I just want to read off some of the names here. We got Hippie Daddy, Doug Smith, Terps Fan 908, Jeremiah Wiser, Ming 2007, Beatle Nation who actually writes that “Allen does a great job of demystifying a complex topic.” Well, I do my best so thank you for that. William Hensworth, Michael Nol and all the others. So we have well over, I mean, I don’t know the number right now, but we have a whole bunch of people that have rated and reviewed the podcast.
If you haven’t done it, I would say please. If you’ve gotten any value out of it, please go ahead and do that. It does help others find the podcast, and it gives me feedback on if I’m on target with the content. I really appreciate it if you could do that.
Second announcement is we’re actually having a birthday. Option Genius is 10 years old. I can’t really believe it. I didn’t even realize it until April. February was the month when we started the company, and it’s 10 years old. Most businesses don’t even make it to 10 years. I’m stunned and shocked that something that started off as like a side project, something to just keep me busy, has continued to grow and evolve into what it has, and it keeps going. The sky is the limit, everything looks potentially is unlimited. More and more people are asking for help everyday, and we are planning on doing everything we can to get you whatever help you need.
We are so grateful to all the customers that we’ve had the pleasure of helping over the years. We have so many success stories, it’s heartwarming. That’s really the best part of doing this. When someone writes in or calls in and leaves a message, or hits me up on Facebook and says, “Hey, you know what? This one thing you did or one thing you told me has made so much of a difference.”
Some of the courses that we’ve had, we’ve gotten testimonials from there where they’re saying, “This really changed my life. I can’t believe what I didn’t know before but this light bulb went on and now things are different. My family’s grateful and I’m grateful and it’s wonderful.” Thank you to all the customers, all the members that we’ve had over the years. Without you, you know, you put the confidence in us. You actually put your wallets up and paid for it and I can’t thank you enough.
Thank you also to all the email subscribers, everybody that’s on our email list. Some of you have been on there for years and years. I actually got two emails this week from two different people who said that they’ve actually been on the list for years, and they appreciate the content, and they love everything that we’re doing.
Also, thanks to you, the podcast listener. We’re up to episode 23. It’s been a fun ride, and it’s interesting. I’m learning at the same time. I think that’s one of the ways that you really show that you know what you’re talking about when you teach it to somebody else. The podcast has been a wonderful experience.
I know before I started this, maybe a few months earlier, I started listening to podcasts, and I was like, “Wow, this is really cool. It’s like a radio show.” I love to do one of these. We tried it out as an experiment, people really liked it, and the numbers just keep increasing for how many people listening to it, subscribing to it, downloading episodes, so it’s awesome. Thank you for all that.
I’m very, very humble. If there’s anything we can do for you in the next 10 years, just reach out to us. Let us know, please. We are here to serve. I know everybody says that but if there’s something we can do for you, please let us know.
Now on to the show. Life insurance, that’s the topic of today’s episode. Something we should all have. Everybody knows you should have life insurance because death happens. It’s sad, but it does happen. Sometimes it happens unexpectedly but life insurance is something that has been around for centuries and for good reason. It really helps people.
There are different types. There’s two main groups, of course. There’s the term policy, the term life insurance, where you pay an amount every month for a certain amount of time. If you die within that time, the insurer will pay off your family. Let’s say you want to buy a million dollar policy, and it’s going to last for 20 years. Every month you make a payment to the insurance company and if you die within those 20 years, your family gets a million bucks. It doesn’t matter what you paid for it, your family gets a million dollars.
If, for example, you live longer than 20 years, that policy will expire and it’s over, it’s done. The contract is finished. That money that you paid for is gone, but you did have that insurance. Basically, you are betting against the insurance company that you are going to die. That’s what it boils down to. You’re going, “Hey, Mr. Insurance Guy. I know I’m going to die in the next 20 years, so I want you to pay me off.” And the insurance company is looking at you like, “No, you’re not going to die, buddy, but we’ll take that bet.”
Think about it. You pay money to create a contract. The contract has an expiration date, and if you don’t die before the deadline, the contract expires, and the insurance company keeps all your money. Does that sound familiar? Something that we’ve been talking about maybe on these podcasts? It’s exactly like selling an option except the insurance company is the option seller, and you are the buyer.
Over here on the podcast, I’m trying to teach you to sell options so that you’re the insurance company making all the money, and you’re not the gambler, not the speculator. Over here we’re buying life insurance, but we’re flipping it. We’re the buyer, we’re the gambler or the speculator. Cool, huh? Funny how the world works.
Then also there’s what’s called cash value life insurance. Now there are different categories of this. There’s whole life, there’s variable life, there’s universal life, there’s variable universal life. They’ve got all different categories and names and all that stuff. That’s the one I want to talk about today. Term life, pretty simple, if you don’t have it, get some. Whole life, people have mixed feelings. Some people think it’s a rip off, some people think it’s great.
Back in 2005 for me, things were looking up. I’d just gotten married, had my first real job, my wife was a nurse so she was making money, I was making money, so I was looking for an investment, something long term, something where I wouldn’t have to do anything, it would have good returns. I had expected my pay and my salary and my income to increase, so I wanted something that could have been tax deferred, so I could just put money in and then have it tax deferred until forever, and have it liquid, so I could use it whenever I wanted to. I was looking for something. What are the different options? What’s out there? What’s out there? Because I wasn’t trading at that time, that came later on. I wasn’t trading, I didn’t know much about options and stocks. I had done a little bit, but it wasn’t full time.
I stumbled upon life insurance. At first, I was like, “What is this? This is boring, man. What the heck is this all about?” But I dug into it and then it turned out that they had a lot of really, really great benefits that you don’t really find in other investments. Basically, whenever I want to learn about something, I will go all the way in. I will get every book I can about it. I will do everything I can to learn about it.
I remember having on my nightstand I had about three or four different volumes about life insurance. And when I say volumes, I don’t mean books. These were about 400 or 500 pages full of very complicated legal words that it took a while to actually go through and understand the whole process and if it was actually worth it.
But what I found was that this type of cash value life insurance has some amazing benefits. That is why I wanted to do this episode because if you’re not aware of these, then you should be. First of all, when you put money in, that money grows tax free. You aren’t paying any money on the growth. Unlike your regular trading account, every year you have to report to the IRS how much money you made, how much money you lost. Then if you make money, you pay taxes on it.
And on a life insurance policy, they have the cash value portion of it. Any money you make in there grows tax free. When you go to pay the taxes on it, you have more money to grow and grow and it compounds by itself. So that’s the first benefit.
Second benefit, you can actually withdraw the money tax free, as well. This is kind of like a Roth IRA if you’re familiar with a Roth. You put money in after tax, you pay your taxes on your income, you put that money into the Roth IRA, it grows tax free and then when you take it out, you don’t have to pay any taxes on it. Same thing here.
Now there is a catch. Normally you cannot do that in an investment except if it’s a Roth-type investment, but here the insurance company doesn’t just give you the money. You can go to the insurance company and say, “Hey, you know I got $200,000 of cash value in my insurance. I want to take out $50,000 because I’m going to go buy a house, or I’m going to go on vacation, or whatever you want.”
The insurance company will turn around and say, “Okay, sure, we’ll give you the money, but it will be as a loan against your policy.” So they’re not just going to give it to you outright. That’s a distinction you have to know. It doesn’t make any real difference, though, because … Well, let me go back a second.
Depending on the company that you get the insurance from, some companies will actually make you pay back that $50,000 in small monthly payments and some of them will say, “No, don’t worry about it. You don’t have to pay it back. You pay it back whenever you want.” And if you don’t pay it back and you die, well, then they’ll just cut it off from your cash value.
You have a $200,000 cash value, and you take out a loan of $50,000, but you still have a $200,000 cash value. When you die, they just give your heirs $150,000 plus whatever the death benefit is. Basically, they’re giving you the money. If you owe money they’re giving it back to you, there might be interest, there might not be. There might be payments, there might not be. You have to look for a good insurance company that works with you and will give you the money back without requiring payments, and if you can get it, without any interest. You don’t want them to be charging you interest on the money that, it’s your own money.
Number three, and this is something that I found in my research, that creditors or lawsuits cannot touch your money. If you declare bankruptcy, if somebody sues you, if you’re a doctor or even a lawyer, or if you’re in some kind of industry where there’s a good chance of somebody coming after your assets, if it’s in a cash value life insurance policy, they can’t touch it.
This was a huge thing because I had expected big things for myself and going into different industries and whatnot and I was saying, “Oh, I might get sued so let’s have my assets in a way where nobody can touch me.” The story that I heard was O.J. Simpson, when he got sued by his ex-wife’s family, Nicole Simpson, her family, when he didn’t go to jail, but they sued him in court and won for damages against him for killing Nicole Simpson, but he didn’t pay them because he didn’t have any assets, he had no money.
Well, how could he live such a lavish lifestyle? He still had his houses and cars and travel and all that stuff. How did he do that? Well, the story I heard was that he had all of his money in life insurance policies, so that way they couldn’t touch it. Even if somebody gets a judgment against you, if your money is in a life insurance policy, they can’t touch it.
Kind of like a homestead exemption on your house, for those states that have it, homestead. If creditors come after you, they can’t take your house because it’s homesteaded, similar to that.
Number four. The death benefit is tax free to your heirs. Let’s say you get a $2,000,000 policy. Over the years you build up some cash value, let’s say you build up $500,000 as the investment portion of it and you die, your heirs get $2,500,000 tax free that they don’t have to pay any taxes on. That’s with all life insurance, but it applies to the cash value, as well. Not only does it grow tax free, you can use it during your lifetime tax free, creditors cannot touch it, and if you die, your heirs get it tax free. So your wife, or your kids, or whoever your beneficiaries are, they can get it tax free.
I thought those four things were pretty amazing. I hadn’t found that combination in very many different investments. Yeah, the Roth IRA you could do it. Now there’s the Roth 401K all that, but those have limits on how much money you can invest. If you have, I don’t know, let’s say you win the lottery or something, or you get some big bonus, or you get a big amount, let’s say you get $500,000, well you can’t go put it in your Roth IRA. There’s a limit to how much money you can put in every year.
But in a life insurance policy, yeah, you could do that. You could turn around and say, “Hey, you know what, Mr. Life Insurance Guy, I need to put in this much money.” They might not allow it in one policy, but if you spread it out into different policies, yeah, you could do that. That’s pretty cool, as well.
It can be expensive. It’s much more expensive than a term life insurance, but over time for the right people, it is definitely worth it. If those four benefits would appeal to you, and you were already maxed out on your other retirement funds or retirement accounts, this is definitely something that you should be looking at.
What I did was at that time I wanted to verify what I’d read in these books. I went to my dad’s financial planner, this is a guy, he was working at American Express, which is now Ameriprise, I went to this guy, he’s part of our community. I thought this guy’s not going to steer me wrong, he’s going to tell me the truth, and he should know this stuff because he’s a financial planner.
I told him and I say, “This is what I’m looking for. I want a policy where I can make varying deposits. Meaning some months I can put in a thousand, some months I can put in three hundred, some months I can put in five hundred depending on how much money I make that month or whatever, if it varies. I want to be able to change that. I want to choose my own investments. I don’t want to be stuck with four or five mutual funds. I want a whole bunch of mutual funds or index funds or whatever that I can choose from, whether it’s global funds, or commodity funds or bond funds or whatever. I want a good mix.”
“I want to withdraw the money. If I take out a loan for the money, if I use the money for whatever reason I want to take the money out as a loan, I want it to be at zero interest. I don’t want to be paying money on my own money, I don’t pay interest on my own money. Then eventually what I want, is I want the policy to pay for itself. Because there are fees, there’s the life insurance component of it. That costs you money, you have to pay for that. Every month the life insurance company will deduct some amount of money from your cash value to pay for the life insurance.”
“Now what I wanted was I’ll keep putting in money every month, every month, but eventually what I want is the cash value of the account to be so large that from the gains, or from the yield, or the profits, or whatever you want to call it, that gain will pay for the life insurance policy itself, and it’ll keep growing. For example, let’s say on a yearly basis, this life insurance policy is going to cost me $500. I want the gains from my investment portion of it to be more than $500 so that it could pay for the policy itself, and continue to grow, so at that point I have free life insurance. I don’t have to pay for it anymore. The gains are paying for it and I don’t have to worry about it. I thought that would be so cool if I could be like 40, 50 years old or something and be like, ‘Oh, yeah, you know. I have this free life insurance. It’d be really cool. It’s a cool story to tell.'” So that’s what I was looking for.
He said they had that, which they did. He had that, he called it a variable universal life policy, a VUL. Right then and there, he set me up so I signed up, I started off putting $1000 a month on a $500,000 policy. They had a limit at the time where you could only put in $12,000 a year because it was $500,000. There were other policies. You get a larger policy, then you can do a whole lump sum if you want to but I didn’t have the lump sum, I could do $1000 a month so I chose that, went with the $500,000 policy.
This continued, this went on month after month. The money was just being deducted. I had chosen the mutual funds I wanted my money in, I was happy with them. Until about August 2008. At that point I had been laid off. I couldn’t afford the $1000 a month. I needed to keep the policy growing so I changed it to $200 a month. I had to keep putting money in, I had to keep paying for it because it wasn’t paying for itself yet, and I didn’t want it to cancel. So I had to keep paying a little bit. So I changed it to $200 a month instead of $1000.
Again, out of my mind, not thinking about it. I’m off doing other things, $200 automatically going every month. Cool. Now one thing you might not know about me is that I keep track of my net worth on a regular basis. I used to do it every month, but now I do it about every quarter, where I have a spreadsheet that goes back 10, 12, 15 years. It’ll list every single one of my accounts, every single one of my assets.
I will find how much it is worth when I’m doing the spreadsheet and I’ll plug the number in, so that way I can track if my net worth is going up or down, if a certain account is growing or falling, why, I’m going to go look into it and say, “Hey, what’s going on here?” What’s the rate of return? What’s the return on my assets? Where am I making the most money? Is it on this account? Is it over here? All these different things.
I’m doing this on a regular basis. So while we are going through probably the greatest bull market of our lifetime, the last few years, I’m looking at my spreadsheets and all my accounts are doing well. All my accounts are growing up, except for the life insurance. For a while I was like, “You know, I’m only putting in $200, it’s not going to grow that much, that’s $2400 a year, it’s not a big deal, it’s growing a little bit, it’s okay.” Let it go, let it go.
But then eventually I got to the point where I said, “You know, I need to really figure out what the heck is going on.” Because there was some months where it was actually losing money when it should’ve been making money. Some of my investments were up 10%, 12% for a year. This thing was only up like 2% for the year. I’m like, “What the heck is going on?” This is not right based on the mutual funds and everything that I had chosen.
I started digging in, started looking at all of the statements and going through all the fees, and it shocked the heck out of me, how much money I was paying on this crazy policy. For example, Ameriprise, themselves, were charging me 5% on every deposit. So every time I would give them money to put in the account or in the life insurance, they would take out 5% right off the top. I was like, you know, why are they doing that? They were just taking it off right off the top because they can.
Then I had my money in all these different mutual funds. Each of these mutual funds were charging me 2% to 3% on assets, which is, if you know anything about mutual funds, that’s a lot of money. If you’ve heard of anything from Jack Bogle or any of these guys that talk about index funds and why mutual funds are a bad deal, the Jack Bogle, he’s got an amazing quote. He goes, “The mutual fund guy, he has the best deal of all because you take 100% of the risk, you use 100% of the money, but you only get 30% of the return. So you put up all the money, you take all the risk but you only get 30% return.” Why does he say 30% return? Because of the fees. If you’re paying 2%, 3% or more on your fees, most of your return that is being generated for you is going to go away in fees.
You can go look it up if you want to. That’s not the point of this podcast but my mutual funds were charging me a lot of money. And then, of course, Ameriprise was charging me for the death benefit. That was after they took out the 5%, which doesn’t make any sense. Then on top of that, they would charge me a management fee every year. Every year there was a management fee based on the assets. They were actually charging me twice. Once to put the money in and then every year whatever’s left over, the mutual funds were charging me and the death benefit was charging me. I’m getting nickle and dimed by all these fees.
My goal, originally, right, was to have the policy have enough cash to be able to generate enough returns to pay all the fees and keep growing. But at this rate, it was never going to get there. There was no way. It was impossible. Now, full disclaimer, I knew in advance that this type of policy only works if you max it out. So I did that for almost four years. The maximum I told you, you could put in was $15,000, I was putting in $12,000. If I had kept that up then maybe eventually, eventually it would have been a self-sustaining policy but the fees would’ve been massive anyway. With an amazing bull market that we’ve had over the last 10, 12, 15 years, it really should have done better.
In the end, I finally decided to cancel the policy in May of 2017. Now, I still believe in this type of life insurance and I am actually looking at another policy with another company, TIAA-CREF, I believe. But this policy I decided, I’m getting out of this, I’m canceling this. So I had to get on the phone with Ameriprise, talk to about four or five different people before they actually let me cancel it.
When I was on the phone with the final guy, he was still convincing me not to cancel. He’s like, “Are you sure you want to do this because you have such amazing gains and take a look at this and blah, blah. This is such a wonderful policy.” He looked at my returns and he was so excited. He was like, “Oh, my God. You had an amazing return on this policy. You made 42.5% on this policy. How can you cancel this? This is amazing. This is unbelievable.”
I was so pissed. I was furious. If I was there in person, I would’ve hit him. I actually did, on the phone, I screamed at him. I was like, “Yeah, I made 42.5% but it took frickin’ 12 years to do it. What is that on a yearly basis, man?” I took my calculator, 3.2% per year, that’s how much it was. “You’re telling me I had a 42%, no I didn’t get 42%, I got 3% a year after all your frickin’ fees.”
Now you put that in context, the SNP 500 over the same time period gained 124.8%. That’s almost triple. Almost triple what I made. My mutual funds were almost all of them in stock funds. So it should’ve had a very close, maybe not 125% gain, but it should’ve made 100% instead of just 40%. In total, I had put exactly $60,000 into this account and when I canceled it, I got back $82,521 for a gain of $25,521 over 12 years.
I guess I should be grateful because it could’ve been negative. I could have lost money, and I did have life insurance over that time period, so if I had died, yes, my family would’ve gotten the $500,000. So that is how my life insurance made me $42.5%.
What is the lesson here? Is it not to get cash value life insurance? No. I still think it’s a good policy if you get it from the right company. I told you I’m currently looking for another policy. I’m thinking about getting it from TIAA-CREF, I haven’t looked at them yet but depending on their fees and what they have available, I’m thinking about them because they are a nonprofit and so they have much lower fees and they don’t charge any management fees, and they have low cost index funds that you can choose.
They’re more about the consumer, supposedly. Ameriprise is all about the money for themselves. They’re a publicly traded company. It’s their job to make their shareholders money, not to make their customers money. I assume that the guy had, the financial planner when he signed me up, I’m assuming that he had some kind of fiduciary responsibility to put me in the right account, or to advise me if this was not a good deal or whatnot. But, oh well, who knows.
But TIAA-CREF, take a look at them if this kind of policy is interesting to you. Their fees are lower. They have better options on what to choose from in terms of index funds and low cost mutual funds, and they don’t have any management fees. Do your research. Contact four or five different companies and take a look. If you want, reach out to me and I’ll point you in some different directions of what stuff I found.
Here’s the thing. If you’re making a good income and normally if you max out your IRA, your 401K, your retirement plan, or if you’re in a situation where you might get sued for something related to work or business, such life insurance policy might make sense for you. That’s the case. If you’re not doing that, then maybe life insurance is not good for you because it does have fees, management fees or whatnot. So take that for what it’s worth.
I hope this episode was worth it. I know for some of you guys it’s going to be like, “Holy cow. I need to get one of these policies.” And for other people are going to be like, “You know what. I’m going to pass because I got to max out my retirement stuff first.” For others, it’s going to be like, “Well, you know, I don’t want to wait for this stuff to grow. I want to trade my own money.” And that’s fine, too.
So that’s it for this episode. May the odds be in your favor.
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