Episode 34: The Wealth On Any Income Book – Section 3: Insurance, Real Estate and More – Transcript
Hi Folks, Welcome to the Wealth On Any Income podcast. This is where we talk about money tips, techniques, attitudes, information and provide inspiration. I’m your host, Rennie Gabriel.
In the previous episodes I spoke about your five year financial goal; the difference between good debt and bad debt; how good debt can support you to create wealth. We discussed how to complete a Balance Sheet and determine your net worth so you know how close you are to Complete Financial Choice®. For the Income and Expense form, when you focus on expenses first you’re rewarded with more income. We discussed how to measure the level of pleasure based on where you spend your money.
In the last episode we spoke about investment clubs, load versus no-load funds, how to invest without paying commissions, and investment terms like Dogs of the Dow and Dollar Cost Averaging,.
Today, I’ll continue to read in the last section of the 12th step in the Wealth On Any Income book that deals with creating your prosperous financial future. Today we’ll cover common insurance products from life and health to property. You will be amused at how simple this can be, and how complicated an insurance agent can make it. We will also cover investing in real estate, peer to peer lending, trust deeds, life settlements and tax advantaged investing. This episode will be about 20 minutes.
As I read, I could stumble over some words. I am not a professional voice over actor so please forgive me if that happens.
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Insurance
There have been too many books written about various types of insurance for me to take up the time and space to go into any detail on that subject here. What I will do is repeat the reason for purchasing this product, which I used when I discussed risk management as one of the six roadblocks to financial independence: Insurance is used to protect yourself in the areas where you can’t afford to do it on your own. If you have a small fender bender and there’s $300 of damage, you can probably handle that. But if you were to injure someone with your car, it could cost tens of thousands, or even hundreds of thousands of dollars. Auto insurance is designed to protect you from the possibility of financial ruin over a momentary lack of judgment.
If you got sick and missed two days of work it probably wouldn’t be the end of the world. What if you became disabled and couldn’t work for one or two years? Could you maintain your standard of living? Would you lose your home or car? Disability income insurance protects you from completely losing your standard of living in the event you are unable to work due to a serious illness or accident.
When a family is dependent on the income from one or both parents, and one of them dies, does that mean the rest of the family doesn’t need money any longer? Is it likely they will still want a place to live, food to eat and clothes to wear? If the children were in a private school, it is probable this was important to their parents. Would they be able to stay in a private school? Where will the money come from? This is the purpose of life insurance. Insurance is for asset and risk management.
Life Insurance
There are two primary types of life insurance: term and cash value. There are many variations on these two types.
Term insurance is designed to provide the largest amount of death benefit at the lowest out of pocket cost in the early years. When a couple is young, raising a family, and has little disposable income, term insurance can be an appropriate choice. It provides the important protection at an affordable rate. As you get older and the term expires, the cost increases for the next renewal term. You can select coverage for terms of 1 year, 5 years, all the way to 30 years. The coverage can remain level, or the premium may remain level, but there has to be a trade-off. When you stop paying premiums, the coverage ends and the money you spent is gone.
Life insurance has often been ridiculed as an investment vehicle. Its primary purpose was to provide ongoing support when an income earner died. It was not intended to be the investment vehicle of choice. There are many cases where it is the only structure that allows some people to save money. In recent years, it has become an investment alternative. It can be an incredible vehicle when used creatively in estate planning strategies. It can provide tax benefits in the form of a universal life or variable life product.
Cash Value insurance combines a savings element with the death benefit offered by term insurance. With this type, you pay more money for the same amount of coverage, but a portion of the premium is set aside in a separate fund which you can access, without having to die. It comes with names like whole life, universal life, variable life, endowments and more. Which is right for you? That depends on your situation. Are you single or married? Do you have children who are dependent on your income? Do you have parents who are dependent on your income? Do you have debts you would like paid off at death, instead of passing them on to family members? Are you in a business with someone where a death could cause a decline, or possible end to the continuation of the business? Do you expect to leave a large estate at death and would like to pay the death taxes at a discount? If you refer to the section on how to pick a financial planner, you can use those same questions to pick a life insurance agent. Start by asking people you respect for a referral.
What product would you use to solve the following situation? Make believe you’re the head of a family with a spouse and two children, ages 6 and 8. You are in the fortunate situation where your career pays enough for your spouse to stay at home and care for the children. Your objectives are to begin a systematic investment program, protect your family if you die too soon, and set aside money for your children’s college education. You’re willing to take reasonable risks with your investments and want diversification like mutual funds offer. You don’t like the tax hit from owning mutual funds personally (versus through a qualified retirement plan), and would like your investments to have some tax advantage.
Here’s where a professional experienced insurance agent or financial planner becomes your ally or advisor. Should you get term insurance to protect your family or cash value insurance? Should you get a variable annuity to defer the taxes on the mutual funds or add to your 401(k) plan at work? What if you don’t have a retirement plan at work? Should you get a universal life policy to have flexibility with the premiums? What about your investment goals?
One recommendation could be a Variable Universal Life insurance policy (VUL). This would provide the protection for your family, the mutual funds for your investment goals, and the tax advantages you’re looking for. Again, I’m not going into detail here, that’s the job of a financial planner or insurance agent.
Even though you have an idea of the product that could fit, how do you choose the company to purchase it from? There are over a hundred life insurance companies offering a VUL product. Again, this is the advantage of using a professional. You can spend your precious free time on the Internet getting quotes from dozens of companies; learn the ins and outs of each product; research the loads, actuarial assumptions and underlying portfolios; or you can have someone who has years of experience do it for you.
Health Insurance
Most people who have health insurance are covered through their employer or some government plan, like Medicare. Unfortunately almost one third of our population does not have health insurance. One serious health incident like cancer, stroke, heart attack or auto accident when there’s no medical coverage, can drive a family into bankruptcy. This is one of the reasons the Affordable Health Care Act became law in 2013. I would urge you, if you don’t already have major medical coverage, to do what it takes to get coverage. The higher the amount of the deductible (the portion you pay) the lower your premiums will be. Of course, the older you get, the more likely there will be health challenges, and the premiums will be higher.
Property Insurance
Property insurance differs from life and health insurance and is based on what you are protecting. In property, or casualty insurance, you are protecting things and not people; things like a car, house, boat, business and so on.
What are some of the things you should look for when shopping for property insurance? One would be for the company to be an “admitted carrier.” I live in California, and in the 1990s there were many situations where people had purchased auto insurance from companies that had not been approved to do business in my state. They had the lowest rates, but when the policy owner had to file a claim, they didn’t pay. Price is not the only factor when shopping for insurance. Look to the financial strength of the company. You’re buying insurance to protect you against the things you can’t afford to lose, right? The lowest premium, but denying claims doesn’t work for building wealth. Ask, and get confirmation the company is admitted to do business in your state.
Will you be going direct to the company like 21st Century Insurance (now AIG) or GEICO? These are examples of direct writers. This is a company where you do business directly with the company and have no agent working on your behalf. You ought to save on the premiums with these types of companies. I have an insurance background, and going direct works for me. I don’t need someone to explain policy features to me; I can read and understand the contract.
Will you be buying more than auto insurance with the company? As an example, one company I’m aware of, ANPAC, provides a refund feature if you insure both your home and auto insurance with them. They return 25% of your first year premium in the fourth year if you’ve gone without claims for three years, and do this year after year. In addition, if you also have your life insurance with them, they provide additional discounts. If you’re going to purchase this coverage anyway, why not save as much as you can?
Finally, there are the value-added services an agent can provide. The agent is someone who knows you and your situation. They have many other clients and can provide referrals to people in other specialties you might need, from cement masons to dentists. A unique service I ran across years ago was for parents who have children attending college. Some insurance agents sold a program that did a national search for various scholarships, grants, and other financial aid depending on the area of interest and the school the child had selected. Some programs even provided funds for adults (parents) who wanted to return to school and complete their education. These search programs typically cost $75 to $250, and often guaranteed finding educational funds of at least $500, or twice the money you paid. Speak with others before you put your money down; be sure they are legitimate and their guarantee will be honored.
Financial strength, being an admitted carrier, discounts, value-added benefits and the services of an agent or financial planner are some of the things to look for when you go shopping for life, health, or property insurance.
Real Estate
This is my favorite area of investing despite the housing and mortgage meltdown in 2008 and the pandemic in 2020. Those were actually the times to take advantage of the fire sales. Some people like to invest in single-family houses. I prefer apartment buildings. In the same way the stock market is highly subject to investor psychology, feelings, and emotions so are single-family houses. Apartment buildings are more insulated from emotions. When I purchase a building and make upgrades to increase rents, I directly increase the value of the building. If I bought it for 10 times the rental income, and double the rental income, I have doubled the value of the building, regardless of investor emotions.
Stocks and mutual funds are easier to invest in. You can start with small amounts of money. With real estate you need larger amounts of money, unless you use someone else’s money. Many of the real estate seminars teach how to find property and use other people’s money to purchase it.
I am not Warren Buffett and when I buy stock I will have no influence on the board of directors, the products they develop or how they choose to market their products or services. I have control issues, and that is why real estate investing is comfortable for me. I get to choose the area I invest in, who the tenants are, what upgrades I will make and when I will sell the building. Buying and managing apartment buildings is what made me wealthy.
There are many ways to invest in real estate besides houses and apartment buildings. There are office buildings, triple-net leases, industrial properties, tax liens, self-storage facilities, fix and flip, REITs and trust deeds.
Trust Deeds
This is a way to indirectly invest in real estate. Just like you can borrow money from a bank to help finance the purchase of a house, you can loan money directly (or through a lender) directly to a borrower who will use their home, or other real estate, to provide the security (collateral) for the loan. If they default on their payments, you would go through a foreclose process and become the new owner of the real estate. I have often lent money in this way and earned 8-15% interest. Some loans are first trust deeds where I am the only lender. Others were as a 2nd trust deed lender where there was another lender in a superior position to me.
Peer to Peer Lending
The advent of the Internet has allowed people all over the world to connect through social media, and allowed the creation of peer to peer lending. One example was Lending Club where you could loan money to people in amounts as small as $25 and earn 6-12%. The minimum account size was $2500, and you needed to read the risks, but this was an alternative to letting money sit in the bank. Perhaps they will come back with a similar product in the future.
Life Settlement Investing
This is a way to invest in life insurance policies that have been issued to other people. Cash value policies can be surrendered to the issuing company or sold on the open market for more money than the issuing company might pay. You would be taking over as the owner and beneficiary of the policy issued on the life of someone else. You would make the premium payments and at the death of the insured you would receive the death benefit. There are several companies that are set up to handle all of the paperwork and claim you can earn 14% or more with no stock market risk. To get an idea of how these companies operate you can Google life insurance settlement companies.
Use the leverage of tax-advantaged investing
If you have the opportunity to invest in any type of qualified retirement plan, such as a 401(k), profit-sharing, pension plan, Tax Sheltered Annuities, or any tax qualified retirement plan, take advantage of it. To see the difference of making investments on an after-tax basis or a tax-deferred basis, I’ll read to you the following chart. Just be aware you want to discuss any potential tax liabilities you may have for your individual situation with your personal tax advisor.
Taking into considerations tax deductible contributions of $100 per month earning 10% for someone in a 30% tax bracket
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As you can see, the impact over time of deferring taxes becomes significant. By year 30, the difference between $85,398 and $226,049 is 264%. Losing 30% in taxes at that time would reduce it to $158, 235. This is still $72,000 more than the amount available if taxes were paid along the way. That difference alone is enough to buy a brand new top-of-the-line Mercedes-Benz for all cash.
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Here’s your opportunity to grow: Buy a copy of my most recent book, Attitudes of the Wealthy from my website instead of Amazon. Profits from any book purchased from my website are donated to the charity Shelter To Soldier. Go to www.WealthOnAnyIncome.com/books
In the next episode we’ll cover why you should NOT pay your debts off first and how to guard against investment fraud or fraudulent charities.
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Until next week, be prosperous. Bye, bye for now.
