Segment 1:
00:01 Danny Howes: Good morning, Vero Beach! Welcome to The Financial Pulse Radio Show. I’m your host, Danny Howes, CEO of East Coast Tax and Financial Planning. Welcome, welcome, welcome to the show. We are going to be talking about insurance for May. The most exciting, the most riveting, edge of your seat topic that we could possibly address and that’s good old-fashioned insurance. The thing that we have to pay for and buy, month in month out, year in year out, and hope we never have to use. And of course I’m gonna talk a little bit about property and casualty, a little bit about umbrella insurance and liability insurance and all that different stuff, but what we’re really going to focus on here in the month of May is the things that pertain to your personal financial planning and how estate planning plays into, how health care plays into items like life insurance, death insurance [chuckle], long-term care insurance, things of that nature.
01:02 DH: But today I wanted to start off just talking about the distinctions between a lot of the different types, and then we’re gonna drive deep into particular types of insurance in subsequent weeks. Every single Thursday, 10:30 AM right here on WAXE radio, The Financial Pulse. And so this month, we’re gonna be diving into these different types of insurance. And insurance is that necessary evil, it’s that itch we can’t scratch, it’s so annoying, because again, it’s something that we pay for that we hope we never have to use. Fire insurance, property and casualty, car insurance, even life insurance and health insurance. We hope we’d never have to use these things but we feel compelled, and it’s responsible to make sure that you’re protecting your family, make sure you’re protecting your assets. And many times people don’t realize that that’s what you’re actually doing. When you’re purchasing insurance, whether it’s fire insurance whether it’s on your home, or whether it’s auto insurance, all these different types of insurance that you buy, they’re really there to protect your assets, not yourself.
02:09 DH: Because insurance really doesn’t do anything except for protect assets, we wouldn’t need insurance if we didn’t have assets. For example Medicaid, people that don’t have anything and no income go on Medicaid and they get free insurance and they get free coverage. Well why would somebody that has money and has wherewithal buy insurance? It’s the obvious reason; because you don’t want people to come and take your assets and your money. Whether it’s a car accident or a fire in the house, that’s an asset that’s going to take away your home and then you’re gonna have to pay for another one and all these things are obvious, I get it. But we forget over time exactly what these things are for, and that’s what they’re for. Long-term care insurance for example, a lot of people think that’s almost like a quasi-health care thing, it’s not. It’s there to protect your assets. Because you can get free health care through the government, through Medicaid for long-term care, whether it be a nursing facility or whatnot, but you gotta be completely broke in order to do so.
03:11 DH: So long-term care insurance and coverage, while there’s several different types that we’ll get into later on in the month, they’re there to protect your assets because they expect you to spend down all of your money and your assets before you can tap those free or government-provided entitlements and resources. Let’s talk about something that always kinda bothers me, and that is auto insurance. Now I might have a lot of property and casualty people calling me and giving me a lot of different reasons or why they feel differently about this but I’m always surprised. The wealthiest clients of mine and people that I run across, and I’ve been a victim of this too, is we go out and we want the best insurance because we can afford the best insurance and we wanna make sure that everything is taken care of, we don’t have to worry about anything. So we go out, we buy the lowest, absolute lowest deductible insurance we can get with the largest liability coverage that we can get, making sure we’re covering bodily injury, making sure we got comprehensive coverage in case we hit a nice car, or if we get sued, God forbid, because something really bad happens in the accident and we’re at fault, we want to make sure we are completely covered.
04:33 DH: But this is a potential hole in your financial bucket. Well why do I say that? Well, if you’ve got a lot of money, if you make a lot of money or you’ve got a lot of money, why in the world would you buy the lowest deductible auto insurance, or really other kinds of insurance like property and casualty and so forth, when you have plenty of assets to take care of those type of things? If we hope we never use property and casualty insurance for somebody slipping and falling on our property or, God forbid, a hurricane coming through, or wind damage, or you name it, hail damage, all that stuff. Or for auto insurance, if we run into the back of somebody and all these things, different things can happen, these risks in life that we’re trying to cover. What’s the difference between a $5,000 deductible on an auto insurance policy and a $500 deductible? There’s a numerical difference right, $4,500. Well if I got a $1,000,000 in investable assets, or even a half a million dollars in investable assets, then I’m liquid. Or I make really, really great money and I’ve got a really great rainy day fund, why am I paying so much for insurance for a low deductible plan? Because over time I’m gonna have way diminishing returns on something that I’m paying for that I hope I never have to use.
06:01 DH: That’s an inefficient dollar spent because you have the wherewithal to be able to make that higher deductible payment. What if this event that never happens, never happens and you spent all that extra money that you’ll never get back. I hope I never get back the fire insurance on my home that I have. I hope I never get it. I hope I never get the hurricane rider money back. I hope I never get that stuff. So if that’s the case, would I be better served if I could save a couple hundred dollars a year, or even more by taking the maximum deductible. Because I can easily pay that if that horrible black swan event happens, and I take that other extra money and I put that back into my financial model, and I put that back into my savings, and I reinvest it and I let that grow over time. What does that look like? What does the difference look like?
06:55 DH: Well what if that event doesn’t happen for another 10 or 15 years, but I took that extra money and I put it back into my financial model and it grows and it compounds? And all of a sudden it’s now part of my nest egg and I’ve grown another asset as a result of not inefficiently overpaying unnecessarily in insurance. Now, consequently on the opposite side, what I see are a lot of poor people go out and they have any financial margin whatsoever, and the best thing they’ve got for financial protection is a credit card in their back pocket because maybe they’re just starting out in life, or whatever the case may be, they don’t have enough money and they go out and they buy the highest deductible insurance ’cause it’s the cheapest. Right? When in reality they should actually invest in the opposite because if something does happen they want to make sure that they’re covered and that they don’t have to hit a credit card or something like that to take care of something that’s outside of their control.
07:50 DH: So it’s just, there’s a lot of different arguments and things and everybody’s situation is different, so I don’t want to make blanket statements “this is what you should do”, but it’s a thought to ponder. Even in your business, if you think about your errors and omissions if you’re a professional, a doctor or an attorney, or some kind of professional, and accountant like myself or financial advisor, think about that. Think about the deductibles and the things that you’re paying for, if your business is doing well and it’s got plenty of cash, wouldn’t it be better served to reinvest in your business than to way overpay in insurance features that you may never use, particularly deductibles is what I’m addressing. Because it’s all about efficient dollars. Nobody wants to unknowingly or unnecessarily overpay in taxes or overpay in fees or overpay in products that they’re never gonna use, or hopefully they never use. Like insurance.
08:45 DH: It’s not that you’re not protected. You’re still protected, you still have the insurance there, but if you have enough financial margin or wherewithal to be able to easily absorb a couple thousand dollars more, or maybe even $10,000 more, for the purpose of being able to take saved premium dollars and redirect them into savings and retirement savings, it’s just the smart thing to do. And that’s what we’re going to talk about the rest of this month, are just the nuances, the ins and outs of insurance. When we get back, I’m going to talk about the differences in the different types of insurance as it relates to death insurance, what I call death insurance, life insurance and long-term care. Those vital things that we need when we’re doing financial planning for retirement. That’s what we’re going to do when we get back from this segment.
09:35 DH: And then like I said, we’re kicking off a series all about insurance and how to make sure you’re not over-insured, under-insured, and what type of insurance, particularly life insurance, and long-term care that you should have. So join us right back after this, go ahead, go on facebook.com/eastcoasttaxandfinancialplanning, like us, we’ll be back right after the break.
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Segment 2
00:00 Danny Howes: Well, welcome back to The Financial Pulse Radio Show. I’m your host Danny Howes, CEO of East Coast Tax Financial Planning. Today, we are kicking off our insurance series. We’re gonna be talking about the most riveting, most exciting, most nail biting topic that we could possibly discuss, and that’s insurance. And hopefully, I’ll keep you on the edge of your seats. Maybe you’ll learn some things that you never thought about or pondered, as it relates to insurance, like life insurance, and long term care, and some of the techniques that we use in financial planning to make sure you’re not unknowingly or unnecessarily overpaying in premiums, and that you’re not robbing yourself just to buy the best. So often when we’re doing well, when we have a lot of assets and we’ve accumulated, or making good money, and we’ve kind of arrived, if you will, and now we want the best, right? Especially when it comes to protection. And so, when we call these big insurance companies, where we have our insurance agent, “I want the best. I want the most coverage I could possibly get. I want the lowest deductible. I don’t care, because I can afford it and I want that protection.”
01:09 DH: And we talked about in the last segment, how many times we over pay in insurance month after month, year after year because we want low deductibles, because it’s a common feature with loaded insurance products, property and casualty, auto, and that sort of thing. Because we feel like that’s the best thing to do but in reality if we’ve got lots of margin, if we got lots of money in the bank, if we got a great income and can absorb a lot of things, it might be better off to take the higher deductible and invest the difference, right? So, that’s one common theme that we see quite a bit.
01:46 DH: But now, I wanna dive in to the different types of life insurance. There’s so many different things out there that you can get involved with. Life insurance has evolved into not only just covering you in case there’s a premature death, but becoming a legacy-type of planning product to enhance your legacy for your children, heirs, alma mater, religious organization, charities, and so forth. Whatever your objective is for your money and your wealth after you pass, life insurance can be an incredible tool to use.
02:23 DH: And then, we got what I call death insurance, where it’s there for a temporary period of time. So death insurance is what I call term insurance because it’s really only good if you’re dead. It’s not doing anything for anybody until you’re dead. And it can serve an incredible purpose because it’s usually very inexpensive compared to the amount of leverage or death benefit that you can provide for your family, your loved ones, the liabilities that you might be carrying, and so on and so forth. But term insurance, everybody knows what that is, right? It’s there for a certain period of time, whether it be 10, 20, 30, even 40 years now. You can get all different types of term limits. And of course, the longer the term insurance that you buy, the more expensive it is because the longer the insurance company is at risk that you’ll actually use it. But it is temporary, it’s not permanent. There are some insurance term policies out there, quite a few actually. Pretty much all carriers that offer term have some sort of convertible product. And what convertible means is that, at any given time, or in a specified time period, you can actually convert your term insurance into permanent insurance. So, term is temporary.
03:42 DH: Permanent insurance comes in several different forms and sizes, but the most common permanent insurance and the kind of the oldest one in the group is whole life. And whole life is just that, it’s for your whole life. You go, you get your examination, and they come out, and they do all the vitals, sometimes they get doctors’ records, and all those different things when they finally approve you, they lock in a rate, a cost of insurance for you for the rest of your life. So, you pay the same premiums every month, or every year, for the rest of your life and as long as you make those premiums it doesn’t matter whether you’re 35 or 95, that policy is still gonna pay out. It’s guaranteed for life. There is no term limit, no expiration. So obviously, that type of insurance is gonna be much, much, much more expensive than term insurance because the insurance company has these actuarial formulas knowing that, okay, certain people keep term products for a certain amount of time and so many people will just like with fire insurance just pay for it forever and never use it.
04:53 DH: And so, the insurance company makes bundles and bundles of money because they basically are collecting all these premiums over all these years to ensure against something that many people would never ever use and hope to never use because again, it’s temporary. Younger folks that are up and coming that maybe have young children, they can’t afford more expensive permanent insurance, they can still afford term insurance because it can be very expensive, especially for people that are in their 20s, 30s and 40s. But as we get older, for legacy planning and for making sure that our estate objectives are met, or making sure that our spouse is taken care of, should we predecease them and there’s loss of income. A whole myriad of reasons. Permanent insurance is there and is designed to make sure that it never lapses, so long as you follow the rules. And like what we’ve learned with the annuity series that I put on and the mutual funds series and all these different things, these companies are in it to make money. And that’s what I mean about rules and we’re gonna talk a lot about this, this month. When we get into the different types of permanent insurance.
06:02 DH: Because there’s several different types, and they’re not all created equal. And whenever there’s complication, whenever there’s moving parts or something, that’s where these companies can make lots of money and where you can make huge mistakes that can be almost immeasurably costly, because of the devastation that can happen when an insurance plan blows up, that’s meant to provide for a very important purpose. ‘Cause here’s one thing about life insurance it’s completely different than auto insurance, or fire insurance, and that sort of thing.
06:37 DH: Life insurance is there to protect what’s gonna inevitably happen. We never get outta here alive, right? My father always told me, there’s two things you have to do. You have to go pay taxes and die. ‘Cause you got to do those two things. And if you don’t do one of those two things, if you don’t pay taxes, then there’s still only two things you’re gonna do. You’re gonna go to jail and you’re gonna die, right? [chuckle] But that’s what it is. So life insurance, particularly permanent insurance, it’s designed, you’re only gonna purchase that because you have a particular purpose for that insurance. You either wanna leave a lot of money behind for a cause, maybe you have a special needs child or grandchild that you wanna make sure is protected and taken care of; maybe there’s a significant amount of loss of income should you pass and you wanna make sure your spouse is taken care of; maybe you’re a business owner and there’s a lotta liabilities that you personally signed for; or you’re a key person in your business, your business had a chance of not being a going concern anymore if you pass away. So, you wanna make sure that you have enough insurance, and proceeds, and capital to make a transition while your spouse or your estate sells your business and transitions that.
07:53 DH: So it is a very, very important key pivotal… Plays a key pivotal role in your life because you’re going to use that insurance, so long as you keep it the rest of your life. It’s guaranteed that you’re going to use that insurance because we’re not getting outta here alive. So when we’re evaluating and trying to make decision of, “Well, should I do universal life insurance?” which is basically a flexible premium in many cases. It’s lower cost now because we’re younger, but as we get older our mortality gets closer, and so our insurance cost is gonna go up in the future. Whole life is whole life. You’re gonna pay that same premium throughout your whole life. A very predictable, very safe as far as cost control, and so forth.
08:44 DH: Universal life can have a guaranteed minimum premium, they call it GUL, Guaranteed Universal Life. But many cases, universal life is that, it’s going to go up as we age. And in off of universal life, there is what they call Variable Universal Life, where much like the variable annuities, the money that you invest in the policy, if you invest more that just what’s needed to cover the death benefit, it goes into things like mutual funds to grow the money, so it can go up and down in value, use that as investment, or Equity Index Universal Life which is tied to an index.
09:26 DH: So, many different things that we’re gonna be talking about this, man. I’m really excited about it. If you’re considering buying insurance or you have insurance policies, I encourage you to tune in every single Thursday, 10:30 AM. Go to our website eastcoasttaxandfinancial.com. Click on the financial pulse link. We’re gonna be putting up radio shows there, so that [09:44] ____ and transcribing them and so forth, so if you can’t catch everything or every episode, they’ll be there. But every single Thursday, 10:30 AM, right here on WAXE radio. Go to facebook.com/eastcoasttaxandfinancialplanning. Like our page. We do a lot of great things there. I’m Danny Howes, make sure you protect that money, folks, but most importantly make sure you know who and what you’re protecting it from.
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