Everything You Never Wanted to Know About Life Insurance (But Absolutely Need To)

Mindy:
Welcome to the BiggerPockets Money Podcast, show number 139, where we interview Joe Saul-Sehy from Stacking Benjamins, and dive deep into the super fun topic of life insurance.

Joe:
People are convinced to have insurance on their kids. Well, for most of us the reason why you have insurance is to protect against the loss of a paycheck.

Mindy:
Hello, hello, hello, my name is Mindy Jensen and with me as always, is my premium co-host Scott Trench.

Scott:
Mindy, you always ensure a wonderful opening adjective. Thank you so much.

Mindy:
Scott and I are here to make financial independence less scary, less, just for somebody else, and show you that by following the proven steps, you can put yourself on the road to early financial freedom and get money out of the way so you can live your best life.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business or shut down that sleazy life insurance salesman, we’ll help you build a position capable of launching yourself towards those dreams.

Mindy:
Scott, today we have Joe Saul-Sehy from Stacking Benjamins. While you learn nothing from his podcast, you will learn a ton from this one today. Joe is like a walking encyclopedia of life insurance, how it works, how you can decide whether it’s right for you and what type of policy is right for you. He really just changes the viewpoint that you look at life insurance from. I wasn’t sure if I needed life insurance or not going into this show, and just listening to it has cemented my decision.

Scott:
Yeah, it’s just Joe is a former life insurance, financial planner and he sold life insurance as part of that, right? He’s just one of the sharpest guys in the finance world today. Getting his perspective as somebody who really knows the industry and he’s no longer selling life insurance, I think is really, really valuable because he understands the ins and outs and I think you’re going to get an incredible framework for making decisions about life insurance out of today’s episode. I did, personally.

Mindy:
Yeah, I did too. This was great. Joe Saul-Sehy, hi. Welcome back to the BiggerPockets Money Podcast. I’m so excited to have you on the show today. You last joined us way back on episode 40 and this is show 139. Where have you been man? What have you been up to?

Joe:
I’ve just been sitting by my phone waiting for you to call Mindy. I’ve done nothing between last time I was here and then so, I’m so happy mom started crying when you finally called so life is good.

Mindy:
Hi, mom. Hi, Joe’s mom. A lot of people don’t know this, especially if they listened to your podcast, but you are actually a smart person, well qualified to give financial advice.

Joe:
I’m sitting right here Mindy.

Mindy:
For those of you who don’t know, Joe, he was a fee based financial planner for 16 years. He had all the licenses to trade stocks and sell every type of insurance. Joe, I’m so happy to have you back on the show because I wanted to talk to somebody who knows about insurance and specifically life insurance, but doesn’t have any skin in the game because life insurance can be super confusing. But it can also be difficult to talk to somebody and get some straight answers, because they have a stake in the outcome. I’m pleased to welcome you to our show, to talk about life insurance.
I’m not the only person who’s confused about this. I posed this question on our Facebook group, I got like 122 responses. Joe, I want to know, everything there is to know about life insurance. Go. I’m just kidding. What is it? Why do you need it? Do you ever not need it? How does it work? All of those things. Before we jump into all of that though, let’s start at the very beginning when it comes to life insurance and insurance in general, how does it work? How is it priced? How do I incorporate it into my financial planning? Can I incorporate in my financial planning?

Joe:
I think the first thing Mindy is that, you have to start with subtraction, right? I think a lot of us have had our heads filled by different sources on insurance. We all try to just cut to the chase with insurance, which on one hand is good, because there’s people who know insurance and they’ll tell you, “Well, do this or don’t do this,” and that’s all fine. But I feel like insurance is important enough, and the basics are actually easy enough, that it’s frankly not that hard to understand, to get our head around it.
But we can’t get our head around it if what I’m going to say, because people that think they know insurance, I think today, some of them are going to want to strangle their device and throw it at me sometimes during our conversation. But if they just stick with me, I think they’ll get a much fuller view. Let me go through a few those things. The first thing is, and this is what I hear all the time is that one type of insurance is better than another. Everybody says, “You should always have term insurance or my insurance salesperson says you have to have a whole life policy, you have to have this.”
There is no product that is better or worse. Now, when I’m talking about product, I mean product type. There are companies and there are salespeople who are taking round pegs and putting them in square holes. They’re doing it wrong, and they’re doing it for the wrong reasons. They’re doing it because of commissions. They’re doing it because it’s the only thing they sell. They don’t sell the right thing. They’re doing it because they use shorthand, and they’ve been taught by other salespeople that this is the right way to go. But we got to get rid of all that.
Instead, I think if you understand how insurance is priced and then how it works, I think we get a much better idea. Let’s start with this. Insurance is sharing the risk with a bunch of other people. Instead of thinking about giving your money to an insurance company, think about this, Scott, Mindy and I we’re all standing around a barrel, and we decide that, “Listen, if one of us can’t make some money, one paycheck that the rest of us will pitch in.” To do that, we decide about how often we think somebody might miss a paycheck. So we take that number, we figure out what it is, we then divide it among the amount of time that we think we will all have paychecks, and we take that off the top and we throw it in this barrel, right?
Everybody’s throwing money in the barrel. Then let’s say that Scott needs a break, and he’s not going to get a paycheck that time so he reaches in the barrel to get the money. When he reaches the barrel to get the money, there better be enough there first. He goes in and he grabs the money. What’s cool about that is, instead of Scott missing a paycheck, so in this case, we’re talking about disability insurance, right? Instead of missing a paycheck or not getting any money during that timeframe, Scott takes a little bit every paycheck and puts it in the barrel.
Then if he needs it, he takes it all out. With life insurance, it’s the same. We know we’re all going to die at some point. We put money in the barrel, then when somebody passes away, we reach in and we grab an amount of money, which is the death benefit. When we think about insurance, we have to think about two things. We have to think about probability, number one. How often is this really going to happen to me? I’ll give you an example of where this is important. It’s not life insurance.
When we look at car insurance and we look at homeowners insurance, which one of those two assets for most of us hopefully cost more money?

Scott:
Home.

Joe:
Your house, right? But which insurance … Hopefully, right? But which insurance costs more? Car insurance cost a lot more than homeowners does? Why? Because even though your house is way more expensive, the chance of you having something bad happened to your house, much less for most of us than something happening in our car. It isn’t just about the asset.
It’s about the probability. When it comes to life insurance in particular, the way that they sell it is everybody … Actually, let me back off that last sentence because I want explain one more thing. There’s one more key thing to know about this barrel of money is that, instead of the three of us doing it … A lot of people understand there’s this law of large numbers, and that the more people we have throwing money in, the easier it’s going to be for a company to guarantee that they can cover the risk.
Like if Scott needs money out of the barrel, and then Mindy needs money the next week out of the barrel, and Scott just took it all, we’d have a problem. But if we have tons of people throw money in the barrel, you can start to statistically figure out how this happens. What happens is, companies get into this business of co-risk. What they, do think about it this way, they have a scoop, and that scoop is the price that they charge all of us collectively to run this pooled risk that we do.
If we give money to Allstate, let’s say I’m just throwing out a company or Progressive or whoever. When we throw money into that barrel, Progressive takes their scoop, and they scoop money out to pay their people and make their profit. Now, they make sure they make a profit. Don’t get me wrong. But whenever I hear this thing about companies ripping people off with insurance, does it happen? Yeah. But does it happen as often as you think that it does? No, for two reasons. Number one, that scoop is regulated by states. Companies can’t run afoul of the state insurance divisions, and to do that, whenever they change their pricing on contracts, they have to submit that through different states.
By the way, it’s a pain in the butt for insurance companies, because instead of it being a federal thing, it’s 50 different states they have to do it through. But the state looks over their shoulder, number one. But number two is, they’re not the only one with a scoop. They know that there’s other companies that have scoops as well. Whenever you think that you’re getting ripped off by insurance, it probably means that you have the wrong type for you. It does doesn’t mean that you’re getting ripped off. Maybe it does. But in most cases, what I saw was people were shopping for insurance in a place where they really might not need it.

Scott:
Let me think about … I guess there’s a lot there. I think that the concept is really helpful. We understand, “Hey, it’s pooled risk and it’s based on the size of the potential claim and the probability of that potential claim.” The more people we aggregate together, the more accurate we can get over time. I think that’s great. How do I as like an … I don’t even know life insurance, right? I’m looking at this, as, I’m going to get married later this year, but I’ve never had life insurance. I figured it’s for people with kids and families to protect the families in the event that you die.
How do I even begin thinking about it? What bucket of insurance should I begin going after from a life insurance perspective?

Joe:
Yeah, the best way to think about that Scott, actually, is to reframe the question and make it larger because you’re asking the question, I think that the insurance companies have taught us to ask, what insurance should I go for? Which is not the question. A good financial planner will tell you that you want to widen that discussion and instead say, “Where is my Achilles heel? How do I cover it?” Because once I ask the question differently about how do I cover it, it might not include insurance at all. A lot of insurance people want to limit it to just insurance products. But, if you’re financially independent, and you and your spouse can do okay without each other’s paycheck, why do you need insurance?
There is no reason for you to have insurance. I’ll give you an example of where I think there’s some flawed arguments going on with a lot of people. People are convinced to have insurance on their kids. Well, for most of us, the reason why you have insurance is to protect against the loss of a paycheck, right? Is your five year old out making money that’s contributing to the family budget? No. I mean maybe, the answer is maybe.

Scott:
[crosstalk 00:11:52] that one kid that who reviews toys and has a YouTube channel that has billions of dollars a year in income.

Mindy:
That’s super common Scott.

Joe:
I want to be that kids dad.

Scott:
Is Daphne going to retire from school.

Joe:
Because then you can insure that kid. That’s right, independent by age eight. But if you’re more like the average kid, you’re not contributing to the family budget. All that parents need to worry about is this horrible event where you’re burying your child and what do burial costs add up to? Frankly, the second that you get a good emergency fund, a good cash reserve, you don’t need insurance on your kids. Insurance on your kids is a horrible thing. The reason a lot of people get it though, is because it’s cheap.
I think the next thing we should go over Scott to answer your question is, how does life insurance get priced because a lot of people wonder about whole life, which people, some people call rip off, other people say you needed? Universal life or term insurance, what’s really the difference? Here’s the deal. Imagine that you walk in, Scott walks into an insurance store, and there’s these boxes and each box represents $1,000 worth of insurance.

Scott:
I thought they were barrels.

Joe:
When they buy insurance, you’re buying it … That’s right, I’m going for barrels. I’m mixing my metaphor.

Scott:
All right.

Mindy:
I thought this was a bad joke.

Joe:
You’re buying these boxes of insurance and they’re in $1,000 increments. Scott goes in and when he looks at his situation, let’s say that Scott’s working and his spouse isn’t. The first thing to do is figure out where’s the shortfall? How much money will my spouse earn after I pass away? How long does she need to earn that money? If I present value all that to today so that she has financial independence, whatever age she wants and she makes enough money to live, to fill in the gap in the budget, what’s that shortfall? That’s the amount of insurance that you go to buy.
Let’s say that number is $300,000, I don’t know. If it’s 300,000, Scott is buying 300 units of $1,000 worth of insurance. That price, the first question they’re going to ask is how many units? The second question they’re going to ask is how old Scott is, because when it comes to life insurance, it’s all based on your age, because actuarially Scott at Scott whatever young age you’re at, whatever disgustingly young age you’re at versus me.

Scott:
19 years.

Mindy:
14.

Joe:
It’s going to be very cheap, but every time you have a birthday, that cost per thousand goes up. Because, well, I’m 52, If I go in and buy insurance at age 52, it’s going to be fairly expensive versus buying it for 30 year old, because the probability that I’m going to die more quickly is way, way bigger than it is for a 30 year old. Once again, back to that law of large numbers. That’s important because when you start looking at insurance this is why term insurance makes a lot of sense for people. The insurance company, not only is selling insurance to people when they’re younger, because you’re going to buy it when you’re young.
A term insurance policy also only guarantees that it’s going to last for a certain term. When you look at actuarial tables, people are going to die much more statistically after 60 to 65. All of a sudden death in America at those ages really start ramping up. Well, the cool thing about term insurance is you’re getting rid of it, between 60 and 65 years old. If we go back to that basic question people ask, which is, how do I cover my risk? You think about the risk that you’re not going to have enough money after 60 or 65.
Hopefully, if you’ve done a good job of planning, if you’re listening to this show, you’ve done a great job of planning; you no longer have any need for insurance. There’s no more coverage that you need, so it’s okay for the insurance to go away. Not only does that barrel of money we’re throwing money into, have a lot less people taking money out because frankly people are dying. They’re just dying after the insurance expired. Second, people are buying it younger, which means that the chance of them dying during that process is less. Term insurance is less expensive for whole life for a very basic reason.
A whole life insurance company is guaranteed to be there when you die. A term insurance policy will probably not be around when you die. The vast probability is that it’s going to be long gone. Insurance companies can offer you a much cheaper policy than they can on a whole life insurance just because of the way it pays out.

Mindy:
Okay, I have 10,000 questions. First of all, if I am … I guess clarification to that question. If I’m understanding you correctly, whole life insurance means that I am buying a policy from XYZ company and they guarantee a payout whenever I die?

Joe:
Yes.

Mindy:
Okay.

Joe:
No matter what age you are …

Mindy:
No matter what age?

Joe:
You’re 85 you’ll still have the policy. Yes.

Mindy:
I don’t just buy the policy once, I pay every month, there’s premiums to pay every month?

Joe:
You can pay it however you want. This is actually, Mindy brings up a great thing. Remember how it sold per thousand?

Mindy:
Yes.

Joe:
Let’s say you buy a whole life policy that’s $100,000.

Mindy:
Okay.

Joe:
Let’s say that you put $40,000 into that policy immediately, the price, then the amount of risk the company has, because whole life policies have this thing called a cash value. Now, here’s the crap about cash value, a lot of people are going to tell you cash value is a great way to save, right? The reason cash value was created in the first place was to reduce the cost of this expensive insurance, because imagine if the insurance is going to be around when you die, and every year that cost per thousand is going up every time you have birthday, the company, whenever you put a premium in the company, you’re paying for that year’s insurance.
If the insurance were priced the way that you’re really paying for it at your age Mindy it’d be, because you’re super young, the policy would be very inexpensive. Then next year, you’d get a bump up in your price and then the next year a bump up, the next year a bump up. Well, what happened was, of course, nobody can afford that, right? They get to 65, 70, 75, 80 and these policies will be lapsing, meaning people would have to let them go, because they can’t afford the insurance anymore. Insurance companies came up with cash value for this reason, so you could pre pay some of the future costs for those ages when it’s going to be really expensive, prepay them when you’re young, so that that insurance is less likely to go bye bye when you die so that they can have a guarantee.
Now the funny thing is, they’ve done this all on the inside with a whole life policy, so you don’t actually see the mechanism but it truly is the mechanism they’re using. Let’s say your cost per thousand is $1, and you’re buying 100 of them so your cost is $100 for the year. They might charge you $500 for the year. $100 covers this year’s insurance, 400 goes into the cash value, which is not a savings plan at its heart. It’s pre-buying insurance for when you’re 90, 95, 85, 80 years old and backfilling the super expensive years, so that you don’t see these massive price increases as you go on your insurance policy.
That’s why by the way, when insurance people and this is where insurance people get really messy, a good insurance person when it comes to a type of flexible insurance called universal life, if somebody needs a universal life policy, a very good insurance person is going to tell you, they’re going to say, “Listen, Mindy, take as much money as possible and shove it in this policy now, because if you put $40,000 into $100,000 policy, you’re doing two things. Number one is you’re only buying $60,000 worth of insurance.
Where the hell does 60,000 come from Joe? Well, you put 40,000 that you’ve just self insured yourself, so the outstanding amount the insurance company’s only liable for is the rest of that 60. You’re buying a hell of a lot less insurance by shoving a lot of money in it. The cool thing by the way is that money does get a tax break, it is tax sheltered money. Now, it’s not as great as it sounds, because the insurance company’s going to suck it to you in fee, so we can get back to that. But the money’s in this cool tax shelter.
Then from now till the time you die, you’ve bought a lot less insurance. When it comes to legacy planning and some of this long term planning, I’ll see groups online where people go, “My insurance agent has told me to take $15,000 and put it in this insurance policy.” I’ll see 45 million people jump on that statement going, “They’re ripping you off, they’re ripping you off, they’re ripping you off,” and I’m the other guy going, “No, they’re doing the right thing, because the more money you stick in this, the less insurance you’re actually going to buy and the insurance you buy is going to be cheaper, because of the fact that the outstanding number of thousands that you’re purchasing over time are less.”
I don’t know if that makes any sense. But once you get this little change, it kind of changes that game.

Scott:
Well, before we even get that, you’ve defined whole life and you’ve divided term, can you define universal life?

Joe:
Yeah. Universal life, Scott, great question is a hybrid of the two, because what happened was with a whole life policy, it was so staid and you’re locked into all the provisions, and they don’t show you these inner workings that I’m talking about. I’m buying how many thousands and my cash value is doing what? I really, it’s hard to understand what’s going on in the inside. But the cool thing about it, is it comes with lock tight guarantees. If you buy a whole life insurance policy, the insurance company is guaranteeing that that money will be there when you die. Because of that, whole life insurance is the most expensive type of insurance that you could possibly buy of all the types.
The reason is just, if they have to guarantee it, they’re going to make sure that you put tons of money into it, so that they can guarantee that it’s going to last and that they make a profit. Universal life unbundles all that. Universal life says, “Okay, Scott, how many thousands do you want to buy of insurance and how much cash do you want to put in?” We can run some projections that will show you that this will last, and we could also maybe a variable universal life policy will put mutual funds inside of there, things that look like mutual funds instead of just cash. Or we can have it be a high interest money market account.
We could have it be some S&P 500 look alike thing. Universal life is where they unbundle all these pieces and they say, “Okay, how much money you want to put in it.” If you can’t cover the amount of the basic premium, they’ll tell you, “No, that’s not enough. At the very least you need to put X in it.” But you can put more than that in a given year. You could put less than in the next year. But also the problem there is, if you don’t put enough money in it, and that insurance keeps getting more expensive every year, every time you have a birthday, now they’re digging more and more into the cash and into your premium and the policy is much more likely to lapse.
Universal is a hybrid of term insurance paired with cash value, but that term is going to last forever, meaning it’s very expensive term insurance because it’s guaranteed to last until you die.

Scott:
Got it. Okay, well I don’t know if I fully get it but I’ll have to go and noodle on that and research a little bit more of that. Where can I do that by the way? Where can I go and if I want to dig into these and maybe spend another hour thinking through these, so I can really unpack them and grasp these concepts fully?

Joe:
My favorite book about insurance of all, covers all financial planning. I think it’s one of the most even handed books on financial planning out there. It’s Ric Edelman’s The Truth About Money. Ric Adelman, of course is a big name in the industry. He’s been Barron’s top adviser many years in a row. Has a radio show, but his book, The Truth About Money is very funny and very even handed. You’ll see where I got my analogy of us standing around a barrel with a scoop, because that’s directly Ric Adelman and that’s when I got it. The thousand dollar increments thing he also explains in much more detail.

Scott:
Awesome. Yeah. I think it’s been very helpful and a really good frameworks for me, I just I’m going to need to spend a little more time with the universal life insurance, I think to nail it and understand those concepts.

Joe:
Actually, what’s cool about that Scott, is that is it now knowing what you know, then we take a look at what do you really need to know. Because the cool thing is, we just went through the basics, but you don’t need to know everything about everything. If you’re trying to replace income, if your gut is that I’m just trying to replace income and I’m a good saver, there’s no reason to look at universal life, because universal life is guaranteed to last forever, and you’re not going to need to cover a risk forever.
You’re not going to need whole life, because of the fact that I don’t need this thing to last my whole life. Then that gives you one option, which is term. Term comes in a few basic varieties. But if you know the $1,000 at a time concept, they’re pretty easy.

Scott:
Let’s just go back to this from a concept level, right? If you’re listening to this show, and you’re a BiggerPockets Money listener, and you’re trying to save up, you’re probably thinking about, “Hey, by the time I reach retirement age, I’m going to be 65. I’m going to be ready to retire.” That’s just I think is probably a given for most of us here listening on the show, right? I’m ideally going to be able to retire significantly in advance of that. Maybe it might be 50s, maybe mid 40s, maybe even for some of the ambitious folks, their 30s or 20s.
When I think about it from that perspective that says to me that what I want is a term policy and I want to decrease the amount of my term policy each year as I get closer and closer to financial independence, right?

Joe:
Yes.

Scott:
I’d want, hey, if I’m 30 and I’ve got two kids and a spouse and I got $100,000 net worth, I might want a $900,000 policy right now, because I’m really important to the household, spouse that’s working. But each year as I get closer and closer to that million dollars, maybe by 40 I’m at $900,000 in net worth. Now I just need a $100,000 policy, right?

Joe:
Yeah.

Scott:
What product could I use to go about solving that problem?

Joe:
Exactly. They’re just decreasing term policies. You know what, when you look when you’re young, the cost difference between a decreasing term policy and just a level term policy, not a lot more. This is where you might opt to be a little more conservative and go, “You know what, I know I’m not going to need all this.” The cool thing with a term policy though is you can cancel it anytime. There’s no cash inside of it. Cash really only exists to make sure … When they first created it, cash only existed to make sure it lasted forever. Term insurance it’s not meant to last forever.
Because there’s not that you could probably buy level term at a young age, just in case life throws a wrench in your plan and it’s not going to cost that much more, and you’re still going to, if things go poorly be adequately insured. What I would always recommend, when I was an advisor was, we would take that last time we needed insurance and we just add a couple years. We’d add a few years just in case something happened and life got in the way. Maybe instead of having it end at 60, we’d have it end at 65. With the cool thing being if we’re going to retire at 45, I can dump it at 45.

Scott:
Nice. Can you go through that one more time and define a level term concept, the buckets within term?

Joe:
Yeah, so a level term concept just means that, I pick an amount of time, and the price is going to stay the same. Going back to my analogy of every year the price gets more expensive and on the inside, it truly does. The insurance company just figures out what it’s going to cost on the backend, which is going to be a lot more those later years and what it’s going to cost now and instead of charging you less now and more later, they just charge you a level amount. They also, because they’re getting more money up front now, they also give you a slight discount on the money, because they know it’s not going to take as much of their money to fund you the whole time.
You’re actually prepaying a little bit when you buy level term insurance. You can pick any timeframe you want. Depending on the company, they might have 10 year level, 20 year or 30 year level, whatever it might be.

Scott:
But I’m aggressive now and informed client thanks to your great discussion earlier. I’m sitting here and thinking, “Hey, I’m 30 and I’m going to be retired in a couple of years, and I only want it for five years, 10 years. I might get there much faster because I’m going to house hack and [inaudible 00:29:03] and start doing all the things we talked about on BiggerPockets Money. I don’t want a 20 year level term that I’m locking into for the same thing. I want to pay the lower price now, go aggressive and then hopefully not needed five, 10 years later. Is there a product that works for that?

Joe:
Well, and that’s just one year. That’s just one year term insurance.

Scott:
Great. I could just go back every year to my broker and ask for that?

Joe:
You don’t even have to. You just get a policy that the price is only guaranteed for one year, and every year it goes up like your homeowners or your car insurance, your health insurance changes every year. You get the thing that says, “Hey, my homeowner’s is more this year than it was last year,” for whatever reason. It’s the same thing. Just say, “Nope, I want one year.” Now, there are companies out there that will sell you that type of coverage, but they’ll guarantee that they won’t cancel you for 10 years.
You might want something like that where the price changes every year and you’re okay with that, but they can’t cancel you for a number of years. The cool thing is Scott, what I love about the aha that I’m seeing is, once you understand that every year I have a birthday, the cost goes up, you then start realizing all these shortcuts people have get in the way. It really is a much more fun discussion when you know exactly how insurance gets priced.

Scott:
Well, here’s the other thing, too, is like, yeah, every year, the price is going to go up because I’m getting older. But ideally, if I’m good with money management, the price is actually going to go down, so I’m going to need to purchase less 1,000 units-

Joe:
Because you’re purchasing less.

Scott:
… $1,000 units of insurance, because I don’t need that anymore?

Joe:
Yes.

Scott:
It sounds like there’s a pretty, your probability of dying at 30 versus 31 is probably not that much larger? The probability of dying at 70 versus 30 is going to be very vast, so that the price changes aren’t going to kick in too much between certain, year to year, right?

Joe:
No, it is very much a slow curve that becomes a huge curve in those later years. Much, much, much bigger change between 60 and 70 than between 20 and 30 as an example.

Scott:
Sounds very expensive to buy a 30 year term insurance plan or a whole life policy, if you’re looking to become financially independent at an early age.

Joe:
It is surprising how cheap 30 year term really is, especially for somebody who’s 30. If you’re 30 years old … That’s why companies buy it, right? Companies have term insurance on you, because they know that you’re probably going to leave at 60 or 65, and so they’re able to get these insurance policies incredibly cheaply through work. By the way, that’s why I like workplace policies, but I also because of the way people hop around from job to job, this is where some of the important questions come in.
I know that we got some questions about insurability. The reason why you want to have a policy that lasts for a longer period of time isn’t just betting on today. It’s also, you’re betting on your future insurability. If you’re very insurable now and something happens to you, no fault of your own, something happens, you might not be as insurable later on, so locking yourself into a policy that they can’t take away from you for a 10, 15 year, whatever period it is also becomes an important and a little bit more conservative factor.

Scott:
Can you walk us through that? What are some things that affect insurability?

Joe:
Well, anything that affects the fact that you would pass away early. If in your family, you have a history, if your family history has cancer all over it, insurance companies wonder about that family history. If you have had anything to do with cancer in your history, that’s a problem. Mindy is pretending she’s smoking right now. That’s the number one thing and by the way, don’t fake this stuff. When I was a financial planner, the number one thing that smokers especially would say, they’d go, “Oh, what if I just didn’t smoke the week before my …” They’re going to send somebody out to probably do a blood urine type test.
For most of the testing that these guys do, if you don’t smoke for a week, they’re not going to see it. However, here’s the problem. There’s this thing called the two year contestability period. If you die during those first two years, they go back and they look at every single thing in your lifestyle and if they find cigarettes anywhere in your lifestyle, they don’t pay your beneficiaries anything. I would rather go in with the truth than risk the first two years. The cool thing is if you lie, and you get away with it for two years, you’re scot free.
You could say Scott that you are a 12 year old woman and because women live longer, and because 12 year olds are younger than you, you could get hella cheap insurance. If that insurance passes two years, and they haven’t discovered that you’re really you, you’re locked in, but I’m not … I would never ever, ever play that game. I think well, it’s just fraud, number one, but number two, you’re also messing with the whole reason you have insurance in the first place.

Scott:
This is a stupid question I’ll ask anyways like, “Hey, once a year, twice a year, I have a cigar. Does that qualify me as a smoker in the eyes of the insurance policy?”

Joe:
No, but I would still disclose it. I would still say, “I have a cigar once every couple of years,” and it’s not going to be a big deal.

Scott:
Okay, fair enough.

Joe:
If by the way, it says, “Are you a smoker, yes, no?” Most of the time, the insurance company will define that, do you smoke more than X amount per day or X amount per week?

Scott:
Okay.

Joe:
I would say, “No, I just burst into flame. I don’t smoke.”

Scott:
That’s right.

Joe:
Just think about anything that will shorten your life. If there’s anything that will shorten your life that’s in your family history or in your history, that’s when you’re going to have a problem.

Mindy:
Okay, a few moments ago, I said I have 10,000 questions and then Scott jumped in and started asking all of his questions. I’m not done yet. Joe, you said that this, you mentioned taxes. You said this is a tax shelter. What does that phrase mean in case somebody listening who doesn’t understand that, and then also is life insurance payout taxed? Scott has bought $100,000 for his beautiful wife, Virginia. Does she only get 50? When you win the lottery, you only get basically half of what it is or does she get all 100?

Joe:
I’m going to answer that second question first, because it depends on how the premiums get paid. If a company pays for the premiums and they write those premiums off, then the benefit is taxable. But in most cases you’ll see that you’re actually buying from a flex benefit plan, or they’re having you contribute to insurance where they’ve negotiated a lower rate, because they’re giving the insurance cover the entire company. If you’re paying for it, and it’s coming off your paycheck, I’ve never seen it as a pre-tax deduction. It’s always an after tax deduction. If you buy insurance with after tax dollars, the benefit, the death benefit to your beneficiary is tax free.
There will be no tax taken off that 100,000 bucks. Now that money inside, and this is where the sales people start coming in, right? Because they start talking about, “This is a great place to save.” There’s this thing that I used to look at when I was a financial planner called the tax triangle. If you imagine a triangle and these three circles on the sides of the triangle, everybody can do this at home. You can look at how well your triangle is set up. The first side of the triangle is, money goes in toward the triangle through this corner, and the money is pre-tax. When you pull that money out later during retirement, that money gets taxed. What type of investment is that?

Mindy:
A retirement investment.

Joe:
Yes, that’ll be like a pre-tax 401K or a traditional IRA, where you’re taking the tax write off right now. That’s bucket number one. By the way, that’s the bucket most people, especially older people have really filled up which is why a lot of us tell people to look at bucket number two. Bucket number two is where money goes in after tax, we’re taking money that’s already been taxed from our paycheck or wherever, and we’re funding whatever the investment is, and we pull it out, it’s going to be tax free.
This will be your Roth IRA. This would also be municipal bonds, even though there can be some problems with social security municipal bonds, but still largely tax free the interest on those. Then the third place is actually life insurance. Money that goes into life insurance policies, if you pull it out correctly, you can also pull it out without having taxes come out of that money. This ends up being another tax shelter. The problem with that, so everything I told you so far is true, but I used a few words, which is if you pull it out correctly. The insurance companies have figured out ways to make sure that you don’t pay tax on the way out, but man is it complicated.
It is. In fact, it’s so complicated that I can’t think of many times for the average person where adding life insurance makes sense. I’m going to get back to that because people are wondering what the third bucket is. The third bucket by the way, is where money goes in, has no tax advantage on one hand when you put it in, and it’s not tax advantage when you put it out, and you’re going to throw off taxes a lot, right? This is your regular brokerage account, savings account, that type of thing.
You want to have somebody that’s flexible, somebody that gives you tax advantages later, that would be Roth IRA, minus and maybe life insurance, and then money that’s pre-tax where you get the bird in the hand today, tax wise. Those are your three different tax pieces in the tax triangle. But life insurance when it comes to the fact that it’s tax advantaged, the only time I’ve seen this be a really good deal is when somebody has maxed out everything they can do tax wise. Then they get to the point that it’s still they have these goals that are way far in the future, and they don’t want to throw off a lot of taxes today.
You can do the very complicated math. It’s funny that I’m sighing as I’m even saying this. You can do the complicated math and shoving money into a life insurance policy wholesale, just shoving as much money in as you can is a way better idea, way, way, way better idea than putting money in an annuity way better, because the money goes in after tax. The money comes out tax free. With an annuity, the money is going to come out tax deferred. Also the fact that with annuities, it’s last in first out the way it gets taxed.
People are afraid to take money out of annuity, because they’re going to get hammered the second that they touch their annuity. With life insurance, you’ll never pay tax as long as you can keep the policy in force. I would tell you when I was financial planner; I would use life insurance as a tax control vehicle. But I would use it maybe once a year, once a year. This is a person who’s making like $800,000 a year and they’re spending 200,000, and we’re just trying to figure out where the hell to stuff money, let’s just stuff money in as many different buckets as we can.

Scott:
It sounds like the use case for this is, “Hey, I just came into $5 million through an inheritance or something like that, and I don’t know anything about investing, and I want the most guaranteed tax advantaged income stream I possibly can find,” and this is a way to go about solving that issue for example. Both this and an annuity would probably be less efficient for long-term wealth creation I would imagine, than investing in an index fund long-term if we’re after tax brokerage account, pre-tax vehicle or Roth IRA or real estate.
Those are the other types of options, but that could be a good option for that guaranteed income or stable income source and the tax advantages in that situation is that, when appropriate … I’m just trying to-

Joe:
Almost.

Scott:
… to think about it.

Joe:
Almost I would say this Scott, if it’s a low cost policy and it’s a variable policy, meaning that you have an index fund inside of that life insurance policy, you’ll look at the internal rate of return on that, especially if you max it, if you shove as much money as you can, so you minimize that cost of insurance, right? You want to shove as much money as you can, then it becomes a very, very efficient place. Because what we’re trying to do is we’re trying to make the cost of insurance less than what the tax would be that you’d pay. If we can do that, and if you pass away, we also were able to take it out of the estate. This is where we’re getting into some heavy duty planning.
But then we were taking it out of the estate because the death benefit if we set it up correctly then isn’t a part of your estate. If we can do that too, then we’ve done some incredible tax planning.

Scott:
This is for a very high income earner who is i a high tax bracket, which makes the tax advantages that much [crosstalk 00:42:03] realize, and we’re getting pretty complicated and this is where you, this is not the what you should be buying from your salesperson, giddy insurance broker who confuses you with a lot of terminology. This is with your fee only financial advisor who helps you work through a really tax advantaged approach to sheltering a lot of income. Is that a fair way to [crosstalk 00:42:24]?

Joe:
Yes, yes and you are bathing in money. You are bathing in money. Really the only takeaway point is that universal life insurance isn’t bad. I see it used incorrectly I’d say 99% of the time Scott. 99% of the time it’s somebody that doesn’t have very much money. They’ve been sold it by somebody who sells insurance, because it pays a nice commission and now they have this permanent policy, where they’re not going to need insurance for their entire life. They’re funding it minimally because they don’t have any cash, which means it’s making it even more expensive because they have to buy more thousands using it just awfully.
But I’m going to go back my first statement when we first started, the policy isn’t bad. It’s the round peg square hole that’s actually bad.

Scott:
I just think that if you hung around the fire community, you’ve inevitably come across the guy that we’re describing here, the salesperson who talks about this vehicle and it’s over everyone’s head, every listeners head and all the hosts head, whenever this happens. You just can’t figure it out. It’s like, that seems like there’s something there. I don’t really understand it. Most of us shy away from it, I’m sure.

Joe:
You should.

Scott:
But thank you for coming in and explaining this in a way that we can generally grasp. By the way, this is universal life that we’re talking about here this type of insurance?

Joe:
Yes.

Scott:
This is the third one not term or whole life right, that you’re just describing?

Joe:
Yeah, no. I’ll tell you where whole life comes in well, Scott, I would invariably I’d say once every five years, I would have a client who said, “I just want no risk at all around my insurance.” I would explain to them about how they’re paying through the nose for this thing. They’d say, “Yeah, I understand, I just want to make sure that no matter when I die, this is there, that that is what I want.” I just want it to be very clear that my client knew ahead of time you’re paying through the nose, you’re paying for all these guarantees and I felt really good about that for those people, because those people went in with their eyes open.
They knew exactly what they were buying, but it was what was important to them, which I think is an important way to think about your risk management.

Scott:
There you go.

Mindy:
Okay, good. I’m glad you clarified that because I actually thought we were talking about whole life. That’s the universal life policy is the cash value. Now is that the one … This came up a lot, the cash loan options and the velocity banking and the infinite banking and all of that stuff. I’m not sure that’s related to life insurance, but I know that … I just know enough to be dangerous. I know that policies from 1,000 years ago if my parents would have taken out a policy on me when I was a kid, that would be valuable to me to borrow from now, but policies issued now aren’t the same, right? Am I close to correct?

Joe:
Yeah.

Scott:
Unfortunately yes. I just want to chime in there. On this same subject, I feel like I have a very large amount of skepticism about all of those items-

Mindy:
Same.

Scott:
… but not a framework to be able to challenge the salesperson screaming all these benefits in the face. I want to just throw that context in there for before Joe answers.

Joe:
Yeah, because there’s a lot of different things Mindy that you threw out. But let’s start with infinite banking first, because infinite banking means that you’re going to buy one of these life insurance policies, you’re going to stuff it full of cash. Because you’re stuffing it full of cash, you can then take loans from that money, so you’re going to have a cash reserve. If something bad happens to you, you will have a death benefit, which is also pretty cool because then your heirs end up with money, but if you live, which is what we’re all hoping for, yay, you take out this money as loans meaning that all this money that the things making is tax free, it gets a little more complicated than that.
It works. It actually works unless, think about how many things you’re betting on that if you take out that loan, and you can’t continue to put a paycheck into that policy to continually fund that cash value, the second that cash value begins draining, what happens? If instead of you having $40,000 of cash and $100,000 policy, you go down to $30,000 of cash next year. Not only are you a year older, which means that the each $1,000 is more expensive, you’re buying $10,000 more insurance. When these infinite policies go bad, they tend to go bad in a hurry. When they unwind, when your life unwinds, everything unwinds with that type of a policy.
I’m reticent to do it not because the concept doesn’t make sense. They can tell you the concept all day, and you’re looking for the flaw Scott, there is no flaw. The only flaw is, if you can’t continue to keep that cash portion funded, and you keep having birthdays, which you can’t stop having, it’s going to unravel in a hurry if you can’t continue to fund it. What you really need to have happen, you need to be able to guarantee that the future is going to continue to look as good as the present. Most of us like doing that. I just don’t like doing it around my-

Scott:
Or that you’re going to die.

Joe:
Yeah, or that you’re going to die. Right.

Scott:
Immediately. [Crosstalk 00:47:38], yeah.

Joe:
Yes,

Scott:
Okay, I’m just making sure I have that right.

Joe:
Yeah, there’s just too many variables. I prefer to play on a life where things are going to change, right? It isn’t flexible enough for me. The chance of it going wrong means I’m going to end up paying a lot of fees that I wouldn’t have paid if I just did the straight forward thing. You’ll come out ahead if everything magically works out, but the bad news was, over 16 years of being a financial planner, the number of times that we had emergency meetings because things weren’t working out the way that we thought they were, leads me to believe that we should probably plan for flexibility not to lock things in.

Mindy:
Okay, so just to recap, the cash loan or the policies that are being issued today, are the same as the policies that are being issued when I was a kid, except that just has more time to build up the cash that I could borrow from, is that …?

Joe:
No, policies have definitely changed over time and insurance companies have been very reactionary. We can just do … I’m sure it didn’t happen exactly this way. But companies are all selling this approach about, “Hey, we pool this risk. I can do it for you. This is a great thing that everybody has. Hey, let’s do this.” Then somebody walks up and goes, “Yeah, but what if I die much, much later? You’re trying to charge me at 80 years old for this policy? I can’t afford it.” “Oh, well, let’s make the policy level and let’s have you put money in.”
Well, with whole life insurance that gets really difficult, and you can’t sell that to a 25 year old. A 25 year old when you look at the amount of risk they’re going to have of dying over their entire life, they’re going to go, “Come on, why would I buy this? I’m spending so much money for insurance as a 25 year old, because I’m pre covering when I’m 80. This isn’t very affordable.” Like, “Okay, here’s what we’re going to do. We’re going to make some of this go into a cash value.” Make some of it go to a cash value so that your policy is cool paid up.
You’ll pay even more now, but here’s the cool thing, when you get to 60 your policy is completely guaranteed. What they’re really saying is, you’ve pre purchased all these thousands ahead of time. Yeah, the price is even higher, but it’s only going to be a short-term pain and then your policy is guaranteed forever. Well, so then insurance guy is walking around trying to sell these things. During the ’60s, ’70s interest rates go through the roof, right? People are like Listen, “Why don’t I just invest in these CDs paying 10%?”
Forget about your cash value. I’d go ahead and do this myself.” All of a sudden, the insurance guy goes, “Oh, I got to change that game. Well, how about if we did this? What if we can make that instead of a guarantee, what if we float that interest rate that you get?” If we float the interest rate, now it becomes a savings vehicle and now you’ve got all these insurance salespeople going, “Hey, Scott, you can insure your family and if you need the money early, check out what interest rate it’s earning, it’s not that old whole life thing. It’s now this thing that pays a higher interest rate.”
Then, as inflation lowered in the late ’80s and mutual funds became a hot thing in the ’90s, insurance guys walking in going, “Hey, this pays a good rate of return.” They’re like, “4%, five, are you kidding me? My mutual funds are killing it.” Insurance companies go, “What are we going to do to compete?” I know what we’ll do, “We’re going to stick mutual funds inside of these insurance policies. That’ll do it. That’ll be great.” Policies have always evolved, but the bad news is that I think you get my point; they’ve always been reactionary to what’s going on around them, to try to make sure that they continue to stay relevant.

Mindy:
Yeah, I don’t know if I’m misunderstanding this or just finally getting super clarification. But I wasn’t all that excited about life insurance before I talked to you, and now I’m even less so. I see Scott thinking, “Oh, this could be, this could be.” Scott and I are in different places in our lives, but I don’t think that I need life insurance. When do I know that I don’t need life insurance? Does everybody need it?

Joe:
No, it’s very easy to do the math if we start off not with life insurance, but what’s my risk? Always start off with what’s my risk. If I get disabled today and I can’t work anymore, how much money does that take off the table? Can my investments be enough for me to live on not just now, but with inflation forever, right? If that happens, then I don’t need disability insurance. Same thing with life insurance, if I have enough assets that if I pass away and my family can do okay, without me, I don’t need life insurance until, this is the other side of the equation.
Until we get so much money that now I have these really onerous estate taxes. When I get a huge nest egg and I’ve got estate taxes, insurance then becomes a very effective way to solve that, because instead of paying a one and a half million dollar insurance bill by myself, I could maybe put $100,000 into a life insurance policy and that’s at a million and a half dollars, and now, my life insurance policies going to cover a million and a half dollar estate tax that I can’t get rid of, but I only had to put $150,000 toward it, because it only cost me 150,000 to pay that tax.
There’s two times you need insurance, to protect your income for most people and your value to the family, which is something else that we should address and on the other side, protect you from estate taxes.

Scott:
Okay, so now I got another question for you. Mindy, here’s what’s going through my head, is I’m thinking, let’s zoom forward a couple years and suppose I have a couple of kids. I think my spouse to be is going to be is a very competent person and could manage my portfolio and those types of things, but the kids couldn’t. The way to protect them is not through insurance, but figuring out a mechanism to ensure that the portfolio can cover their expenses and anybody who would take care of them in that particular.
I’m not thinking I need insurance. What I’m thinking is so arrogant is this is, “Hey, if I’m doing, off to a pretty good start here around 30, then maybe it’s time to talk to an estate planner about what happens if my portfolio balloons to eight figures over my career, nine figures over my career, and what are the implications of that and planning for that potential outcome?” Maybe that’s something that I need to start thinking about now, if I think that that’s reasonably likely. How’s that for absurdity from my perspective out of this discussion?

Mindy:
Well, and I was going to ask that same thing, who am I talking to, to help me plan this who doesn’t really have a horse in the race? Who’s not going to be like, “Oh, yeah, you should get an annuity.” By the way I don’t like annuities. I think they’re horrible.

Joe:
Well, what’s funny is again, I don’t think there’s a bad product. I think annuities serve a fine thing. I think there’s people selling them horribly and there’s companies that are ripping people off, but I think … If I told you, you could get a pension that you created yourself that you can’t outlive, you’d go, “Damn, that’s cool.” Then I say, “Oh, that’s an annuity.” You go, “Oh, that sucks,” because of the way that they’ve been sold so I’m not anti-annuity, I’m anti-annuity salespeople hawking high fee crap.

Mindy:
Oh, okay, maybe that’s a better way to phrase it. Let’s talk about annuities after this, but who does … Let’s say somebody is listening to this and they’re like, “Okay, I listened to Joe explain how life insurance works. I don’t think that I need a policy to benefit or protect my income.” Who do I talk to about getting one for as like a … I don’t want to say tax dodge, tax shelter, I’ll use your word?

Joe:
Oh, yeah, I think when you get to that point; find a fee only financial planner, who can help you with that. I think that for most people listening here, I think it is even far more important to get the amount of insurance right and I don’t like Mindy the rule of thumb around, “Hey, five times your income or 10 …” It’s crap. It’s easy to figure out what the right amount of insurance is, and it really is a range and it’s two things. Number one, there’s an analysis that we used to do called a capital needs analysis.
That means Mindy passes away, what expenses are there that there weren’t before? By the way, this is also a reason why sometimes in some families that have very few assets, somebody who doesn’t bring home any money can have an insurance need. Because if you’re a stay at home spouse, who is taking care of the family, there’s no way that your spouse is going to be able to do all this work without you. They’ll have to hire somebody, or they’ll have to figure it out. We have to figure out in monetary value what that was.
Often, we would have stay at home spouses that we would recommend that they get insurance because of the economic value to the family, not just the paycheck they brought home. But anyway, so we figure out all of these needs. Then we add up those needs, we present value them, we then figure out where’s that money going to come from? Well, you’ve already got $400,000 in the 401K or 50,000, or whatever it is. You’ve got a Roth IRA, you’ve got the HSA. You’ve got money in savings. You add up all of these things, and then you take that money off of the money that you’d need, and then the rest of it you cover with insurance.
Then you go through the types based on how long you think that money is … that you’re going to need that. Like Scott said earlier on, maybe it’s decreasing term, where every year, it’s less than less term coverage for 15 years or whatever the amount is. I would be conservative with it, especially if you’re doing this young. By conservative, I would have it go a little longer than you think, because the cost difference is not that big a difference.

Scott:
This is awesome. That just makes so much sense the way you’re framing it, so I appreciate it.

Mindy:
Yeah. Where can somebody find a fee only financial planner?

Joe:
You know what? I like the CFP organization. They have a list of all the CFPs that are out there. Not all CFPs are fee only. There’s a couple of great organizations personally I really like, and have had a good relationship when they’ve come on our show with advisors that are affiliated with XY Planning Network. I think I look at many of those advisors, very straightforward. They’ll charge you a fee for their time and a lot of the time Mindy, especially when it comes, if you’re just worried about planning … I always like having smart people in my corner, so I’ll always advocate for an advisor, whether it’s a licensed advisor or not, I just like people pushing me to do better.
I always want to be the dumbest person on my team. But if you’re just looking for insurance, you can go to most of the term insurance companies. You can use some of their calculators to figure out what the numbers are. By the way, I said there’s two sides to this. Number one was that capital needs analysis of how much is it going to take. The other side of the field goal we call it was, what’s called a human life value, which is if Scott passes away, he’s going to earn X amount of money over his entire lifetime.
If we present value that money and he died today, how cou;ld we replicate his paycheck forever? That obviously, that number is going to be way too high. But the problem I have with the capital needs analysis of so and so make so much and I’ve got this level of debt, and I’m going to grow my assets at this rate, those numbers are blowing the wind. If I get a capital needs analysis that tells me that I need 250,000 bucks, and I’ve got a human life value of a million, I might buy $350,000 worth of insurance.
I’m not going to put it right at that 250. By the way, most of the term insurance companies out there will have these calculators right on their site. When you think about those, I’d much rather use that calculator then use a rule of thumb.

Scott:
Great. I want to jump back to a couple of questions that came from the Facebook group here. One of the questions is, what to do when companies refuse to pay out a policy. I want to qualify that with a context I think is behind that question where, hey, if I get into an automobile accident and it’s the other guy’s fault, then my insurance is the one that goes after their insurance for the claim. It’s nice to have your insurance provider, figuring that out for you and all that kind of stuff. With the life insurance, it’s your beneficiary against the insurance company, right?

Joe:
Yeah. The only-

Scott:
I think you answered this question before because of the two year thing, but I just wanted to get a framework for answering that.

Joe:
Yeah. The only reason that they would do that are two reasons. Number one, most have a suicide exclusion, which usually is also for the first couple years if you commit suicide. You go buy a million dollars worth of insurance just before you plan to commit suicide, they’re not going to pay. Then also, if you lied on your application, generally, that’s also two years. It’s because you did something that violated the terms of the contract, is the only reason why they wouldn’t pay.

Scott:
Got it.

Mindy:
What medical conditions have the most impact on your rates and when does it make sense to do a no exam policy?

Joe:
I am not a health expert. But based on everything we said I can answer this really easily. Anything where the insurance company thinks you’re more likely to die is going to impact it the most. If they’re going to, if that’s going to push that number up and make it so that the probability of you dying quicker, is much more evident then they’re going to charge you more. They are not allowed by law to discriminate. I’m not saying that they do or not, I’m not on the inside. But by law they’re not allowed to discriminate and say, “I just don’t like Mindy and I’m going to charge her more money.”
Can’t do that. Because of that, you think about that, if I’m an insurance provider, and you tell me that you don’t want to tell me about your health condition. What I’m going to do then is, I’m going to maybe insure you and if I do, you’re going to go in the dirtiest part of the pool. You’re going to be standing around that barrel of money with people that all have to throw a lot of money in. Generally, I would much rather tell people what my health is and hope like hell, I’m not in that last barrel than not.
But if I’m awfully sure that the question is, are they going to insure me or not, and I know I’m going to be in that worst barrel, I’d rather be in the worst barrel if I need assurance than be excluded completely. Another thing to be clear about too, insurance companies by law are allowed to exchange information. It’s much like when you apply for a credit card, it goes on your credit report that you applied to, so you don’t apply for five credit cards at once. If you have a health condition realize that every insurance company is going to know that. If you put it on one insurance application, there’s no way the other ones aren’t going to know. They all work together when it comes to fighting fraud in applications.

Mindy:
Okay, and what about extracurricular activities, like riding motorcycles or skiing or snowboarding –

Scott:
Or rugby.

Mindy:
… or skydiving or like that sort of thing? I don’t skydive but …

Joe:
Different companies have different exclusions, but you need to tell them that if you are going too … Because there will be provisions in the fine print of the policy that say that if you die skydiving or if you die, a big one on a company that I used to really like was about auto racing. If you’re involved in auto racing, they would raise … By the way, it was all types of racing. If you race, automobiles, motorcycles, boats, they went through all the list, that you have to disclose that. This is where I would ask the insurance companies specifically before you start filling out the form because once it’s on the form, then you’re declaring this is the truth. I would ask a person out loud say, “Hey, I race motorcycles, is this going to be a problem?”

Mindy:
Is there anything that I might not think of? Obviously, if I race motorcycles, I am at an elevated risk of dying a horrible death. Is there anything that I would not necessarily think of that would be an issue?

Joe:
I can’t say. The weird ones that I always saw was that statistically and this will frustrate people, because I know there’s probably a lot of people out there that use chiropractors. But a lot of … There have been so many problems with chiropractors that if you’re applying for disability coverage and you have a chiropractor, that’s one that always threw me for a loop. I would have to ask people, “Do you have a chiropractor?” They’d say, “Well, yeah, I go once a month or three times a year for an adjustment or whatever it might be.” I would tell them right away, I’d say, “You’re going to get a horrible rate for disability coverage,” and say, “Well, but my chiropractor is a lifesaver.”
It’s not your chiropractor. It’s that there’s enough claims against chiropractors and that business overall, that insurance companies really have … That one always surprised me-

Mindy:
That is surprising.

Joe:
… but I can’t think of anything else. Yeah, I can’t think of anything else Mindy that really surprised. Oh, I know another one.

Scott:
[Crosstalk 01:04:49] travel to dangerous countries, those types of things?

Joe:
Yes, yes. Are you going to travel and where specifically are you going to travel to? They’ll ask that on the form. The third thing is, if you have a trampoline in your backyard, the number of trampoline accidents in backyards or even if you have a net around them, the number … I remember, if you have a trampoline in your backyard, insurance companies would go, “Ehh.” Especially again, homeowner companies really didn’t like trampolines.

Mindy:
What about pools?

Joe:
Homeowners companies also have issues with pools, especially if you have a pool and a kid, yeah.

Mindy:
Oh, okay.

Scott:
Fast cars?

Joe:
No, but that’s going to be your auto insurance. Your auto insurance, it’s funny that the type of car you have, and if it’s red or not makes a difference. That’s always weird.

Mindy:
I told Carl that I specifically did not want to red sports car because they get pulled over. Scott, come join us on this side of 40 and your rates plummet.

Scott:
Nice. Yeah, I look forward to it.

Mindy:
Okay, can I take a policy out on my spouse, even if he couldn’t be bothered to finish the paperwork on his own?

Joe:
What I would do is I would fill out the entire policy and just have them sign it.

Scott:
[Crosstalk 01:06:05] very specific phrasing of that question.

Mindy:
Yes.

Joe:
Well, let’s be clear. You can’t take out a policy on your spouse and then feed them poison mushrooms.

Mindy:
Oh man.

Joe:
You can’t do that. Yeah, sorry, Mindy.

Mindy:
I got to change what I’m making dinner then. No, oh, could I take a policy out on Scott?

Joe:
You can, but there has to be evidence of a reason why you need that insurability. Companies will have key man insurance. In as much as Scott is a key man in BiggerPockets and he is, it’s going to take a new CEO time to get up to speed. Companies will often take out a key man policy on key people to make sure that they still have money coming in. That’s a good business planning policy. But to finish answering that first question, you can take it out but they have to sign it. They have to sign it.
They have to know they’re being insured. You have to have a reason to do that. A spouse can fill out the entire application. If they’re really lazy, you just fill it all out for them and have them just sign it.

Mindy:
Okay. Yeah, no, I asked … Scott said, “Oh, I don’t know. I don’t have life insurance.” Yeah, you do. BiggerPockets has a policy on you.

Scott:
Perhaps.

Mindy:
Let me guarantee that.

Scott:
They don’t know about my travel plans to like, I don’t know, Nepal for my Everest expedition.

Mindy:
Oh, yeah, yeah, I definitely want to get a policy on you before you go to Everest. Okay, Joe, I think this will be the last question because you’ve answered a lot of these just in the general conversation. What criteria do I look for in a good life insurance policy, and how can investors find resources or connect with the right life insurance companies? I think we covered the criteria part of that, but how do you find a good life insurance company?

Joe:
I think there’s a few things that you’re looking for. You want a hybrid of two things, you want an insurance company it’s been around for a while, because of the fact that the big important thing about your insurance is, that they’re going to be there when you need the benefit. The reason you get insurance is to get that benefit later. I see people just look at price. If I’ve never heard of the company, and I’m not sure if they’re going to be around tomorrow, I’m not sure that I want to give them money.
By the way, the precedent has always been just to be clear before you get a bunch of hate mail is that, when a company does go under, other companies step in and take their book of business and ensure their book of business. The chance of that happening still is remote. You could probably go with the cheapest insurance and get away with it. I just don’t want to take that risk. This is risk management that I’m doing. I want them to be around for a long time. At that point, it should be pretty competitive.
Now I had an insurance agent tell me one time that insurance companies all have a group of people they work with best, but that changes as you age. Let’s say that as an example, progressive for car insurance really likes you between 25 and 35, and at 36 years old you’re much better with Amica or you’re much better with, whatever, Allstate or whoever the company may be. That may be their niche. Whenever you have a birthday when it comes to things like your auto insurance, that’s a great time to look.
With life insurance, you’re going to make this decision one time. I think then once you know that the policy has been around a while, if it’s a term policy, you can specifically look at two things. Do they offer the policy that you want? Scott was talking about decreasing term policy, where it’s less coverage every year. Some companies don’t offer that. You want to ask, do you have that particular policy? Then the second thing is, if they do, then if two companies do then it just comes down to price, right? Who’s offering the lowest price? By the way, you’re going to find out this idea that companies are ripping you off again is a lot less than you think.
The difference when you go through all of this decision making process and you’re truly comparing an apple to an apple is way, way razor thin margin versus what people think it is, when they’re arguing about it on Facebook.

Mindy:
Wait, all the experts don’t discuss this on Facebook?

Joe:
It’s unbelievable. Sorry, I should have said hashtag spoiler.

Scott:
I think every random person who discusses life insurance on the Facebook group really nail it right in the head. Anyways.

Joe:
It’s way more fun Scott to say they’re all ripping you off. They’re all ripping you off.

Scott:
Yeah, that’s right. They know it intimately.

Joe:
Yeah.

Scott:
All right. Well, is there anything else … We’re coming up on our time here. Is there anything else that we should know about or questions that we haven’t posed yet that we should be throwing out there that you can think of are common things before we wrap up here?

Joe:
No, I think that’s the main stuff. I really like when you … really I think to encapsulate everything we talked about Scott, to throw away the there’s one type that’s best, realize that your situation is unique and focus on your situation and the fact that there’s thousands, you’re buying it per thousand, you want to buy it for a set amount of time and then work backward. I think you’re going to make a much, much better insurance decision than using a rule of thumb.

Scott:
Perfect. Love it.

Mindy:
Joe, this was super helpful and this really helped explain to me what exactly is going on with life insurance and just defining the whole term and universal life insurance policies is very, very helpful, how it works and all of that. I really appreciate your time today. If somebody did want to actually reach out to you and talk to you more, how could they find you?

Joe:
Well, you can find me, I’m on Twitter, AverageJoeMoney. Come talk to me there. You can of course, find me at a show where you’re not going to learn anything close-

Mindy:
Nothing.

Joe:
… to what you’ve learned here. The goal of our show is to never teach anything ever, so you’ll find me at Stacking Benjamins every Monday, Wednesday Friday.

Scott:
Stacking Benjamins is a great trade show. It’s very fun. There’s a lot of learning going on there even though Joe tricks you over time into absorbing lots of information about complex financial concepts, so definitely go checkout Stacking Benjamin.

Joe:
You’re going to ruin my reputation Scott, you got to stop that.

Scott:
He has some fun guests on from time to time as well.

Mindy:
We listen to you whenever we clean up the garage. My husband listens every time, but I listen when we’re cleaning out the garage, which is very frequently and I just always associate you with the garage and not the basement. But Joe does actual record in his mom’s basement.

Joe:
Yes, mom’s basement which has been moving around a lot lately. We’ve been nomadic here for a while, mom and I moving around the country.

Scott:
Well, this has been great. Thank you. I think I just want to say that this has been a premium episode of the BiggerPockets Money show podcasts so we appreciate it Joe and your time and all your insight here and yeah, thank you.

Joe:
Thank you guys. I appreciate it. It was a ton of fun. I love nerding out about insurance.

Mindy:
Clearly, clearly you love this. You’re going through the history I’m like, “Oh, wow. Either he made that up on the fly, which is really impressive or he actually knows that which I’m hoping, which is also really impressive.”

Joe:
Like I said, it may not have happened that way exactly Mindy. But I think it helps explain how reactionary that industry is, yeah.

Mindy:
But that’s still very, very helpful. Okay, so you mentioned a couple of books and you mentioned your show and your Twitter and all of that and we will include all of these links in our show notes, which can be found at biggerpockets.com/moneyshow139. I guess we’ll see you in 100 more episodes, Joe.

Scott:
99.

Joe:
I hope so guys. I’ll be waiting until then. I’m not going to breathe until then.

Mindy:
Oh, don’t do that.

Scott:
Sounds good.

Mindy:
Okay, and until then you can find Joe at his show. He’s got 87 million episodes, so you will get no shortage of Joe. Okay, we are out of here. I have no good insurance pun. Bye.