Full Video: https://youtu.be/ZzC7xgvnQDM
Summed Up Video Transcript
Now, this topic has been blowing my mind.. and to be honest I’ve put it off for some time. Usually, it takes me 1–2 days to prepare a video/article but this one took weeks. It was a lot of reaching out, research, and personal dilemmas about what I should do. There’s a ton of good videos on this topic (trust me I’ve watched them all) and I don’t want to repeat them for the 100th time. So even though I’ll cover some basics the main focus in this video/article will really be my experience.
I’ve broken the video down into 5 parts or questions I asked myself.
Remember if you’re enjoying this free content hit that like button (on YouTube as well) or the algo will think you don’t care.
1. What’s life insurance?
In a nutshell, when you die someone or some entity receives funds.
There’s basically 2 forms of life insurance: Term and Whole Life Insurance, it’s all very simple really, let’s review them both super quickly now.
Term Life Insurance
- Think of car insurance (pay monthly for protection), nothing else, that’s it
you either get in a car crash and get something out of it (in this case you die) or you don’t. Usually not worth anything until you need it. - Fixed “Term” 20–30 years on avg
Pros
- Small Premiums
- Family Income replacement in case you pass
- Flexible use (Debt payoff (using it as low-cost security) which can help “sweeten deals” , Business policies (risk management for employees)
Cons
- Expensive to renew (due to age)
- Old adage you “lose it when you need it the most”
But that’s BS because by the time you lose it you should have alternative savings to pass on, Some IRA, Home, Savings, etc. (We’ll cover this later)
Whole Life Insurance
- Often referred to as Perm, Universal, Variable
- High Premiums (much higher due to policy fees, commissions, and then also death benefit/cash value)
- Typical 1:20 Ratio => $5 Term = $100 Whole = Same Death Benefit
- “Cash Value” is where the $95 difference is
Pros
- Coverage for life (most important)
- Premiums are guaranteed
- Cash value grows slowly (3.5 avg) or variable (ex. fix to market)
- The cash value can be borrowed against tax-free but usually at a fairly high-interest rate of circa 5%)
- You can cancel the policy to get the cash value (Cash Surrender Value) BUT that means you forfeit the death benefit and may need to pay taxes
- Your Life Insurance is legally untouchable
Cons
- Cash value disappears when you pass away, leaving only the Death Benefit
- Very expensive premiums (Not being able to choose where they go)
- Lots of fees (First few years goes towards sales rep commissions)
- Borrow interest usually at 5%. Annually. Compounded.
- The surrender of your policy may result in a taxable gain
“10 Year Break-Even Point” (Cash Value Can Pay For Premiums)
2. What are the numbers & comps?
I have 2 whole life insurance plans now for about 4 years. My goal was to hit the “10 Year Break-Even Point” where dividends pay for your investment. compounding! I’ll need to make a video on how savage compound interest is but for now just, believe me, it’s an exponential chart pattern and it will make or break you depending on if it’s debt or investment.
My current stats and google spreadsheet to dive into the numbers >>
Premiums (Monthly Cost) = $783.84
Premiums Paid (Invested Sum) = $39,038
Cash surrender value = 4,398 + 4,398 = $8,796
Total Return = -$30,242
I pay $9851.88 Per year for these plans.. Let’s see how that holds up against other investments.. view the link above and go to the comps tab.
Friendly reminder:
– Roth 5.5k distribution now up to 6k in 2019
3. Should I “surrender” my plan?
I trade for a living I see everything in life as a trade. Everything has an opportunity cost.
– You go on a holiday you miss your friends birthday
– You go out you lose your morning to work
– You work in the morning you lose an opp to build relationships
Here were my deal breakers to keep my whole life:
1. When I die accumulated cash value does not go to me if I take it out “before” I die that amount is subtracted from the policy benefit amount #WTF
2. Compounded 5% interest on my own money?! (Stop the madness)
3. Time value of money, $9,851.88 a year is more valuable today than in 50+ years. I think I’d rather allocate it to other asset classes.
4. Why did I wait so long to cancel?
The lame answer is I’ve been busy. I’ve had the most non-stop life and haven’t had the time to “chill” or think about some things though.
- Since my devastating crypto hack I’ve decided to examine everything in my life. I was a bit ignorant of all the terms, especially the loan interest.
- I was also making over $10k / month by the age of 23 with our various businesses and I thought it would be a smart diversification. Basically too much cash flow and not enough time = bad financial decisions
5. Who is it good for?
Idk no one? Maybe someone who has a lot of free cash flow and they simply want to hide money from themselves even if it’s not a good investment. There’s also the part where if you are being sued or have any other legal issues. Your life insurance is untouchable which is kinda cool.
Term insurance makes 100% more sense.
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I appreciate you guys, wish you have a great day and make some awesome trades! Stay safe and until next time. Chau Chau