Last week we talked about the ideal financial product. Today, we’re going to talk about the ideal financial tool. Stay tuned.
From Philadelphia, the home of the Liberty Bell, Financial Freedom Radio starts now. Here’s your host, Raymond Jewell.
Welcome everybody to FinancialFreedomRadio.com. My name is Dr. Raymond Jewell and I’m gonna be your host for the next 15 or 20 minutes or however long we take. Today, we’re going to dig into the ideal financial tool, which we called last week the ideal financial product. We’ve had a number of people asked questions. So we want to answer the questions first. First, let’s bring in our illustrious producer. How are you, Steve?
Hey Ray, how are you? That was quite a build-up there. I don’t know how illustrious I am. It’s funny, I didn’t even want to bring this up, but I’ll just talk. This is how weird this day has been. I got attacked. I just came in from taking the dogs outside and I got attacked by a bug as we were running the intro. So the intro was a little off today. He was on my neck and now he’s gone and now I don’t know where he went. So if I freak out a little in the middle of the show…do what?
Did you kill it?
No, it was crawling on my neck and I picked it off. I thought I threw it on the ground.
Did you take a life?
I did not take a life. I simply tried to remove it from my body, but now I don’t know where he went. So I’m a little freaked out right now.
I think everybody’s all excited about your bug.
Well, they should be excited about this show. Last week was one of the biggest watched, listened to shows that we’ve had so far. At the end of the show, after we wrapped it, I had questions. Come to find out, a lot of people ask me questions about the show. So I thought this would be a good opportunity for us to dig in and do a little q & a with some of the questions I had and some of the questions other people asked me. So I thought we could entertain that idea for this show. If you don’t mind me trying to hijack your show again.
No, that’s fine as long as it’s in the best interest of the consumer.
Stop, you’re just being so silly. Okay, so one of the things you mentioned last week, I’m kind of going off-script here a little bit. I get the idea of a whole life policy is basically a glorified savings account with a death benefit for all intents and purposes. Isn’t that kind of true?
No, not even close. It’s more sophisticated than that.
Absolutely, it’s fancy. You’re putting money into it on an ongoing basis, right? You can take money out of it, you can borrow from it. What really caught my attention and what I really had a hard time grasping was I’m paying money into a policy. If I get injured, disabled, whatever, I’m unable to do that. The company is going to continue to make that payment for me. That just doesn’t make sense. Why would they do that?
Right, well it’s a disability portion of it. It’s a writer that attaches to the policy. You need life insurance is a very vital part of people’s portfolio and it does many things, but we have the internal rate of return, external rate of return, and eternal rate of return. So in order to satisfy all those, you have to have something that’s non-interrupted. If the thing that can interrupt and devastated lives number one is death. We all know that. It can financially ruin people because if you lose the income of an individual, depending on how much that income is in their family life. There’s a term in economics called human life value. It was a belief coined by Solomon Hebner who wrote a book called the economics of life insurance. He was a professor at the American college. He wrote about human life value and what that is is a value that we have in our lives. The value that we have to our families, the value that we have to our business. Whatever we do, there is a value. Let’s drill it down to human life value. Whenever you have a human life value, that’s the value you have to your family and your spouse. She has value to you. So, you want to try to calculate what that value is and determine and make sure that you ensure that human life value. So as you start to get older, you have a greater value when you’re younger because you have more earning years. But as you start to get older, your earning years start to drop off. In retirement, you have human life value that translates to medical conditions and taking care of things that you don’t worry about when you’re younger.
So you want to make sure that you protect that human life value. So at a young age, you protect it with a disability part of it. As you start to get older, you’ve got a disability now. I’d say pretty much all of the whole life policies have the disability drop off at age 65 because then you qualify for social security and you’re in retirement. But at 65, depending on the age of it, you’ve got all sorts of things you can do within that policy to make sure it continues on. Disability protection is a vital part of a macro-economic model. When you get it in one portion, you now have assured yourself and your heirs that there’s going to be something there no matter what happens. Make sense?
It makes sense, it just seems such an unusual concept. The company would be willing to put money into a financial vehicle for me on my behalf. It’s like, hey listen, you can’t do it so we’re going to do it for you. It’s just such an interesting concept that I never even knew existed.
It’s a writer that you pay for. It’s part of the premium.
So part of what you’re paying for is the privilege of having that done for you.
You could do it without it, but it would be silly. All these financial people term insurance. Let’s look at what term insurance is.
That was one of the questions I got. The difference between term and whole life.
All insurance works like this. When you’re young, there’s a minimal chance you’re gonna die. I think the last statistic I heard was less than half a percent or one percent of people that had term insurance actually die while they have it. The chance of you dying is very slim. As you start to get older, the chance of you dying gets greater. So what do the insurance companies do? They increase the premium as you start getting older in terms of the insurance. They’re willing to take the risk when you’re not going to die, but when you’re getting older, they want to minimize their risk. They don’t want to take it, so they keep jacking their premium up. So eventually, you’re discouraged from having it or it will expire at a certain age. Usually, it’s age 70. Whole life works the same way. It’s a minimal chance you’re going to die, so there’s not a lot of cost to death. So that money goes into a pool of money. When you look at the whole thing in total, your pool of money is growing and I think most of them are guaranteed 4% on guaranteed cash value and then you get dividends. There’s two types of insurance companies. There are a stock company and a mutual company. Stock companies pay dividends to stockholders. Mutual companies pay dividends to policyholders because policyholders own the company. So the more efficient the company is in running their business every year determines the number of dividends they pay back to the policyholders. The term insurance part is what it’s called, term. So what a lot of financial planners will do is sell you term insurance because it’s an easy, cheap way to solve a problem, but it’s very inefficient because you get nothing back. So when you pay for the premiums in a term insurance policy, you have a lost opportunity cost on those dollars.
You have to look at those dollars going out the window. You have to say, well I could have kept them and put them at the current rate of return that I’m getting on other things, what would I have gotten? That becomes a lost opportunity cost. You lose the lost opportunity to invest it elsewhere. So with whole life insurance, you not only have no lost opportunity cost, you have a growth on your money. Now, a lot of people say it doesn’t beat the markets. Well, when you look at it in total over the long run, insurance policies have beat markets. My insurance policy have beat markets because when people have their money go down. We just saw recently the monies contract. They lose. So if you’ve got $100 in the market and you lose 50%, you’re down to 50. People say they’ll win that back. Well, yes you can. It may take you 3 or 4 or 5 years to get that 50 back, but in reality, you should’ve had $150. You lost 50 and it just dissipated into thin air. People say it’s not a loss until you take it. That’s true, but on the books, it’s a loss that you have to work to recover and then go even higher. In your insurance policies or any kind of instrument that has a guaranteed floor, it never goes down. It just keeps going up.
So when the market went down, I lost nothing. People lost nothing that was in insurance policies. There’s other instruments too like annuities.
We’re not talking about this is the only investment vehicle that people should be looking at, but this is one of them. So we’re not saying that it’s the market or whole life policy. We’re saying that a whole life policy is a way to protect some of your assets. This isn’t an either-or proposition.
It’s not an investment.
It’s an investment if it gives you money back for a 4% rate of return.
When you look at it, it becomes an economic tool. That’s what I was talking about when I introduced the show. It’s a financial tool now that enables you to take these dollars and grow more.
Isn’t that the same as an investment?
Well, if you take your money out of an investment, you stop earning. There are ways to make money out of these tools and then use it to grow more money. While you have it out, it’s still earning growth.
Can I summarize this question, the difference between term life and whole life? If I stop paying the premium on a term life insurance policy and say I don’t want to pay the premium anymore, is it fair to say that I have nothing now? I’m only insured or I only have a policy as long as I’m paying the premium?
Correct. It lapses.
It lapses and then you have nothing. It’s basically like thanks for the free money.
They stop paying after a 31 day grace period and then it’s gone.
But the insurance company is saying we’re willing to pay a death benefit to you as long as you keep paying us a premium, but once you stop paying as a premium thank you for your money. Have a nice day. With a whole life policy, I’m paying the premium into something and if I stop paying, I still have that something assuming I’ve gone past the first few years. Let’s say I’m 10-15 years into a whole life policy, I still have an asset there, right?
To me, that’s kind of a big summary of the difference between the two. So, the next question we got was how much money does somebody needs to get started with a whole life policy?
It depends. I don’t mean to be evasive with this. It depends on how much you’re willing to save. At a younger age, you could put away $50 a month and get maybe $50,000 worth of coverage or whatever and the savings account grows. At a young age, you can get a lot more than you can when you’re in your 50s.
So someone in their mid 20’s or late 20’s could start with $100 a month.
You gotta look at their macro model and then you can decide, you can see where the dollars that they can put away.
Once again, you’re going back into the modeling. I’m just talking about from a policy point of view. If somebody wanted a whole life policy, could they get one for $100 a month?
So, really there’s no minimum limit? Some of these places are like you’ve got to put at least $500 a month in. With a whole life policy, what you put in will determine the quality or the coverage or something like that. If I put in more money, then I’ll get more coverage if I put in less money, can I up it later?
No, a whole life once you start, that’s what it is forever. It’s like your mortgage, once you contract to pay a mortgage payment, that payment never changes. So as inflation goes up, that payment stays low. You have to get another one.
Let’s say I’m in my mid-20s and I’m paying $100 a month and then all of a sudden, I get a good-paying job and I’m making $50,000 a month’s and now I wanna put $500 a month into the policy. Could I get another policy for 500 and stop paying the 100 and then basically have that sit there?
No, you keep paying the 100. You’re paying the $100 and you can pick up another one.
So you can have more than one?
This is something we’ve not talked about. The longer you have that policy, the more seasoned it becomes and the higher the dividends go. Eventually, the dividends could exceed your premium.
At that point, does it pay for itself?
You could. For every dollar you put in your insurance policy if you’re getting $2 credited into the cash value, wouldn’t you keep putting money in there?
Yeah. You answer the question. You can get started with virtually nothing?
Okay, what about this life insurance policy? What about health requirements?
You gotta pass a physical. Depending on your age and how much you’re asking for, sometimes they’ll take a risk for a lower amount without a physical, but yet they will have a para-med come to the home and actually look at your health, detect your blood pressure, check all your vital signs and look at you physically. There’s a weight category that you gotta fit within. So you can get turned down.
Let’s say I’m trying to get a policy for 500. I’m making up numbers just to keep the math simple and keep the concept simple. If I want to get a policy for $500 a month, it’s got a million-dollar coverage and they say no, but we could give you one for $50,000 coverage for $100. If you get declined for one, could you get one less?
Yeah, it’s called ratings. Sometimes they’ll do that based on your health.
I guess my point is, I’m kind of older and I’m kind of out shape, I have high blood pressure. So I may not be able to get the policy that I want, but I could get something now to get the ball rolling while I’m getting my health in shape, while I’m meeting the requirements of the policy I want, and once I get there, then get another one of the ways I originally wanted it. Could I do that?
It depends on what the medical company wants.
But it’s possible?
Possible, but it’s called a rating. They’ll charge you more money for lower coverage.
Okay. So even though I can get it, they’re gonna charge me more because of the rating?
Maybe. Lay of those twinkies.
I don’t eat twinkies. I eat reasonably healthy.
All the mountain dew drink.
It’s diet caffeine-free mountain dew. It’s basically bubbles and aspartame. So the next question I got a lot of was why are there no financial people talking about whole life? They all seem to be talking about term life policies? I think you kind of covered it, but here’s a chance to talk about it a little bit more. Why is no one selling this?
It’s interesting. You really don’t know what the financial planners don’t know. So when they’re not working in a macro-economic model, it’s easier for them to convince people to buy term insurance because that is conventional wisdom. I don’t know if I’ve explained this, a little bit of weed stuff. John Kenneth Galbraith coined the term. He’s an economist, coined the term conventional wisdom. It was a way of explaining away untruths. So what they would say a lot of times is by term and invest the difference. People hear that enough. So they end up thinking that that’s the right thing to do when in fact, it’s wrong. It doesn’t make any sense, it can be proven wrong, and you could see the flaws in the model. It’s easy for them to sell a term insurance policy because it doesn’t require a lot of money and then get people to put money into a fund and they get to manage that money. A lot of them look for money under management. So, it has to be in the best interest of the consumer as to whether you should go that route or not. You can’t look at something in micro and accept it as a macro. You’ve got to look at it in macro first and then attack the micro. It’s easy for them to do it and a lot of them are looking for mutual funds and things like that that they can get money under management because they get paid a commission off of it. They get paid a commission off the term and they get paid a commission off the whole life.
It’s harder to sell whole life because of the bad press that it’s gotten. So when somebody sees how the whole life works within the model and they understand the model, they see it for being a logical step. But without that, it’s very hard to explain to someone. So when you look at the model and you see the pieces in the model and how they fit together, you see that you need to take the logical steps to solve the problem. Thatis to get financial security, build wealth, enjoy wealth, and leave it to your kids or your heirs. If you don’t like your kids, you can leave it to a charity, whatever.
Alright, we’re out of time. So anything you want to say to wrap up?
Thank you all for coming and downloading financialfreedomradio.com. I hope this was helpful. We’re going to keep digging into financial tools and talk about how to integrate them into your financial world. So I want to thank you for coming. Share it with your friends, like it, subscribe, and ring the bell. We’ll see you back here next week at FinancialFreedomRadio.com. Take care. God bless.
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