "Alright, we're going to apply to company A, they rated you, so we're going to apply to C, F, and G over here and see if we can get a better offer there." Because you don't have to accept all of them, you just want to see what's the best rating.

So when you work with an agent as well, it's better for you because you can get coverage, at least on a temporary basis, through that process while they're working their way through trying to figure out how to get their best rates. Are there bad life insurance agents out there?

Of course there are. Is there a seedy side to the industry? Of course there is. But I think that a lot of that stuff was really overplayed. And most life insurance, what I've just, all this long speech, this is life insurance agent 101. You work with a guy who's been in the business for two months, he knows all this stuff, and he'll work your way through.

So get your insurance and there's a little bit of knowledge to get you started. Thanks a ton, Joshua. Hope that cough feels better. Indeed. Thank you very much. All right. I've got two written in questions from patrons that I'm going to answer here and then we will be done for today.

Oleg writes in and says, "Joshua, I won't be able to join the live Q&A, but I do have a question if you have time to answer it on the show. What would you do with $300,000 in cash that you want preserved as a liquid asset for a possible future business opportunity, one month to three year horizon?

High yield savings, 2%. Vanguard prime money market, see the latter, 2 to 2.6%. It may be acceptable to lose up to 10% of the cash if there's a good possibility for a much better return." This answer is very simple. I'll make it fast. I'm not aware of anything that would be acceptable under those parameters of potentially losing 10% of the cash for a higher return.

Basically you need cash or a cash equivalent. And so high yield savings, fine. Vanguard prime money market, see the latter, fine. I would just consider buying just straight T-bills. $300,000, just go to straight, just buy straight T-bills. Do it at, sometimes you can do it if you have a brokerage account somewhere, ask them.

Especially now that many of the big companies have eliminated commissions, you can just simply fund a T-bill account and buy T-bills directly through your brokerage or go to Treasury Direct and set up an account there and just buy T-bills. T-bills are the gold standard. That's what I would do.

I wouldn't take any risk with it if there was a possible future business opportunity. I think it'd be silly to try to chase half a percent. I mean, what are we talking about? Let's do some math here. So $300,000, let's say we're chasing 50 basis points, half a percent, $1,500, a bunch of shenanigans going here, going there to try to get an extra $1,500 over a year.

When you're talking about a one month, a three year horizon on $300,000, if it's a three year horizon and we're trying to get an extra 50 basis points, we're talking an extra $4,500. If it's a three year horizon, maybe there's something better, but if it's truly one month of three years, I wouldn't take the risk of losing my business deal for that.

So I would put it straight into T-bills. Kevin asks, "Joshua, my question is in the realm of total returns versus dividends, but not on which one is best, etc. Another investing podcast interviews many folks from the world of high finance. It's abundantly clear these folks look down upon the plebes who like dividends.

One in particular was the founder of Morningstar who didn't use the words, although his tone was crystal clear. Is this dislike of dividends taught in advanced finance schools like the CFA or CFP? Am I missing something glaringly obvious? Any fool can know. The point is to understand." Albert Einstein quote.

"Please help me understand." I guess, so most of the time, I want to get this right, so let me be careful with my words. Many people who are basic, simple people do see dividends as different than total return. And for anybody who's unfamiliar with these words, basically the idea is companies are supposed to make profits and then the idea is they pay those profits out to their shareholders as a dividend.

So you can look at the dividend rate of a stock or you can build a stock portfolio, a dividend portfolio that you're going to live on the dividends, which means you never share, you never sell any of your shares. You just simply spend the dividends that are sent to you in the form of a quarterly check.

Total return means, well, if you want $1,000, you can get $1,000 based upon $1,000 of dividends, but you can also get $1,000 simply based upon the stock price going up and then you sell a share or a few shares in order to take $1,000. That's the same $1,000 in your pocket, the same $1,000 in your pocket.

So when you look at total returns, usually it's a combination of those things. And it's interesting when you look at the companies that pay dividends versus the companies that pay total returns. And so I think most people who haven't thought it through, who haven't worked it through probably do tend to think that dividends are simpler because they like the idea of not selling their assets.

Now it's my opinion that actually planning a dividend only financial plan is a really powerful plan. It's a really powerful mental structuring of your affairs that you never want to spend principal. You only want to spend profits and that's really easy to do with dividends. It's one of the reasons why I like real estate so much.

If an investor buys some rental houses and you tell them you can live on your rents, but you can only live on the rents and you can't put mortgages on these properties, you have to have them paid off, you now have a built-in budget that somebody can follow and they can budget their affairs and you know they will never be broke because they only are living on income.

They'll never spend the capital, never spend the principal. I think that's really powerful. The problem comes into stocks because when you look at returns, some of your best performing companies often don't pay dividends. And I think there's a really good argument for that perspective. Why would I want a company to pay me a dividend right now if they can reinvest that money into growing their business?

I'm investing in the company because I want them to grow the business, so why should they send me shares of the profit when they can grow the business? I think that's a good argument. I think there's also a good counter-argument though that dividends represent actual profits. And there seem to be a lot of companies who are so good at chasing growing business that they never get around to making all that much money.

I worry about this with some of the companies that are very prominent in the US stock market right now. And I wonder, is this a scam? These companies that just seem to get bigger and bigger and don't actually make very much money, they're not proving that they're actually profitable and yet the share price keeps going up and people keep buying it?

That was something that was at the core of the dot-com bubble and the dot-com burst was simply that everybody said, "We're going to get huge selling pet food online and selling all this stuff," but the companies didn't make any profits. But the stock prices got pumped up, pumped up, pumped up, pumped up because there was demand for them.

And so it looked like everything was working but they weren't actually profitable. So there's a balance there that's correct. I'm not aware of anything being taught in CFA or CFP. There's nothing that's explicitly taught that would account for that. If your analysis is true, if you hear this nose turned up high-mindedness among high-finance professionals, if that's true, my reason as to why it's true is this.

The companies that pay dividends are boring. They're in boring businesses. They're old, they're developed, and they're boring. And the companies that generate profits via total return with increasing stock prices are exciting. They're new, they're growing like crazy, and they have tremendous opportunity in the future. Now, again, I'm not sure your assessment is true.

If it is true, though, that's why it is. It's a whole lot more fun to think about Tesla or Apple or Amazon, these companies of the future that are growing like crazy, have these huge increases, et cetera. This is exciting world of finance versus boring old utility company, boring old Coca-Cola, things like that.

So that same interest that people have, if there's one stock that probably more people have, it's some company like Apple. You feel like, "Hey, this is great. It's a great business." I was stunned to see somebody did a write-up on the Apple AirPod business. And I don't pay much attention to that world, but I was just stunned.

They were talking about how revolutionary a technology as simple as the Apple AirPod, the wireless earbuds that Apple came out with. And they said if that business alone, just the revenue from that business were its own standalone company, it would be the 19th largest company on the US stock market.

That's how revolutionary that is. And I've often been disdainful of Apple in the past, but man, my respect is increasing because what they seem to be really good at doing is taking these things that seem very simple and making a bazillion dollars off of them and doing it in a very reliable way.

I'm listening to the biography of Steve Jobs right now, the Walter Isaacson biography, and I've just been so interested in thinking about it. It's pretty remarkable. So that's my best guess. If any listeners have a better guess, then come on by and tell me. It's an interesting question. But for practical purposes, I'm convinced the total return argument is the way to go.

But yet for planning purposes, I can't get away from loving just spending profits, just spending dividends. And I'm not financially independent to the point where I can just live on the income from my portfolio. But I'll tell you what, as much as I like to pride myself on being a clear thinker and saying, "Oh, I'm not going to make things emotionally," I find the dividend story really compelling.

I really do. I find it really compelling. Just the idea of just living on dividends. Now tax efficiency is the other thing. Dividends are not tax efficient, whereas gains are. So we can tell a lot of stories to complex discussion, and I think the key is to come down on an individual.

But I love the simplicity of you can't outspend your principal. You just live on your income. That to me is a lesson that we all can use today. I can guarantee you this, if you were to ask my wife that question, she would much rather be a dividend investor.

My wife looks at stocks as basically fake money. It doesn't actually exist unless it's creating income. And she's not stupid. It's her way of looking at it. And I like that. It makes sense to me. And so if you gave her the choice of saying, "How would you like to figure out your budget?

Would you like to use this sophisticated analysis that's taking into account total market return, selling some shares over here, taking some dividends as income, and then some shares over here as income? Or would you like to just have enough money that you can just live on the dividends, knowing that that way you can totally ignore the share prices and just ignore them and live on the income?" I'll have to ask her that.

When I get finished recording this show, I'll ask her. But my bet is she'll take the income. It's hard for people to make that transition of going from living on an income their whole life to spending money and then trying to figure out how to be confident that the money's going to last for the rest of their life.

When somebody is an accumulator and a saver to all of a sudden now be a deaccumulator and a spender, that can be difficult. And so if it helps someone to feel more comfortable just living on dividends, I'm not going to fight it. Thank you so much for listening to today's Q&A show.

If you would like to join me on next week's Q&A show, go to patreon.com/radicalpersonalfinance. Patreon.com/radicalpersonalfinance. Sign up to support the show there and you will gain access to next week's Q&A show. If in the meantime, go to radicalbooklist.com, sign up for my reading list. It'll be a good reading list to guide you through 2020.

One thing you can do, read more, learn more, read more. And my reading list will set you on the right track with a good overview, with some really useful concepts that will set you right for how to build financial freedom in 10 years or less. Have a great weekend, everybody.

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