Well, the last lesson was the most fun and entertaining lesson, which is sad that it has to be followed up by this lesson. Yes, this is the Understanding Insurance and Estate Planning lesson, and this is hard for me to teach. It’s hard because there’s absolutely nothing fun, entertaining, or exciting about insurance or estate planning….and it’s my job to teach you this stuff in a fun, entertaining and exciting way. Boy have I got my work cut out for me.
First I want to start by saying that I do not sell insurance, I never have, I never will. I am not licensed, nor do I have any stock in any insurance agency. I don’t even know anyone who sells insurance. So, all that just to say, that I have no vested interest in telling you any of this stuff. I just want to give you the best information that I can, and let you make your own informed decisions.
So, let’s look at insurance. That in and of itself can be a scary thing and it can be full of traps and a lot of holes to get our foot stuck in. So I’m going to try to iron it all out for you so that you can spring the trap and finally understand insurance.
First, never buy anything you don't understand. This is something we talked about in our last class. Chances are, you bought your insurance policies without fully understanding them. Insurance and Investments are the 2 areas where people think they know what is going on, but really don’t. So, just sit tight and we’ll work through it.
It will absolutely steal your financial peace if you do not understand insurance. This insurance stuff is a major deal. This is big, this matters. If you understand your insurance and make sure you’re covered, then it will get you some financial peace. If you do not understand your insurance then it will rob you of financial peace – and sleep at night.
So, what is the purpose of insurance? It transfers the risk of a loss from you to the company. So instead of us having to foot the entire bill if some moron rear-ends us at a red light, by having insurance we are transferring the risk to the insurance company. And if we so happen to be that moron that rear ends someone at a red light, then we are covered because we transferred the risk to the insurance company. I think we can pretty much all agree that insurance is necessary.
However, how many of you hate insurance? We know insurance is a good thing, but deep down inside of us we have this nagging feeling that something is wrong. And it is. Most of us have been ripped off by insurance companies for far too long that it’s just the norm.
Well that ends tonight! We are going to remedy that situation entirely and put you in control of your financial future and in control of the insurance you purchase.
We are going to be discussing 6 types of insurance. The first is
Homeowner's & Renter's Insurance
If you rent a home or apartment, you need renter's insurance. It is so inexpensive to get renter’s insurance, but it is necessary. You of course can control what you do, but you cannot control the idiots who live in the same apartment complex, who fall asleep while smoking a cigarette and burn down the entire complex. So, get renter’s insurance…it’s so important to have.
If you own a home, it's important to have guaranteed replacement cost insurance. Replacement cost means that they guarantee to replace your home no matter what happens. Most of the major companies no longer have guaranteed replacement cost – they switched it out. What they’ve done now is that they put a dollar amount on it (your coverage plus 25%). Let’s say you bought $100,000 worth of a home, and if in 10 years it’s worth $175,000 and you never bothered to change it. You only have $125,000 worth of coverage. If it burns, you’re $50,000 in the hole. Never buy anything that doesn’t have guaranteed replacement cost insurance. Most of the large ones do not offer it. If yours doesn’t, consider changing. This is a big deal. If you get a great deal from your company and cannot find one to switch to, then you need to make sure to increase your coverage based on property values and rate of inflation EVERY SINGLE YEAR!
You also need to carry adequate liability - about $500,000. If someone falls on your property and sues you, they are not going to sue for a couple thousand. They aren’t even going to sue for $250,000…they are going to sue for $500,000…..why because a half a million sounds better than a quarter million.
An Umbrella Policy. For a couple hundred bucks a year, then you can get about $2 Million more of liability if someone falls against your car in your driveway. If someone were to do that, your home and auto would kick in, then after that is exhausted, the umbrella policy kicks in to cover you. You want to have this kind of insurance in place when you really start building some wealth. If you have $200,000 or more worth of paid-for stuff. Once you start getting some assets, you become a big target in our sue happy culture. Once you have assets, you need to transfer the risk to insurance companies and put them between you and the moron who wants to sue you. There are also other ways to keep your assets out of the reach of sue-happy people…we’ll talk about that in estate planning part.
As we talked about last time, just because you need something doesn’t mean you have to pay whatever your insurance agent tries to sell you. There are ways to save money. If you have an emergency fund, it is certainly okay to raise your deductable. It will save you quite a bit of money because you are taking on more risk, which will potentially save the company some money, thus you get lower rates. Another thing you can do is to get your homeowner’s insurance through the same company you get your auto insurance through. You not only get a discount on home, but you get a discount on auto. The third and most profound way to save money is to shop around. We had been with Allstate for 3 years. I had no problems with them, until they increased out homeowner’s policy premiums 2 years in a row. In 2 years, the premiums increased by $220 and we had no claims. I began shopping around and we finally settled on Farm Bureau Insurance. They were able to give us better coverage for $332 less a year, and from what I understand, they usually do not raise premiums by as much as the other larger companies do. But even-so, a $300+ savings a year is worth shopping around.
The second kind of insurance we’ll be focusing on is...
Auto Insurance
In Tennessee it is the law to have car insurance, and the minimum coverage requirement is way too small to protect you, so carry adequate liability insurance. Again, people aren’t going to sue for $100,000….they are going to sue for $500,000. Liability Insurance is the best buy in the insurance business. You should at least carry a half a million dollars minimum. So transfer the risk to the insurance company so you don’t end up bankrupt.
Some ways to save money: You can increase your deductable. In order to figure out if it’s a good idea for you to raise the deductable, you need to do a little math. Take the difference (let’s say you’re going from $250 deductable to a $1000 deductable. So that’s a difference of $750. That’s $750 extra risk. If it only saves you $30 a year, then it will take you 25 years without a wreck to break even. But if you save $250 a year, then you only have to go 3 years without a wreck to break even. That might be a better deal. Just do a break-even analysis. Are you getting enough savings in premium to justify incurring that risk.
On an old car, drop the collision. If you drive a $2000 car and it costs you $400 a year for insurance, then you might want to drop the collision to save you some money. Now don’t drop collision before you have some cash saved up because if you wreck that thing, and it’s your fault, then you’ll be without a car if you can’t pay for the repairs or to replace it. If you have some cash saved up, then you can drop collision. We do not have collision on my husband’s truck. It’s worth about $2700 and needs a new transmission. We can easily be a 1 car family if we need to. We ran the numbers and we couldn’t justify the increase in premium when he drives a half mile to and from work a day, and if the car were to be destroyed, we just wouldn’t care that much.
Again, shop around. By shopping around we saved $120 a year on auto by switching.
Health Insurance
Health Insurance is a MUST! If you have the opportunity to get insurance through your employer, it is irresponsible not to do it.
The #1 (or #2) reason people file bankruptcy is medical bills. I say number 1 or 2 because it’s right up there with credit card debt. And depending on what set of statistics you’re reading, it will either be number 1 or number 2. And it’s interesting that many of the people who file because of credit card debt, actually had paid some of their medical debt on credit cards and couldn’t pay the credit cards. So, it’s a big deal out there people.
"I can rely on TennCare/Medicare if I need to" This drives me bonkers. I have a friend who does not have insurance for herself or her husband, and she has said that when they are going to try for another baby, “it’s okay because Medicaid will take care of her and the baby while she’s pregnant.” Ugh….it drives me nuts because the government can’t even take care of itself…is it really going to take care of you?
How many of you do not have insurance through your employer? Or know someone who doesn’t?
Individual health insurance policies can be quite pricey. When my husband switched jobs a couple years ago, there’s always that 90 day waiting period, and I did not let us go without insurance, so we went the route of individual policies. There are ways to save yourself a little money on the premiums.
1. Raise the deductable
2. Instead of a 80/20 co-pay, raise it to a 70/30. That will lower your premiums, but you’d better have your FFEF or a HSA.
3. Have a higher stop loss on the policy. Stop Loss in individual policies means that you will have a maximum out of pocket. For example, our health insurance policy has a maximum out-of-pocket expense per family per calendar year of $5,000. After the 80/20 split, we pay up to $5,000 (which would be our 20%) – anything beyond that, they pay 100%. It came in handy last year when Cadence’s birth racked up over $125,000 at Vanderbilt’s NICU, without a stop loss, we would have had to pay $25,000 out of pocket. A $10,000 stop loss will also keep your premiums down, and it will make it a decent buy.
Only do these things if you have an Emergency Fund or Health Savings Account to cover the extra risk.
How many of you have some kind of self-employed income in your home? Or know someone who does? This is a great choice for those who are self-employed. It is only for those who are self-employed.
Look at a MSA (Medical Savings Account), which is a major medical insurance policy with a tax deductable savings account attached. It works with a large deductable and you can only get it if you’re self-employed. You can take a $4500 deductable with an 80/20 split (and you can do that with a FFEF) and you can get a HUGE drop in premiums. With the MSA, you are allowed to save, tax deductable, 75% of your deductable into a Medical Savings Account every year. It is like an IRA, but without penalties when you use it for medical related expenses. You can take that money out and spend it on medical needs without a penalty. This can be doctor visits, major medical bills, or even a bottle of tylenol.
For healthy self-employed families, you’d profit from this. It’s a good plan.
Disability Insurance
This is THE most under insured policy in North America. If you work, you need to look into this immediately, and I’m talking you’d better be calling someone or going into HR tomorrow.
Disability Insurance replaces your income due to disability. It usually replaces around 60% of your regular income.
You are 12 times more likely to be disabled than to die before the age of 65. A 28 year old guy came up to Dave once and said “Dave, you saved our family’s life because you’re looking at a man that makes $60,000 a year and is on permanent disability.” He was declared permanently disabled at 28 years old. Because he covered this issue, his family is surviving. (yes, he made 100,000 a year, but if he didn’t have disability insurance, his paycheck would have gone from 100,000 to 0.
There are 2 kinds of disability products:
Short Term Disability (STD): I generally do not recommend this products for a couple reasons. 1. if you have a fully-funded emergency fund, you are self-insured for the 90 day elimination period before LTD kicks in. And 2. Because you’re not going to be all better in 3 months when you lose a limb, have a stroke, or whatever. The only exception where I do say it’s a decent buy is if you are a young couple and the wife is working outside of the home and you are planning on having children in the near future, STD is a good option. I was lucky enough to sign up for STD at my last job one month before I got pregnant with our first son, Hunter. Because I had that STD in place before I got pregnant, I was paid 60% of my salary for 3 months while out on maternity leave. I didn’t return to work, but it was great that I had that coverage because I still had money coming in.
Long Term Disability (LTD): This is the way to go. Unless you’re going to be growing your family in the near future, just pump up the EF and stick with LTD.
For LTD Insurance, you want to get the kind that is called "own occ" or "occupational" - that means that if you cannot do what you are trained to do, then you are considered disabled. That means that if my husband, who is an IT guy, lost the use of his hands. Then he’d get paid for X amount of years before he had to find something else that he can do.
I know I tell you to shop around for the best bargain, but if it is offered through your place of employment, get it there. Don’t even bother to shop around because you will not find it cheaper than you can through a group policy. It just doesn’t happen, so get it through your work if they offer it. Just ask HR.
Long Term Care Insurance
Long Term Care Insurance covers nursing home and in-home care. If you are 60 years old or older, I highly recommend getting this insurance. If you are younger than 60, invest the premiums to be able to self-insure yourself through this. If you invest your money wisely and have a million dollars in assets by the time you’re 65, then you’re self insured and you can afford a nursing home stay.
Regardless of your age, this is a big deal to think about now because you might not be over 60, but your parents are. And you’re going to have to sit down with them and have the talk. Yes, the dreaded talk. They thought the birds and the bees talk was hard enough to give to you…it’s got nothing on the nursing home and long-term care talk you have to give them. The largest issue facing the babyboomers today is the elder care of their parents. So, you’re going to have to have that talk with them. If not, when they are ill you are going to be faced with the burden of putting them in a welfare nursing home because they do not have the money to afford anything else or coming up with the funds yourself.
When having the talk, there is this thing called "The Powdered Butt Syndrome". Once someone has powdered your butt, they don’t want to take advice from you. But you need to go in, armed with some statistics like: 60% of the people over the age of 65 will require some long term care in their life. 20% will need it for 5 years or more.
A lot of people say that they'd be fine being sent to a state-run home, and I have heard of people saying that they'd just hide their parents' assets so that they can qualify for the free care. If you want to hide mom & dad’s assets, then you’re saying that you’d want to quit your job to get on welfare. The federal government, by law, can look back 60 months and un-do any asset transfers to keep you from taking advantage of welfare nursing homes so that they can get free government nursing home care. Doing that is now a criminal offense and is punishable by law.
Your parents (or your) assets must be liquidated before any type of government funding can take place. Medicaid allows for the spouse to keep the home, 1 car, and up to $79,000. Everything else will be used for nursing home care until it is depleted. However, if your spouse is deceased, then all of their assets will be disbursed to pay for elder care.
When everything is gone, then the government will step in and let them go to a Medicaid run institution – which is a welfare nursing home. The level of care there is not what most of you want your parents to be.
You absolutely have to look into long term care insurance. A 62 year old with Alzheimers can live up to 25 years out of their minds. That is close to a million dollars worth of care. All of their hard work and life savings have just gone down the drain. This is not a game folks. This is something you absolutely need to look into and you need to talk to your parents about it.
I’ve tried twice to have that conversation with my parents, and I will be having it again since it didn’t make it through the first 2 times. This is imperative that you have to have the talk with them.
Saturday, June 6, 2009
Understanding Insurance - Part 2
Our 6th Type of Insurance is
Life Insurance
I always thought it was odd that they call it life insurance since it insures your death, but in any case, it is definitely an insurance that most people do not understand. In fact, most people have no idea what kind of life insurance policy they own, which violates our last class to not buy anything you don’t understand.
Now this is probably going to tick some of you off, but that’s okay because I’m giving you the best information from the best sources, and I’m interested in telling you how you can win with money.
There are 2 Types of Life Insurance: Term Life (for a specified number of years) and Cash Value (for your whole life).
Cash Value Insurance
75% of people in America have this type of insurance. Why? Because it is what the insurance agents push the most. Which should throw up a big red flag right there, but for some reason it didn’t.
The premiums are higher because it covers you throughout your entire life and because the policy has a savings account attached to it. It builds cash value, thus the name "Cash Value Insurance." Part of your premiums are invested to gain cash value that you can take out. Many people see this as a way to save for retirement.
Often you will hear, "Term life is like renting, but cash value is like buying a home." Of course, the people saying this are the agents who want you to buy it…but hey…
There is a big myth floating around out there that we need do debunk right now.
Myth: The need for life insurance is a permanent situation and is ever growing.
Truth: The only ever growing and permanent situation is the agent's need to make more money.
Nothing is permanent about insurance! If you get a 20 year level term life insurance policy, just think about where you will be in 20 years. In 20 years, when the kids are grown and gone, the house is paid for, you're debt free (because you've been doing this plan), you're sitting on a nestegg for retirement plus your emergency fund....you are then self-insured. There is no need for life insurance at that point.
Don't believe me? Well, I'll use my family as an example. My husband and I are 28. We have 3 kids (ages 3 1/2, 2, and 9 months). In 20 years our children will all be adults and will hopefully be out of the house. We will be debt free next year, the house will be paid for by 2012, and we'll have approximately $250,000 invested by 2029 (not including our fully-funded emergency fund). If my hubby dies after the next 20 years, I think I'll be able to muddle through life debt free, no kids at home, and a nestegg.
In 20 years, we will be self-insured.
So, let's compare apples to apples:
For $100 a month, Jon can buy about $125,000 of cash value life insurance. It builds cash value that he can take out. In 20 years, it'd be worth about $22,000. That sounds pretty good.
However, Jon can buy $125,000 of term life insurance for about $9.00 a month. He can invest the other $91 and have about $47,000 in 20 years. That sounds a lot better.
Now there are 2 problems with his example. 1. No one is going to want to write a $9.00 a month life insurance policy, and 2. He does not have enough insurance. If he dies, and his wife invests the money (and let's just make it easy and say she can get about 10% in a good growth stock mutual fund), the she would only have $12,000 a year to live on without draining the nest egg. I don't know many people who could do that. I could probably come close, but even then it'd be VERY VERY difficult and we'd REALLY have to sacrifice and scrape by.
HOW MUCH DO YOU NEED??
You need 10 times your annual income, so if you make $40,000 (which is what we’ll say Jon makes), then you’d get $400,000 of life insurance.
A full time mom brings economic value to the home, which is why she needs life insurance as well. She needs to have close to what her husband would have, as it would need to offset the things that she does. If I were to die, my husband would have to bring in Marry Poppins to take my place…and I hear she doesn’t work cheap. So, the husband would have daycare expenses, higher grocery expenses (because he’s not used to doing the shopping, couponing, cooking, etc), and he’d have to find ways to pick up all of her jobs too. So, a stay at home mom brings economic value to the home.
Now, don't get so much that you have to sleep with one eye open. My BIL brags about his $1 Million policy (in whole life) and says that he’s worth more dead than alive. He makes about $40,000 a year, and his premiums for that $1 Million policy are beyond outrageous. He is beyond over-insured. Do not get caught in that trap.
So, let’s give Jon the right amount of coverage.
$400,000 for Jon of Term Life Insurance is about $25.00 a month. He can take that $75 a month he’d be saving in not paying whole life or cash value insurance and invest it. In the event that he dies before the 20 years are up, his wife gets $400,000. At a 10% investment return (as I said earlier) she'd be able to live on $40,000 a year - which is what he makes. Ooops, looks like we just replaced Jon.
If Jon takes out that $125,000 cash value insurance and pays $91 too much every month, and 20 years go by and he has $22,000 of cash value on his policy and he dies. Then what happens to the cash value? Does Jon’s wife get $147,000?
Nope…she still gets $125,000….the company keeps the other $22,000. Doesn’t seem very fair, does it????? That's what I call a RIP-OFF! Since none of us know when we're going to die, how often do you think people actually take out their cash value? I'd venture to say that more often than not, the company gets to keep the cash value. After all, look at their big beautiful buildings. Those aren't cheap and I'm sure they've had a lot of cash value to buy them with.
Cash Value (whole life) is the worst financial product on the market today, but the companies are getting sneaky so they've come up with 2 newer models called Universal Life and Variable Life. They claim that Universal Life yeilds about a 4.5% return on the cash value, and that Variable Life yields about 12-14% on the cash value. And they do; however, these policies walk down a hallway and people take out fees left and right. Fee, fee, fee, fee...it sounds like a french poodle there are so many fees. So, after all the fees, you can expect about half of what they say you can get - IF you are lucky. And that's only if you happen to cash out your cash value before you die.
If you have these types of policies, cash out their value and invest the money elsewhere. Dave Ramsey says, "You are always better to stick with a 20 year level term life insurance policy, and do your investing outside of the insurance company." Money Magazine, Newsweek, the Wall Street Journal and more agree with him.
Life Insurance Summary
Never buy cash value: returns are low, cash value is kept by the company if you die, premiums are too high, and only agents think it is a good idea.
Buy Term Life Insurance: low rates, invest the difference in premiums so that you can become self-insured.
Now if you are over 45-50, and you have a whole life policy, then I’m not saying you need to go out and cancel it. I’m saying that you should pull your cash value from it, and invest elsewhere – maybe a good growth stock mutual fund. That way, your cash value won’t be forever gone when you die.
If you are debt free, have no house payment, have no children at home, have a substantial nest egg, have investments, and are self-insured….then drop the policy.
If you have debt and are over the age of 50, then you may have to stick it out with your whole life policy until you can be self insured.
But for those of us who are younger, the time is not to get some quotes on some good 20 year level term. If you are doing everything I’m teaching you and that Dave’s telling you to do, and you’re really doing it….then in 20 years, you will be self insured and you will not need to pay for life insurance for the rest of your life.
Avoid These Types of Insurance
Cancer Insurance - healthcare covers cancer too.
Accidental Death Insurance - You're not double dead because it was an accident.
Life Insurance on Children - You know, those Gerber policies. Avoid them….they are not a good investment. Instead, put your child’s money away and invest it yourself. They will have a much better return and won’t be sucked into buying cash value life insurance. As I mentioned, we do have a $15,000 rider on our life insurance policies to cover the burial costs of our children, should it be necessary. It’s not very expensive at all – since it’s a term policy, and we know that everyone in the family is taken care of, until we can be self insured.
Credit Life & Credit Disability - it's 90-100% more expensive than regular term life insurance.
Credit Card Protection - seriously, you want to protect your credit cards??? It's just another way to rip you off.
Pre-Paid Burial Policies - invest the money instead of parking it at the funeral home.
Mortgage Life Insurance - the face value decreases as time goes by because your mortgage goes down. Instead, put a sticky note on your life insurance policy that says, "Babe, pay off the house."
Duplicate coverage - it's never a good idea because the 2 will fight over who the primary provider is and no one will ever pay.
Pet Insurance - that's what an Emergency Fund is for, and seriously, if fluffy is going to cost you $10,000....it might be time to put fluffy to sleep. It's a pet.
One last thing I want to talk about insurance is that you cannot convince someone who has already made up their mind about it. There is no telling my Brother in Law that his policy sucks because he's being ripped off.
And you cannot go into your agent's office and try to convince him that he ripped you off, or that he should switch to term life insurance. Why? Becuase him realizing the truth of this would not only make him have to re-evaluate the way he thinks, but he'd have to look for a new line of work. So, just fire him and move on.
Life Insurance
I always thought it was odd that they call it life insurance since it insures your death, but in any case, it is definitely an insurance that most people do not understand. In fact, most people have no idea what kind of life insurance policy they own, which violates our last class to not buy anything you don’t understand.
Now this is probably going to tick some of you off, but that’s okay because I’m giving you the best information from the best sources, and I’m interested in telling you how you can win with money.
There are 2 Types of Life Insurance: Term Life (for a specified number of years) and Cash Value (for your whole life).
Cash Value Insurance
75% of people in America have this type of insurance. Why? Because it is what the insurance agents push the most. Which should throw up a big red flag right there, but for some reason it didn’t.
The premiums are higher because it covers you throughout your entire life and because the policy has a savings account attached to it. It builds cash value, thus the name "Cash Value Insurance." Part of your premiums are invested to gain cash value that you can take out. Many people see this as a way to save for retirement.
Often you will hear, "Term life is like renting, but cash value is like buying a home." Of course, the people saying this are the agents who want you to buy it…but hey…
There is a big myth floating around out there that we need do debunk right now.
Myth: The need for life insurance is a permanent situation and is ever growing.
Truth: The only ever growing and permanent situation is the agent's need to make more money.
Nothing is permanent about insurance! If you get a 20 year level term life insurance policy, just think about where you will be in 20 years. In 20 years, when the kids are grown and gone, the house is paid for, you're debt free (because you've been doing this plan), you're sitting on a nestegg for retirement plus your emergency fund....you are then self-insured. There is no need for life insurance at that point.
Don't believe me? Well, I'll use my family as an example. My husband and I are 28. We have 3 kids (ages 3 1/2, 2, and 9 months). In 20 years our children will all be adults and will hopefully be out of the house. We will be debt free next year, the house will be paid for by 2012, and we'll have approximately $250,000 invested by 2029 (not including our fully-funded emergency fund). If my hubby dies after the next 20 years, I think I'll be able to muddle through life debt free, no kids at home, and a nestegg.
In 20 years, we will be self-insured.
So, let's compare apples to apples:
For $100 a month, Jon can buy about $125,000 of cash value life insurance. It builds cash value that he can take out. In 20 years, it'd be worth about $22,000. That sounds pretty good.
However, Jon can buy $125,000 of term life insurance for about $9.00 a month. He can invest the other $91 and have about $47,000 in 20 years. That sounds a lot better.
Now there are 2 problems with his example. 1. No one is going to want to write a $9.00 a month life insurance policy, and 2. He does not have enough insurance. If he dies, and his wife invests the money (and let's just make it easy and say she can get about 10% in a good growth stock mutual fund), the she would only have $12,000 a year to live on without draining the nest egg. I don't know many people who could do that. I could probably come close, but even then it'd be VERY VERY difficult and we'd REALLY have to sacrifice and scrape by.
HOW MUCH DO YOU NEED??
You need 10 times your annual income, so if you make $40,000 (which is what we’ll say Jon makes), then you’d get $400,000 of life insurance.
A full time mom brings economic value to the home, which is why she needs life insurance as well. She needs to have close to what her husband would have, as it would need to offset the things that she does. If I were to die, my husband would have to bring in Marry Poppins to take my place…and I hear she doesn’t work cheap. So, the husband would have daycare expenses, higher grocery expenses (because he’s not used to doing the shopping, couponing, cooking, etc), and he’d have to find ways to pick up all of her jobs too. So, a stay at home mom brings economic value to the home.
Now, don't get so much that you have to sleep with one eye open. My BIL brags about his $1 Million policy (in whole life) and says that he’s worth more dead than alive. He makes about $40,000 a year, and his premiums for that $1 Million policy are beyond outrageous. He is beyond over-insured. Do not get caught in that trap.
So, let’s give Jon the right amount of coverage.
$400,000 for Jon of Term Life Insurance is about $25.00 a month. He can take that $75 a month he’d be saving in not paying whole life or cash value insurance and invest it. In the event that he dies before the 20 years are up, his wife gets $400,000. At a 10% investment return (as I said earlier) she'd be able to live on $40,000 a year - which is what he makes. Ooops, looks like we just replaced Jon.
If Jon takes out that $125,000 cash value insurance and pays $91 too much every month, and 20 years go by and he has $22,000 of cash value on his policy and he dies. Then what happens to the cash value? Does Jon’s wife get $147,000?
Nope…she still gets $125,000….the company keeps the other $22,000. Doesn’t seem very fair, does it????? That's what I call a RIP-OFF! Since none of us know when we're going to die, how often do you think people actually take out their cash value? I'd venture to say that more often than not, the company gets to keep the cash value. After all, look at their big beautiful buildings. Those aren't cheap and I'm sure they've had a lot of cash value to buy them with.
Cash Value (whole life) is the worst financial product on the market today, but the companies are getting sneaky so they've come up with 2 newer models called Universal Life and Variable Life. They claim that Universal Life yeilds about a 4.5% return on the cash value, and that Variable Life yields about 12-14% on the cash value. And they do; however, these policies walk down a hallway and people take out fees left and right. Fee, fee, fee, fee...it sounds like a french poodle there are so many fees. So, after all the fees, you can expect about half of what they say you can get - IF you are lucky. And that's only if you happen to cash out your cash value before you die.
If you have these types of policies, cash out their value and invest the money elsewhere. Dave Ramsey says, "You are always better to stick with a 20 year level term life insurance policy, and do your investing outside of the insurance company." Money Magazine, Newsweek, the Wall Street Journal and more agree with him.
Life Insurance Summary
Never buy cash value: returns are low, cash value is kept by the company if you die, premiums are too high, and only agents think it is a good idea.
Buy Term Life Insurance: low rates, invest the difference in premiums so that you can become self-insured.
Now if you are over 45-50, and you have a whole life policy, then I’m not saying you need to go out and cancel it. I’m saying that you should pull your cash value from it, and invest elsewhere – maybe a good growth stock mutual fund. That way, your cash value won’t be forever gone when you die.
If you are debt free, have no house payment, have no children at home, have a substantial nest egg, have investments, and are self-insured….then drop the policy.
If you have debt and are over the age of 50, then you may have to stick it out with your whole life policy until you can be self insured.
But for those of us who are younger, the time is not to get some quotes on some good 20 year level term. If you are doing everything I’m teaching you and that Dave’s telling you to do, and you’re really doing it….then in 20 years, you will be self insured and you will not need to pay for life insurance for the rest of your life.
Avoid These Types of Insurance
Cancer Insurance - healthcare covers cancer too.
Accidental Death Insurance - You're not double dead because it was an accident.
Life Insurance on Children - You know, those Gerber policies. Avoid them….they are not a good investment. Instead, put your child’s money away and invest it yourself. They will have a much better return and won’t be sucked into buying cash value life insurance. As I mentioned, we do have a $15,000 rider on our life insurance policies to cover the burial costs of our children, should it be necessary. It’s not very expensive at all – since it’s a term policy, and we know that everyone in the family is taken care of, until we can be self insured.
Credit Life & Credit Disability - it's 90-100% more expensive than regular term life insurance.
Credit Card Protection - seriously, you want to protect your credit cards??? It's just another way to rip you off.
Pre-Paid Burial Policies - invest the money instead of parking it at the funeral home.
Mortgage Life Insurance - the face value decreases as time goes by because your mortgage goes down. Instead, put a sticky note on your life insurance policy that says, "Babe, pay off the house."
Duplicate coverage - it's never a good idea because the 2 will fight over who the primary provider is and no one will ever pay.
Pet Insurance - that's what an Emergency Fund is for, and seriously, if fluffy is going to cost you $10,000....it might be time to put fluffy to sleep. It's a pet.
One last thing I want to talk about insurance is that you cannot convince someone who has already made up their mind about it. There is no telling my Brother in Law that his policy sucks because he's being ripped off.
And you cannot go into your agent's office and try to convince him that he ripped you off, or that he should switch to term life insurance. Why? Becuase him realizing the truth of this would not only make him have to re-evaluate the way he thinks, but he'd have to look for a new line of work. So, just fire him and move on.
Estate Planning - Part 3
So, now that we have your insurance needs straightened out, we’ll talk about estate planning. Estate Planning is the number one thing you can to do tell your family that you love them.
I worked for an Estate Planning attorney in Las Vegas, and that was probably the most beneficial job I’ve ever had. I learned many valuable things about estate planning during that time. Now I’m not an attorney and am not 100% familiar with Tennessee state law, as I only worked with Nevada state law, so you need to seek the council of a certified professional.
There are 4 main documents you should have and they are: A Will, a Living Will, a Durable Power of Attorney, and a Trust. We're going to break each one of those down so that you can understand why and when you need one.
Wills
If you hate your family, do not get a will. A will is the single most important estate planning document that you can get. Why? Because a will not only distributes your property, but it names guardians for your minor children and appoints and Executor of your estate. A will also helps you speed through the probate process.
What happens if you do not have a will? Well, the state does all that stuff for you. And to be perfectly honest, do you think it's a good idea to let the STATE decide who gets your assets, who gets your children, or who distributes your estate? NO. It's a terrible idea, which is why you need the one to lay all of these things out before your death.
Another reason to have a will is that the state does not work for free. Naturally, if the state has to step in and distribute your assets, then the probate fees and costs are going to be much higher. If I am leaving my family something behind, I don't want the state to take more than is absolutely necessary.
So again, a will is very important and will make your family's life much easier upon your passing.
A Living Will
A living will is a document where you decide if you wish to remain on life support or if you wish to die. It also generally expresses your wishes regarding organ and tissue donation. It's main goal is to make sure your choices are honored in the event you are unable to express your wishes, and to take the burden off of your loved ones should the un-thinkable happen. When you have this document and express your wishes, then no one is left wondering what you would want. No one is left with the unnecessary burden of artificially prolonging your life or painfully "pulling the plug" which is a painful choice. This removes the added, unnecessary pain that your loved ones could go through.
A Durable Power of Attorney
This document appoints someone to act in your behalf should you become incapacitated or unable to make decisions for yourself. Obviously, you should name someone that you trust and to whom you can explain your wishes ahead of time. The person who you name in this document will be able to carry on every-day actions in your name, as well as make healthcare decisions, decisions to handle your property, income, bank accounts. Generally speaking, a spouse is named as the one to handle these issues.
If you wait until you need one, then it is too late. One of the sisters in our class explained a time when she needed one of these, and she took it to her husband, whose health was failing, and he no longer remembered how to write his name. That is a prime example of why you cannot wait to get one until you need one. Generally speaking, you can pick one of these up at your doctor's office for free, or you can get them for a low price. It's a very valuable document and one I suggest everyone getting.
A Trust
You need a trust if you have some assets. If you do not have any assets, then at trust is essentially pointless. Since we only own our vehicles and have very little wealth built up (just our mini emergency fund), we do not have a trust. It would be overkill in our situation. But when we begin getting some investments going, we have that fully-funded emergency fund, and we own our home….then we will get a trust.
A Trust protects your assets while you live and after your death. That is why they are generally refered to as "A Living Trust" because you can utilize the wonderful abilities while you are still alive.
One such example of this is that all of your assets are signed over to the trust. This is wonderful because if someone sues you, they cannot take your home, your property, your assets, etc. Why? Because it no longer belongs to YOU, it belongs to your estate – held in the name of the trust. Now in some states, someone can sue a trust, but it is very difficult and there are a lot of protections on trusts.
Another reason trusts are great is that you can not only outline what goes to whom, but you can put limitations, restrictions, and guidelines for disbursement. When I worked for the Estate Planning Attorney in Las Vegas, a casino owner had passed away, and in his trust there was a section about one of his sons. In order for his son to receive his portion of his inheritance, he had to pass drug tests. He also had to have random drug testing over the course of so many months and years in order to keep receiving his portion of the estate. While I don't think many of us would have to worry about that particular instance, it is nice to know that you can say that your child will get ____ amount of money when they graduate college, with a bonus of ______ dollars if they get a 3.5 or higher. Then ______ goes to them on their wedding day, and ______ when they have their first child, and so on. It's very nice to be able to outline everthing like that.
The most important thing a Trust does is that it keeps your estate out of probate. And why do you want to avoid probate? Because it is a LONG process, it is very costly because of all of the fees, and your estate becomes public record. If you have a lot of assets, you do not want money to go to the state and for your assets to be listed as public record for all to see.
Where Do You Get Estate Planning Documents?
Well, there are attornies that deal specifically with Estate Planning. They are very good at what they do, and their number one goal is to make sure you and your family are protected in the event of your death. However, they can be a bit more expensive than many people can afford right now. If I remember correctly, a very very basic will for one person cost about $50 at our office.
However, there is a website that will send you a state specific will. It is US Legal Forms (www.uslegalforms.com). We use US Legal Forms and for a Will, a Living Will and Durable Power of Attorney for both my husband and me, it cost $44.00. That is quite a bit less than what you will pay at an attorney’s office…believe me, I know.
Now Trusts should be done at an attorney's office. This document is far too important to try to take it into your own hands. It is a very long, lengthy document and Estate Planning attornies are the best choices for handling this matter. Depending on the size of your estate and what is involved with distribution, the price can become expensive quickly. When I would type up the trusts, I was amazed at how much work really went into them. We handled many celebrities and casino owners, so the estates were really large and very complex….some paid thousands of dollars for their trusts. However, the regular people with regular stuff didn’t pay nearly that much.
As part of the Nevada State Bar Association, attorneys were required to complete a certain number of pro-bono (or free of charge) cases each year. I believe that requirement exists in many states, so you may be able to talk to an estate planning attorney and see if they’d be willing to draw up a trust for you pro-bono if you have assets and would like to get a trust. It never hurts to ask.
While this was not a thrilling, fun-filled lesson, I hope that it did clear up some confusion you may have about Insurance policies and Estate Planning. All too often people go through life without adequate coverage (both estate planning and insurance) and their families are left scrambling after their passing. I do not want to see that happen to any of us. I do not want us to find ourselves bankrupt because we didn’t carry adequate liability coverage. I do not want to see us or our families struggling with making hard decisions about elder care, life-support, or going through a lengthy probate process.
There is too much pain in the lives of those who did not plan ahead accordingly, and the pain is left for those they leave behind. Do not put this stuff off for another day. Do not say that you will do it later, because there may not be a later. Do not say that you do not need health, disability or life insurance….because you do. Do not say that you do not need a will, or a living will, or a durable power of attorney….because you do. Every single one of us needs those things. We need them, and we have to make them a priority in our lives.
We didn’t have homework last time, but we are certainly going to have it this time, so make sure to look in the homework section.
I worked for an Estate Planning attorney in Las Vegas, and that was probably the most beneficial job I’ve ever had. I learned many valuable things about estate planning during that time. Now I’m not an attorney and am not 100% familiar with Tennessee state law, as I only worked with Nevada state law, so you need to seek the council of a certified professional.
There are 4 main documents you should have and they are: A Will, a Living Will, a Durable Power of Attorney, and a Trust. We're going to break each one of those down so that you can understand why and when you need one.
Wills
If you hate your family, do not get a will. A will is the single most important estate planning document that you can get. Why? Because a will not only distributes your property, but it names guardians for your minor children and appoints and Executor of your estate. A will also helps you speed through the probate process.
What happens if you do not have a will? Well, the state does all that stuff for you. And to be perfectly honest, do you think it's a good idea to let the STATE decide who gets your assets, who gets your children, or who distributes your estate? NO. It's a terrible idea, which is why you need the one to lay all of these things out before your death.
Another reason to have a will is that the state does not work for free. Naturally, if the state has to step in and distribute your assets, then the probate fees and costs are going to be much higher. If I am leaving my family something behind, I don't want the state to take more than is absolutely necessary.
So again, a will is very important and will make your family's life much easier upon your passing.
A Living Will
A living will is a document where you decide if you wish to remain on life support or if you wish to die. It also generally expresses your wishes regarding organ and tissue donation. It's main goal is to make sure your choices are honored in the event you are unable to express your wishes, and to take the burden off of your loved ones should the un-thinkable happen. When you have this document and express your wishes, then no one is left wondering what you would want. No one is left with the unnecessary burden of artificially prolonging your life or painfully "pulling the plug" which is a painful choice. This removes the added, unnecessary pain that your loved ones could go through.
A Durable Power of Attorney
This document appoints someone to act in your behalf should you become incapacitated or unable to make decisions for yourself. Obviously, you should name someone that you trust and to whom you can explain your wishes ahead of time. The person who you name in this document will be able to carry on every-day actions in your name, as well as make healthcare decisions, decisions to handle your property, income, bank accounts. Generally speaking, a spouse is named as the one to handle these issues.
If you wait until you need one, then it is too late. One of the sisters in our class explained a time when she needed one of these, and she took it to her husband, whose health was failing, and he no longer remembered how to write his name. That is a prime example of why you cannot wait to get one until you need one. Generally speaking, you can pick one of these up at your doctor's office for free, or you can get them for a low price. It's a very valuable document and one I suggest everyone getting.
A Trust
You need a trust if you have some assets. If you do not have any assets, then at trust is essentially pointless. Since we only own our vehicles and have very little wealth built up (just our mini emergency fund), we do not have a trust. It would be overkill in our situation. But when we begin getting some investments going, we have that fully-funded emergency fund, and we own our home….then we will get a trust.
A Trust protects your assets while you live and after your death. That is why they are generally refered to as "A Living Trust" because you can utilize the wonderful abilities while you are still alive.
One such example of this is that all of your assets are signed over to the trust. This is wonderful because if someone sues you, they cannot take your home, your property, your assets, etc. Why? Because it no longer belongs to YOU, it belongs to your estate – held in the name of the trust. Now in some states, someone can sue a trust, but it is very difficult and there are a lot of protections on trusts.
Another reason trusts are great is that you can not only outline what goes to whom, but you can put limitations, restrictions, and guidelines for disbursement. When I worked for the Estate Planning Attorney in Las Vegas, a casino owner had passed away, and in his trust there was a section about one of his sons. In order for his son to receive his portion of his inheritance, he had to pass drug tests. He also had to have random drug testing over the course of so many months and years in order to keep receiving his portion of the estate. While I don't think many of us would have to worry about that particular instance, it is nice to know that you can say that your child will get ____ amount of money when they graduate college, with a bonus of ______ dollars if they get a 3.5 or higher. Then ______ goes to them on their wedding day, and ______ when they have their first child, and so on. It's very nice to be able to outline everthing like that.
The most important thing a Trust does is that it keeps your estate out of probate. And why do you want to avoid probate? Because it is a LONG process, it is very costly because of all of the fees, and your estate becomes public record. If you have a lot of assets, you do not want money to go to the state and for your assets to be listed as public record for all to see.
Where Do You Get Estate Planning Documents?
Well, there are attornies that deal specifically with Estate Planning. They are very good at what they do, and their number one goal is to make sure you and your family are protected in the event of your death. However, they can be a bit more expensive than many people can afford right now. If I remember correctly, a very very basic will for one person cost about $50 at our office.
However, there is a website that will send you a state specific will. It is US Legal Forms (www.uslegalforms.com). We use US Legal Forms and for a Will, a Living Will and Durable Power of Attorney for both my husband and me, it cost $44.00. That is quite a bit less than what you will pay at an attorney’s office…believe me, I know.
Now Trusts should be done at an attorney's office. This document is far too important to try to take it into your own hands. It is a very long, lengthy document and Estate Planning attornies are the best choices for handling this matter. Depending on the size of your estate and what is involved with distribution, the price can become expensive quickly. When I would type up the trusts, I was amazed at how much work really went into them. We handled many celebrities and casino owners, so the estates were really large and very complex….some paid thousands of dollars for their trusts. However, the regular people with regular stuff didn’t pay nearly that much.
As part of the Nevada State Bar Association, attorneys were required to complete a certain number of pro-bono (or free of charge) cases each year. I believe that requirement exists in many states, so you may be able to talk to an estate planning attorney and see if they’d be willing to draw up a trust for you pro-bono if you have assets and would like to get a trust. It never hurts to ask.
While this was not a thrilling, fun-filled lesson, I hope that it did clear up some confusion you may have about Insurance policies and Estate Planning. All too often people go through life without adequate coverage (both estate planning and insurance) and their families are left scrambling after their passing. I do not want to see that happen to any of us. I do not want us to find ourselves bankrupt because we didn’t carry adequate liability coverage. I do not want to see us or our families struggling with making hard decisions about elder care, life-support, or going through a lengthy probate process.
There is too much pain in the lives of those who did not plan ahead accordingly, and the pain is left for those they leave behind. Do not put this stuff off for another day. Do not say that you will do it later, because there may not be a later. Do not say that you do not need health, disability or life insurance….because you do. Do not say that you do not need a will, or a living will, or a durable power of attorney….because you do. Every single one of us needs those things. We need them, and we have to make them a priority in our lives.
We didn’t have homework last time, but we are certainly going to have it this time, so make sure to look in the homework section.
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