February 23, 2024 • 28 mins
Discover the uncovered layers of life insurance as we, Justin Gaines and John Proper, navigate the nebulous waters of policies and protection. Prepare to be enlightened on the true functions of life insurance, extending beyond mere debt settlement and into the realm of safeguarding your family's future. We confront head-on the industry's shortcomings, from the shockingly simple process of obtaining a license to sell life insurance to the detrimental effects of ill-advised agents. Education stands as our beacon, for both clients and professionals, to ensure life insurance serves its intended purpose fully and justly.
Venture with us through the poignant realities of juvenile life insurance, especially in cases involving children with birth defects. Grasping the gravity of such insurance is critical as we discuss how it can deliver a year's worth of income, affording bereaved families the time they need to mourn without the strain of financial concerns. We also examine the versatility of life insurance as a smarter alternative to traditional college savings plans, revealing its capacity to adapt to a family's changing needs. Our mission is to arm you with knowledge, debunk myths, and guide you towards making empowered decisions for your loved ones' financial security.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Justin Gaines (00:00):
Welcome to the Bounds Blueprints podcast, where
we discuss the optimaltechniques for finances and
health and then break it down tocreate an individualized and
balanced plan.
I'm your host, justin Gaines,here with my co-host, john
Prover.
In this episode, john and Idiscuss how to prepare for the
worst day of your life and, ifthe plan is structured properly,
how to set your kids up for abright financial future.
Thank you for listening.
(00:20):
We hope you enjoy.
No, so I guess I'll summarizethe basic uses of life insurance
and then I'm going to rank themby what I perceive as in the
industry, most understood toleast understood, and then we'll
go through what I consider asone of the least understood uses
(00:43):
of life insurance.
But I would say the bottomthree are probably equally not
understood by most individualsin the insurance professional.
And that's mostly because, inorder to get your life insurance
license, it varies by state,but in New York, where we are,
you take a 40 hour class and youcan take it online and that
(01:05):
could shoot your life, accidentand health.
So it allows you to sell lifeinsurance, accident insurance
and health insurance If you justwanted to sell life insurance.
It's a 20 hour course.
John Proper (01:14):
I didn't notice that quick yeah.
Justin Gaines (01:16):
Yeah, you take a 20 hour course, pass the course.
Then you have to go and take astate test.
Pass the state test, now you'relicensed and you can go sell
life insurance.
So you wonder why the industryas a whole has a negative stigma
around it.
It's because you have all thesepeople who are running around
with licenses that don't havedepth of knowledge.
They just have a license tosell and, generally speaking,
(01:40):
commissions on a life insurancepolicy.
It varies on what type of lifeinsurance it is, but they can be
anywhere from 50% to 110% ofthe first year premium.
So it's an area where there's ahigh need for it.
I firmly believe that ifeverybody understood life
(02:00):
insurance, they would own lifeinsurance, because almost every
individual has some sort of needfor it.
It might be a small need, itmight be a large need, but just
about every single individualhas some need for life insurance
.
Problem is is you have thesepeople who get these licenses
and then they prey on that andthey just try and sell these
massive policies and then peoplethink life insurance is garbage
(02:22):
because they've seen a garbagelife insurance policy, they've
seen it used improperly.
So it's not that life insuranceis trash, it's just that you
have non-professionals selling aproduct that they don't
understand in scenarios thatthey don't understand, in order
to make the most amount of moneyand you end up with trash
(02:44):
products out there, because it'snot the product that's trash,
it's the application of theproduct that's trash.
John Proper (02:50):
Yeah, I mean I'll say that makes I have a better
understanding, and I see it fromtheir viewpoint now, because
the people at the big nameplaces that just sell policies
with how hard it is to get maybea job that pays decent, I
didn't know it was that easy toget into.
So it's kind of a shame.
I'm not justifying what they'redoing at all, but now it
(03:11):
completely makes sense thatthese people basically just take
a course so then they can makea large amount of money.
They don't really care aboutthe person.
Justin Gaines (03:18):
Well, the other issue is that.
So the number one problem thatyou have in the insurance
industry?
The number one problem that I'malways trying to solve for my
business is talking to enoughpeople.
Now we take a very educationalapproach, so the number of
meetings I can have in a day islimited because of that, because
I'm going to take as much timeas I need to educate you on the
topics make sure you understandwhat we're doing, make sure you
(03:41):
see how it fits into your planand also have it where.
If you go and shop to surroundor you go talk to somebody else,
you can educate other people,but you also, if you were
talking about your plan with afamily member or with a spouse,
if the spouse isn't in themeeting with me, I would like
the spouse to be there.
But if you're talking aboutyour plan with somebody, I want
(04:02):
you to be able to say why you'redoing what you're doing.
I don't want you to be like ohyeah.
I just bought this policy andthen somebody gives you an
objection to it and you're likeI never talked about that, I
don't know about that, and youhave a good point.
That's an interesting thingthat we didn't talk about.
I want to have thatconversation.
I'll even tell clients.
You know, when you're talkingto somebody who doesn't
(04:22):
understand this or doesn't likelife insurance, this is going to
be the pushback that they'regoing to give you, whatever it
may be, and just explain whythey're right and why they're
wrong, and then why I'mrecommending what I'm
recommending and where that'sbeneficial and where the trial
backs are and what you're givingup in order to do these things.
So at the end of the day, nomatter what financial plan
you're using, there's going tobe drawbacks, and I always say
(04:46):
I'm the defensive coordinator ofthe financial planning.
So mine isn't the most riskyand it also doesn't have the
highest rates of return.
It's going to position you sothat you can take more risk in
other areas because you have aconservative nest egg that's
allowing you to take risk inother areas.
But to get to the list to notdraw on this, but to get to the
(05:08):
list, I would say the two mostcommon and easily understood
uses of life insurance aregetting it for debt repayment
and income replacement.
So that's you, go and get amortgage it's a 30 year mortgage
on a $200,000 house.
You go and buy a $200,000 termpolicy for 30 years, you and
(05:29):
whoever you're buying with, andthat way, if one of you passes
away, that term policy, givesthe other person the beneficiary
the $200,000 to then go and payoff the mortgage and now they
don't have to worry about payingthat mortgage.
The other one, incomereplacement.
You have somebody who is, say,you and your spouse, you make
(05:51):
$50,000 a year, or you and yoursignificant other that's living
together.
If you're both relying on thejoint income, this is where
income replacement becomes key.
Or if you have kids that arerelying on your income, that's
another scenario.
Effectively, if you havedependence on your tax return,
you should have incomereplacement through life
(06:11):
insurance, disability, thosetypes of policies.
What it does is you look at howmany more working years do they
have left and then take amultiple of their current income
in order to replace that incomefor the remainder of those
working years.
What you wouldn't do is so takesomebody who's 30,
(06:34):
realistically, they're probablygonna work till 65 or 70, so
call it 35 years.
If you take 35 years at $50,000of income, that's 1.75 million.
But that's not how much youneed.
You do not need 1.75 million toreplace this income because,
one, if your income's at 50,000,a portion of that's taxed, and
(07:00):
the other piece is that you cantake this large nest egg, invest
it into conservative areas thathave low risk but also lower
rates of return, and that'sgonna kick out interest and so,
with principle and interest, youcan replace the income.
So, generally speaking, you'regonna look at somewhere between
10 and 20 times whatever yourincome is, that allows income
(07:21):
replacement.
So those two very wellunderstood, the most common
sales for those very quick, veryeasy.
Now the last three are lessunderstood scenarios and they
take a lot more explaining.
So I'm gonna just list theseones off and then our podcast is
gonna be on the third one.
So estate planning, using lifeinsurance for estate planning.
(07:43):
So that's gonna be managingyour tax load, managing
transferring of assets to thenext generation, creating a
legacy for yourself, any ofthose types of things.
Using it in business planning.
This can be buy sell agreements, making sure that you're able
to.
If one of you passes away, thebusiness can continue.
Similar to income replacement,but there's tons of scenarios
(08:03):
there.
You can also use it foremployee retention, for your key
individuals or also your highperformers.
If you need to create afinancial incentive package but
you don't wanna offer it toeverybody, there's also ways to
do that with life insurance forbusiness planning purposes.
But then what I would say isprobably the most misunderstood
(08:28):
or not understood at allscenario is juvenile life
insurance policies.
So juvenile life insurance justmeans life insurance on
somebody who is under the age of18.
Generally speaking, you can getlife insurance on somebody from
ages six months to whenever, sosix months is really when it
(08:51):
starts and then you can go upfrom there, and those are
juvenile policies.
The reason why I think they'remost misunderstood is because
most people think most peopleunderstand debt repayment and
income replacement, which is, ifyou have dependents, you need
these types of life insurance.
Or if you're trying to passthings on to a family member and
(09:13):
even if they're not a dependentand you want the house to move
debt free, you need that debtrepayment so that it's paid off
and then they get the house.
There's no debt on it With ajuvenile.
A juvenile doesn't have anydependents.
They are the dependent, yeah.
So why would somebody need thatlife insurance?
Can you think of any reasonswhy somebody under the age of 18
(09:33):
would need life insurance.
John Proper (09:36):
I would imagine of common one would be for the
expenses of the funeral.
I mean, I'm sure that peoplemay have money saved up, but you
probably don't.
You're not expecting that.
Justin Gaines (09:47):
Right, you're not expecting, you're not thinking
about it, and I would say that'sthe most common answer for
juvenile insurance.
But I would say that that is,and you kind of touched on it.
You might have money for that,you might have money set aside.
It's also one of those thingsthat if somebody under the HB
team were to pass away, youwould find a way to take care of
(10:08):
those funeral expenses.
No matter what it was, you wouldmake it happen Cause, as a
parent, you're not going toallow your child to not get the
proper funeral services.
You're gonna take sacrifices inwhatever way possible.
Now we wanna make it so thatyou can not have to worry about
that, but more importantly, ifyou try and put your mind as a
(10:31):
parent who's just lost a child,how quickly are you gonna go
back to work?
John Proper (10:39):
It's not even imaginable, like really, I have
no idea how long it would taketo recover from something like
that.
Justin Gaines (10:46):
Yeah, I mean you're talking.
I mean your work, realistically, your work.
Depending on how large of abusiness you work for family
owned business or largecorporation you might be given,
you're gonna have your sick days, vacation days that you can use
, past that they may be generousenough to pay you for some time
away they may not.
The most generous I've seen is,you know they might pay you for
(11:09):
four extra weeks of you workingfrom home or doing.
John Proper (11:12):
Seems reasonable.
Justin Gaines (11:14):
But that's only a month.
That's a month.
And say you had four weeks,just say it happens early in the
year and you haven't taken avacation and that sort of stuff.
You have four weeks saved up,so now you have two months to
try and mourn the loss and tryand heal.
And the reality is two monthsis not enough time to lose
somebody and try and heal.
You're still gonna bestruggling emotionally, mentally
(11:38):
, and so what I use juvenilepolicies for is, yes, we want
some carved away for funeralexpense.
But my primary concern withjuvenile life insurance is
making it so that the policy islarge enough so that the parents
do not have to work for a yearat minimum.
(11:58):
So if the household income is$100,000, then we would take out
$100,000 on each one of thechildren in whole life insurance
.
And that's because one the costis going to be minimal.
You're talking $100,000 on, youknow, and honestly, it doesn't
really matter if they're sixmonths or 17 years.
(12:20):
the price isn't gonna changebecause you're paying a minimum
premium policy $100,000.
You're looking at somewherebetween $300 and $500 a year,
depending on age, preexistinghealth conditions, all that sort
of stuff, but very inexpensivecost for what you're getting.
It allows the parents to nothave to go to work for a year
(12:42):
and they can just focus onhealing, recovering, maintaining
the family unit.
John Proper (12:48):
Because if there's also siblings.
Justin Gaines (12:49):
You also have to be there as a support network
for the sibling that just lostone of their siblings.
You're going through this verytough scenario where all of us
hope we never have to experiencethis, but if that day ever
comes, you need to be able tonot have to go to work, and so
what the juvenile policy istrying to do is, in that
(13:11):
scenario, you have massiveamount of grief, massive amount
of stress.
What we wanna do is we wannaremove any and all financial
burdens, stress and obligations.
We can remove all of that.
We no longer have to worryabout anything other than
grieving, mourning and healing.
John Proper (13:31):
Yeah, yeah, they say.
I think I've heard thestatement.
It's kind of one of the dealswith life that when you're born
you pretty much know you'regonna be seeing your parents
pass, but like no parent shouldhave to see their child pass or
something.
Right, I imagine too.
If I mean, I know you said workmay give, and this is generous
work may give up to two months,but if the child is, if it's not
(13:56):
a sudden thing, if there'sthings leading up to it hospital
visits it could be way morethan way more time before it
even happens.
Justin Gaines (14:06):
So the fact that a year may sound long, but I
can't even imagine what canhappen and I'll be honest, most
of the parents that I speak withchoose to go with longer than a
year if they can afford it andmake sense, just because if
they're truly being honest withthemselves and putting
themselves in that mindset of,okay, have a child and then just
(14:27):
passed away, and you're reallytrying to put your mindset
through it.
It's usually a meeting that'sfilled with tears and emotion
because you're thinking aboutsomething that you hope never
has to happen.
John Proper (14:37):
Sure.
Justin Gaines (14:39):
And almost always they say a year would not be
enough.
A year would not be enough, andso typically, if we do the
calculation based on not takinginto account taxes and not
taking into stuff, that yearworth of income replacement that
we're doing could span to ayear and a quarter.
(15:01):
Year and a half might be ableto buy a chemical room, but
that's where I say, you know, ayear is usually our minimum
calculation.
John Proper (15:09):
Yeah.
Justin Gaines (15:12):
Well, almost every parent does agree with is
that at a year.
A year is the absolute minimum.
Yeah, that I would be able togo back to work.
You know, at six months I'm notgoing back to work.
Yeah, the maternity leave isusually three to six months.
No, you have a baby, you havethe baby and then you go back to
work three to six monthsafterwards.
(15:32):
And that's not even healing froman emotional trauma, it's just
healing from the physical andadjusting to life and all those
components.
So the idea of going back towork after losing a loved one in
six months is unheard of andjust doesn't seem like the right
approach.
So then you have the 12 monthmark.
That seems like okay, I couldprobably start to have the
(15:55):
healing process and then startto look at taking those next
steps, but there are limitationson this.
So in order for you to have ajuvenile policy, you have to
have at minimum that amount oflife insurance on the parents,
and each company fluctuates onthis.
But the parents have to beinsured.
(16:15):
Or at least I have had ithappen where a parent is
uninsurable but we just send inthe application, that
application health reasons orhealth reasons.
Yeah, so uninsurable for healthreasons.
So they get denied.
And then it's allowed becauseyou've at least tried.
It's not that you don't havelife insurance because you don't
want it, it's because you can'tget it.
John Proper (16:36):
Yeah.
Justin Gaines (16:37):
You know there's ways around that and that's
where working with aprofessional has experience with
it, allows you to be able tohave those conversations.
But you have to have lifeinsurance on the parents and
there's a minimum threshold witheach company on what how much
of a gap has to exist betweenthe life insurance on the kids
and the life insurance on theparents.
John Proper (16:57):
Okay.
Justin Gaines (16:59):
So, and that's just because, if you're going to
ensure the kids and youunderstand the risks associated
with the child passing awayearly, more likely is a parent
passing away early and so ifyou're not going to ensure that
risk, why are you ensuring thechild passing away early?
John Proper (17:17):
That doesn't?
Justin Gaines (17:18):
that really doesn't make sense, and so you
also run into a fraud issue.
You know it's just crazy asthis may sound, but if you have
parents that are just ensuringthe kids, not ensuring
themselves, oh, that was myfirst thought.
The parents look at.
You know, if you have anabusive household and you know
they're able to get through thewhole process and they, you know
, pull a smoke screen in frontof everybody and get the child
(17:41):
insured and then they end uptaking that child's life.
You now have, you know, massivefraud scenario.
John Proper (17:48):
And that's.
I have to say, that wasn't myfirst thought.
That's, that's crazy.
I was just thinking if everyonewas in on it, it seems like an
easy thing, for not easy, but itseems like a thing people might
try and it would be like thechild is in on it too, so they
would fake, fake that actuallyfake it that actually doing it
would be.
I guess both are crazy, butyeah, fake it.
Justin Gaines (18:10):
That I've never actually seen.
But you've seen the otherthere's cases out there where
it's happened.
I personally am not going todeal with cases where it's
happened and it's where a lot ofregulation comes from is that
you know you can't, you can'tget life insurance on your kids
if you don't have it on yourself.
Because of that, becauseunfortunately there's sick
people in this world and they'lldo anything to make a buck yeah
(18:32):
, All right, well, I got.
John Proper (18:34):
I got a question then.
So ideally you're probablyworking with clients well before
they have kids, so I guesswe'll use that scenario.
Are you bringing thisconversation up?
When they tell you, hey, we'replanning to have a kid, when
they've already had the kid, Iimagine the sooner the better.
But what happens?
Also, if you meet someone whoalready had a kid like when does
this usually pop up?
Justin Gaines (18:55):
So the scenario doesn't so much matter as far as
like executing on this andgetting a policy in place,
whether you have kids don't havekids, I would say, more often
than not, because life insuranceis misunderstood.
It's a scenario where the kidsare already 6, 7, 8, 9, 10, and
(19:17):
we're having this conversationand then we're putting life
insurance on the parents becausethey don't have life insurance,
and we're putting it on thechild.
But there are scenarios wherewe have the parents insured
already and then they getpregnant.
Now we're having theconversation of when this
child's born.
We should do this and have thisplan together, and so we start
(19:37):
talking about it that way.
And there's ways.
If you understand life insurance, there are ways.
If you have a child that's bornwith a birth defect, that child
will be uninsurable until age18.
It's guaranteed.
(19:57):
The child will be uninsurable.
The way around, that is, if theagent knows that ahead of time.
So say, the child's alreadyborn.
Obviously you don't know thatahead of time if they haven't
been born yet.
If the child has been born andyou know that they had a birth
defect, what you should do isput the policy in place on the
parents first.
(20:18):
So instead of submittingeverything at the same time.
Put the policy on the parentsin place first with a child term
writer, so that puts the termwriter on A child term writer,
puts life insurance on thechildren with no parents.
No questions about.
There's no, looking at theinsurability of the child.
(20:39):
And that writer is convertible,which means once that writer is
in place you can then convertthat writer into a whole life
policy on the child.
John Proper (20:52):
So if you know they wouldn't be able to get life
insurance, but you're able toput a $25,000 writer on the
policy.
Justin Gaines (20:58):
You can now take that writer, turn it in $25,000
of life insurance on the child.
John Proper (21:02):
Nice.
Justin Gaines (21:03):
Now, $25,000 is not going to replace a year of
income, but you're not going tobe able to get to that level of
insurability.
On a child that's had a birthdefect.
And so what we're doing here iswe're putting us into best case
scenario.
We're getting as much as wepossibly can so that we can
cover as much of a financialexpenses we can and buy
ourselves as much time if thatscenario were to ever happen.
John Proper (21:28):
But if you, submit if you do it the other way.
Justin Gaines (21:30):
If you submit everything at the same time, the
child gets denied.
The company can deny you thatchild term writer and you won't
have this conversion optionbecause part of the conversion
is going to ask you has thechild ever been denied life
insurance?
And legally it's fraud if yousay no.
It's not fraud if you know, asan agent, that the child would
(21:53):
not have been approved for lifeinsurance but they'd never been
denied by a company.
It's not fraud.
To answer the question has acompany ever denied them with
life insurance?
No, because a company has not.
You've just evaluated the riskand said that they most likely
would not be eligible.
This is the better route to go.
John Proper (22:09):
Right, right.
Another thing I thought of toois obviously we went over huge
reasons why they get it probablythe most important reason.
But are there any also cool saycool, but like effects that if
a child gets this when they turn18, the plan can kind of Go
roll over?
Justin Gaines (22:30):
Yeah, like you said, we talked about the
primary reasons.
I typically, given the timehorizon of the child and
statistical probability thatthey're not going to pass away,
I usually use an index universallife policy on them.
The reason being is that thecash value in the policy can be
tied to the stock market.
We've talked about indexuniversal life in previous
podcasts, so go check that outif you want to learn more about
(22:52):
this.
But it allows for more upsidepotentials.
You're able to get moreinterest on that.
So, effectively, what you cando with this juvenile policy is
you can treat it like a 529college savings plan, where
you're putting money in there.
When they turn 18, you cantransfer the ownership to the
child.
The child now owns the policy.
They can take a loan out, whichmakes it none of the gains are
(23:16):
taxable.
John Proper (23:16):
They can take a loan out against the policy.
Justin Gaines (23:18):
Instead of going to the bank for a student loan,
take a loan out against thepolicy to pay for some of their
college or all other college ifyou've really funded this,
overfunded tremendously.
Now the benefit to thisstrategy versus a 529 plan is
529 plans can only be used forcollege If your child decides to
(23:39):
go into the trades, decides tonot go to college, decides to
start their own business,decides to go into the family
business and not go to college.
Any scenario where the child'snot going to college, that 529
plan is going to be penalizedfor that.
This plan isn't, because it'snot a 529 plan.
It's not set aside specificallyfor college.
That money is set aside forwhatever you want it to be.
(24:01):
They could sit there, theycould go get an apprenticeship,
become a plumber and then, fiveyears in, they're 23 to 25, they
want to buy their own house.
Because now they're making goodmoney.
They could borrow against thispolicy for the down payment for
their house.
John Proper (24:18):
That's a no-brainer , then with everything.
Justin Gaines (24:22):
That's where you need a professional knows what
they're doing to structure allthese things properly and have
that conversation with you tosay what makes the most sense,
what's the best plan for this.
Because, effectively, what youdo, if you structure it properly
, you can have it where it's apolicy that takes care of and,
from ages six months to 18, it'sa policy that would replace
your income as a parent ifsomething were to ever happen,
(24:46):
so that you can grieve and mourn.
The minute they turn 18, youcan transfer ownership or you
could retain ownership andmaintain yourself as the
beneficiary.
That part really doesn't matter.
There's nuances to why we wouldor wouldn't do that, but the
money can be distributed fromthe account tax-free in the form
of a loan to the child forstarting a business, buying a
(25:09):
house, going to college, buyingtheir first car, any of these
major capital expenses.
It's not like we're just buyinglife insurance for a plan
that's really only good for me,just six months to 18.
Once they get to their 18thbirthday, we can flip this and
(25:29):
now use it as a financialstronghold that we've developed
for the child.
John Proper (25:34):
No, that sounds like.
One thought I've always had isit's always tough to imagine,
when you're having a child andall the new expenses there, to
also start a fund for them.
But obviously the earlier thebetter.
That just seems like afoolproof way of tons of
protection because you'regetting life insurance, for many
people might come back at youand say a very unlikely thing,
(25:55):
which it is statisticallyunlikely but terrible if it
happens.
But then that argumentcompletely goes out the window
if structured properly, becauseI'm sure most people at 18 are
not set up that well.
No, that's cool.
Justin Gaines (26:12):
Yeah, if it's structured properly, you can do
it.
The other nice part about usingan index universal life policy
is that the premium on thatpolicy is variable.
Like you said, if we're havingthis conversation with a newborn
, expenses are high.
You're trying to balance yourbudget, trying to figure out all
of these things.
You could start with a minimumpremium policy and pay the
(26:37):
minimum to have just that purelife insurance.
We're looking for the deathbenefit option.
Start with the minimum, but thenthere's also structuring it
properly.
We want to put as much money inthere as possible, so there's a
max that you can put in inorder to maintain all your tax
benefits.
So we can start at a minimum tomaintain your budget and then,
as you get raises through workand you start to bounce out
(26:58):
getting used to having a child,that budget starts to work out
properly.
You can now increase.
You don't have to go minimum tomax.
You can slowly increase.
We can make adjustments, butyou can change that premium so
that you're putting more into it, so that you're achieving some
of these longer term financialobjectives to the policy.
Other big part to note on thisis, again, if it's structured
(27:20):
properly, you putting in thatextra money.
Some people get wary about thatbecause they're like well, I'm
going to put in the extra moneyand my death benefit is going to
be the same.
So if the child does pass away,I've paid more than I needed to
and I'm still getting the sameamount, but paying more.
If it's structured properly,that's not true.
Your life insurance willmaintain the same amount and
then your cash value in thepolicy will be added to that, so
(27:43):
you'll get both the cash valueand the death benefit back.
John Proper (27:48):
But, again.
Justin Gaines (27:49):
It's got to be structured properly.
John Proper (27:51):
Yeah, thanks for listening to our podcast.
Justin Gaines (27:54):
We hope this helps you on your balance
freedom journey.
John Proper (27:56):
Please share your thoughts in the comments section
below.
Justin Gaines (27:58):
Until next time, stay balanced.
Welcome to the Bounds Blueprints podcast, where
we discuss the optimaltechniques for finances and
health and then break it down tocreate an individualized and
balanced plan.
I'm your host, justin Gaines,here with my co-host, john
Prover.
In this episode, john and Idiscuss how to prepare for the
worst day of your life and, ifthe plan is structured properly,
how to set your kids up for abright financial future.
Thank you for listening.
(00:20):
We hope you enjoy.
No, so I guess I'll summarizethe basic uses of life insurance
and then I'm going to rank themby what I perceive as in the
industry, most understood toleast understood, and then we'll
go through what I consider asone of the least understood uses
(00:43):
of life insurance.
But I would say the bottomthree are probably equally not
understood by most individualsin the insurance professional.
And that's mostly because, inorder to get your life insurance
license, it varies by state,but in New York, where we are,
you take a 40 hour class and youcan take it online and that
(01:05):
could shoot your life, accidentand health.
So it allows you to sell lifeinsurance, accident insurance
and health insurance If you justwanted to sell life insurance.
It's a 20 hour course.
John Proper (01:14):
I didn't notice that quick yeah.
Justin Gaines (01:16):
Yeah, you take a 20 hour course, pass the course.
Then you have to go and take astate test.
Pass the state test, now you'relicensed and you can go sell
life insurance.
So you wonder why the industryas a whole has a negative stigma
around it.
It's because you have all thesepeople who are running around
with licenses that don't havedepth of knowledge.
They just have a license tosell and, generally speaking,
(01:40):
commissions on a life insurancepolicy.
It varies on what type of lifeinsurance it is, but they can be
anywhere from 50% to 110% ofthe first year premium.
So it's an area where there's ahigh need for it.
I firmly believe that ifeverybody understood life
(02:00):
insurance, they would own lifeinsurance, because almost every
individual has some sort of needfor it.
It might be a small need, itmight be a large need, but just
about every single individualhas some need for life insurance
.
Problem is is you have thesepeople who get these licenses
and then they prey on that andthey just try and sell these
massive policies and then peoplethink life insurance is garbage
(02:22):
because they've seen a garbagelife insurance policy, they've
seen it used improperly.
So it's not that life insuranceis trash, it's just that you
have non-professionals selling aproduct that they don't
understand in scenarios thatthey don't understand, in order
to make the most amount of moneyand you end up with trash
(02:44):
products out there, because it'snot the product that's trash,
it's the application of theproduct that's trash.
John Proper (02:50):
Yeah, I mean I'll say that makes I have a better
understanding, and I see it fromtheir viewpoint now, because
the people at the big nameplaces that just sell policies
with how hard it is to get maybea job that pays decent, I
didn't know it was that easy toget into.
So it's kind of a shame.
I'm not justifying what they'redoing at all, but now it
(03:11):
completely makes sense thatthese people basically just take
a course so then they can makea large amount of money.
They don't really care aboutthe person.
Justin Gaines (03:18):
Well, the other issue is that.
So the number one problem thatyou have in the insurance
industry?
The number one problem that I'malways trying to solve for my
business is talking to enoughpeople.
Now we take a very educationalapproach, so the number of
meetings I can have in a day islimited because of that, because
I'm going to take as much timeas I need to educate you on the
topics make sure you understandwhat we're doing, make sure you
(03:41):
see how it fits into your planand also have it where.
If you go and shop to surroundor you go talk to somebody else,
you can educate other people,but you also, if you were
talking about your plan with afamily member or with a spouse,
if the spouse isn't in themeeting with me, I would like
the spouse to be there.
But if you're talking aboutyour plan with somebody, I want
(04:02):
you to be able to say why you'redoing what you're doing.
I don't want you to be like ohyeah.
I just bought this policy andthen somebody gives you an
objection to it and you're likeI never talked about that, I
don't know about that, and youhave a good point.
That's an interesting thingthat we didn't talk about.
I want to have thatconversation.
I'll even tell clients.
You know, when you're talkingto somebody who doesn't
(04:22):
understand this or doesn't likelife insurance, this is going to
be the pushback that they'regoing to give you, whatever it
may be, and just explain whythey're right and why they're
wrong, and then why I'mrecommending what I'm
recommending and where that'sbeneficial and where the trial
backs are and what you're givingup in order to do these things.
So at the end of the day, nomatter what financial plan
you're using, there's going tobe drawbacks, and I always say
(04:46):
I'm the defensive coordinator ofthe financial planning.
So mine isn't the most riskyand it also doesn't have the
highest rates of return.
It's going to position you sothat you can take more risk in
other areas because you have aconservative nest egg that's
allowing you to take risk inother areas.
But to get to the list to notdraw on this, but to get to the
(05:08):
list, I would say the two mostcommon and easily understood
uses of life insurance aregetting it for debt repayment
and income replacement.
So that's you, go and get amortgage it's a 30 year mortgage
on a $200,000 house.
You go and buy a $200,000 termpolicy for 30 years, you and
(05:29):
whoever you're buying with, andthat way, if one of you passes
away, that term policy, givesthe other person the beneficiary
the $200,000 to then go and payoff the mortgage and now they
don't have to worry about payingthat mortgage.
The other one, incomereplacement.
You have somebody who is, say,you and your spouse, you make
(05:51):
$50,000 a year, or you and yoursignificant other that's living
together.
If you're both relying on thejoint income, this is where
income replacement becomes key.
Or if you have kids that arerelying on your income, that's
another scenario.
Effectively, if you havedependence on your tax return,
you should have incomereplacement through life
(06:11):
insurance, disability, thosetypes of policies.
What it does is you look at howmany more working years do they
have left and then take amultiple of their current income
in order to replace that incomefor the remainder of those
working years.
What you wouldn't do is so takesomebody who's 30,
(06:34):
realistically, they're probablygonna work till 65 or 70, so
call it 35 years.
If you take 35 years at $50,000of income, that's 1.75 million.
But that's not how much youneed.
You do not need 1.75 million toreplace this income because,
one, if your income's at 50,000,a portion of that's taxed, and
(07:00):
the other piece is that you cantake this large nest egg, invest
it into conservative areas thathave low risk but also lower
rates of return, and that'sgonna kick out interest and so,
with principle and interest, youcan replace the income.
So, generally speaking, you'regonna look at somewhere between
10 and 20 times whatever yourincome is, that allows income
(07:21):
replacement.
So those two very wellunderstood, the most common
sales for those very quick, veryeasy.
Now the last three are lessunderstood scenarios and they
take a lot more explaining.
So I'm gonna just list theseones off and then our podcast is
gonna be on the third one.
So estate planning, using lifeinsurance for estate planning.
(07:43):
So that's gonna be managingyour tax load, managing
transferring of assets to thenext generation, creating a
legacy for yourself, any ofthose types of things.
Using it in business planning.
This can be buy sell agreements, making sure that you're able
to.
If one of you passes away, thebusiness can continue.
Similar to income replacement,but there's tons of scenarios
(08:03):
there.
You can also use it foremployee retention, for your key
individuals or also your highperformers.
If you need to create afinancial incentive package but
you don't wanna offer it toeverybody, there's also ways to
do that with life insurance forbusiness planning purposes.
But then what I would say isprobably the most misunderstood
(08:28):
or not understood at allscenario is juvenile life
insurance policies.
So juvenile life insurance justmeans life insurance on
somebody who is under the age of18.
Generally speaking, you can getlife insurance on somebody from
ages six months to whenever, sosix months is really when it
(08:51):
starts and then you can go upfrom there, and those are
juvenile policies.
The reason why I think they'remost misunderstood is because
most people think most peopleunderstand debt repayment and
income replacement, which is, ifyou have dependents, you need
these types of life insurance.
Or if you're trying to passthings on to a family member and
(09:13):
even if they're not a dependentand you want the house to move
debt free, you need that debtrepayment so that it's paid off
and then they get the house.
There's no debt on it With ajuvenile.
A juvenile doesn't have anydependents.
They are the dependent, yeah.
So why would somebody need thatlife insurance?
Can you think of any reasonswhy somebody under the age of 18
(09:33):
would need life insurance.
John Proper (09:36):
I would imagine of common one would be for the
expenses of the funeral.
I mean, I'm sure that peoplemay have money saved up, but you
probably don't.
You're not expecting that.
Justin Gaines (09:47):
Right, you're not expecting, you're not thinking
about it, and I would say that'sthe most common answer for
juvenile insurance.
But I would say that that is,and you kind of touched on it.
You might have money for that,you might have money set aside.
It's also one of those thingsthat if somebody under the HB
team were to pass away, youwould find a way to take care of
(10:08):
those funeral expenses.
No matter what it was, you wouldmake it happen Cause, as a
parent, you're not going toallow your child to not get the
proper funeral services.
You're gonna take sacrifices inwhatever way possible.
Now we wanna make it so thatyou can not have to worry about
that, but more importantly, ifyou try and put your mind as a
(10:31):
parent who's just lost a child,how quickly are you gonna go
back to work?
John Proper (10:39):
It's not even imaginable, like really, I have
no idea how long it would taketo recover from something like
that.
Justin Gaines (10:46):
Yeah, I mean you're talking.
I mean your work, realistically, your work.
Depending on how large of abusiness you work for family
owned business or largecorporation you might be given,
you're gonna have your sick days, vacation days that you can use
, past that they may be generousenough to pay you for some time
away they may not.
The most generous I've seen is,you know they might pay you for
(11:09):
four extra weeks of you workingfrom home or doing.
John Proper (11:12):
Seems reasonable.
Justin Gaines (11:14):
But that's only a month.
That's a month.
And say you had four weeks,just say it happens early in the
year and you haven't taken avacation and that sort of stuff.
You have four weeks saved up,so now you have two months to
try and mourn the loss and tryand heal.
And the reality is two monthsis not enough time to lose
somebody and try and heal.
You're still gonna bestruggling emotionally, mentally
(11:38):
, and so what I use juvenilepolicies for is, yes, we want
some carved away for funeralexpense.
But my primary concern withjuvenile life insurance is
making it so that the policy islarge enough so that the parents
do not have to work for a yearat minimum.
(11:58):
So if the household income is$100,000, then we would take out
$100,000 on each one of thechildren in whole life insurance
.
And that's because one the costis going to be minimal.
You're talking $100,000 on, youknow, and honestly, it doesn't
really matter if they're sixmonths or 17 years.
(12:20):
the price isn't gonna changebecause you're paying a minimum
premium policy $100,000.
You're looking at somewherebetween $300 and $500 a year,
depending on age, preexistinghealth conditions, all that sort
of stuff, but very inexpensivecost for what you're getting.
It allows the parents to nothave to go to work for a year
(12:42):
and they can just focus onhealing, recovering, maintaining
the family unit.
John Proper (12:48):
Because if there's also siblings.
Justin Gaines (12:49):
You also have to be there as a support network
for the sibling that just lostone of their siblings.
You're going through this verytough scenario where all of us
hope we never have to experiencethis, but if that day ever
comes, you need to be able tonot have to go to work, and so
what the juvenile policy istrying to do is, in that
(13:11):
scenario, you have massiveamount of grief, massive amount
of stress.
What we wanna do is we wannaremove any and all financial
burdens, stress and obligations.
We can remove all of that.
We no longer have to worryabout anything other than
grieving, mourning and healing.
John Proper (13:31):
Yeah, yeah, they say.
I think I've heard thestatement.
It's kind of one of the dealswith life that when you're born
you pretty much know you'regonna be seeing your parents
pass, but like no parent shouldhave to see their child pass or
something.
Right, I imagine too.
If I mean, I know you said workmay give, and this is generous
work may give up to two months,but if the child is, if it's not
(13:56):
a sudden thing, if there'sthings leading up to it hospital
visits it could be way morethan way more time before it
even happens.
Justin Gaines (14:06):
So the fact that a year may sound long, but I
can't even imagine what canhappen and I'll be honest, most
of the parents that I speak withchoose to go with longer than a
year if they can afford it andmake sense, just because if
they're truly being honest withthemselves and putting
themselves in that mindset of,okay, have a child and then just
(14:27):
passed away, and you're reallytrying to put your mindset
through it.
It's usually a meeting that'sfilled with tears and emotion
because you're thinking aboutsomething that you hope never
has to happen.
John Proper (14:37):
Sure.
Justin Gaines (14:39):
And almost always they say a year would not be
enough.
A year would not be enough, andso typically, if we do the
calculation based on not takinginto account taxes and not
taking into stuff, that yearworth of income replacement that
we're doing could span to ayear and a quarter.
(15:01):
Year and a half might be ableto buy a chemical room, but
that's where I say, you know, ayear is usually our minimum
calculation.
John Proper (15:09):
Yeah.
Justin Gaines (15:12):
Well, almost every parent does agree with is
that at a year.
A year is the absolute minimum.
Yeah, that I would be able togo back to work.
You know, at six months I'm notgoing back to work.
Yeah, the maternity leave isusually three to six months.
No, you have a baby, you havethe baby and then you go back to
work three to six monthsafterwards.
(15:32):
And that's not even healing froman emotional trauma, it's just
healing from the physical andadjusting to life and all those
components.
So the idea of going back towork after losing a loved one in
six months is unheard of andjust doesn't seem like the right
approach.
So then you have the 12 monthmark.
That seems like okay, I couldprobably start to have the
(15:55):
healing process and then startto look at taking those next
steps, but there are limitationson this.
So in order for you to have ajuvenile policy, you have to
have at minimum that amount oflife insurance on the parents,
and each company fluctuates onthis.
But the parents have to beinsured.
(16:15):
Or at least I have had ithappen where a parent is
uninsurable but we just send inthe application, that
application health reasons orhealth reasons.
Yeah, so uninsurable for healthreasons.
So they get denied.
And then it's allowed becauseyou've at least tried.
It's not that you don't havelife insurance because you don't
want it, it's because you can'tget it.
John Proper (16:36):
Yeah.
Justin Gaines (16:37):
You know there's ways around that and that's
where working with aprofessional has experience with
it, allows you to be able tohave those conversations.
But you have to have lifeinsurance on the parents and
there's a minimum threshold witheach company on what how much
of a gap has to exist betweenthe life insurance on the kids
and the life insurance on theparents.
John Proper (16:57):
Okay.
Justin Gaines (16:59):
So, and that's just because, if you're going to
ensure the kids and youunderstand the risks associated
with the child passing awayearly, more likely is a parent
passing away early and so ifyou're not going to ensure that
risk, why are you ensuring thechild passing away early?
John Proper (17:17):
That doesn't?
Justin Gaines (17:18):
that really doesn't make sense, and so you
also run into a fraud issue.
You know it's just crazy asthis may sound, but if you have
parents that are just ensuringthe kids, not ensuring
themselves, oh, that was myfirst thought.
The parents look at.
You know, if you have anabusive household and you know
they're able to get through thewhole process and they, you know
, pull a smoke screen in frontof everybody and get the child
(17:41):
insured and then they end uptaking that child's life.
You now have, you know, massivefraud scenario.
John Proper (17:48):
And that's.
I have to say, that wasn't myfirst thought.
That's, that's crazy.
I was just thinking if everyonewas in on it, it seems like an
easy thing, for not easy, but itseems like a thing people might
try and it would be like thechild is in on it too, so they
would fake, fake that actuallyfake it that actually doing it
would be.
I guess both are crazy, butyeah, fake it.
Justin Gaines (18:10):
That I've never actually seen.
But you've seen the otherthere's cases out there where
it's happened.
I personally am not going todeal with cases where it's
happened and it's where a lot ofregulation comes from is that
you know you can't, you can'tget life insurance on your kids
if you don't have it on yourself.
Because of that, becauseunfortunately there's sick
people in this world and they'lldo anything to make a buck yeah
(18:32):
, All right, well, I got.
John Proper (18:34):
I got a question then.
So ideally you're probablyworking with clients well before
they have kids, so I guesswe'll use that scenario.
Are you bringing thisconversation up?
When they tell you, hey, we'replanning to have a kid, when
they've already had the kid, Iimagine the sooner the better.
But what happens?
Also, if you meet someone whoalready had a kid like when does
this usually pop up?
Justin Gaines (18:55):
So the scenario doesn't so much matter as far as
like executing on this andgetting a policy in place,
whether you have kids don't havekids, I would say, more often
than not, because life insuranceis misunderstood.
It's a scenario where the kidsare already 6, 7, 8, 9, 10, and
(19:17):
we're having this conversationand then we're putting life
insurance on the parents becausethey don't have life insurance,
and we're putting it on thechild.
But there are scenarios wherewe have the parents insured
already and then they getpregnant.
Now we're having theconversation of when this
child's born.
We should do this and have thisplan together, and so we start
(19:37):
talking about it that way.
And there's ways.
If you understand life insurance, there are ways.
If you have a child that's bornwith a birth defect, that child
will be uninsurable until age18.
It's guaranteed.
(19:57):
The child will be uninsurable.
The way around, that is, if theagent knows that ahead of time.
So say, the child's alreadyborn.
Obviously you don't know thatahead of time if they haven't
been born yet.
If the child has been born andyou know that they had a birth
defect, what you should do isput the policy in place on the
parents first.
(20:18):
So instead of submittingeverything at the same time.
Put the policy on the parentsin place first with a child term
writer, so that puts the termwriter on A child term writer,
puts life insurance on thechildren with no parents.
No questions about.
There's no, looking at theinsurability of the child.
(20:39):
And that writer is convertible,which means once that writer is
in place you can then convertthat writer into a whole life
policy on the child.
John Proper (20:52):
So if you know they wouldn't be able to get life
insurance, but you're able toput a $25,000 writer on the
policy.
Justin Gaines (20:58):
You can now take that writer, turn it in $25,000
of life insurance on the child.
John Proper (21:02):
Nice.
Justin Gaines (21:03):
Now, $25,000 is not going to replace a year of
income, but you're not going tobe able to get to that level of
insurability.
On a child that's had a birthdefect.
And so what we're doing here iswe're putting us into best case
scenario.
We're getting as much as wepossibly can so that we can
cover as much of a financialexpenses we can and buy
ourselves as much time if thatscenario were to ever happen.
John Proper (21:28):
But if you, submit if you do it the other way.
Justin Gaines (21:30):
If you submit everything at the same time, the
child gets denied.
The company can deny you thatchild term writer and you won't
have this conversion optionbecause part of the conversion
is going to ask you has thechild ever been denied life
insurance?
And legally it's fraud if yousay no.
It's not fraud if you know, asan agent, that the child would
(21:53):
not have been approved for lifeinsurance but they'd never been
denied by a company.
It's not fraud.
To answer the question has acompany ever denied them with
life insurance?
No, because a company has not.
You've just evaluated the riskand said that they most likely
would not be eligible.
This is the better route to go.
John Proper (22:09):
Right, right.
Another thing I thought of toois obviously we went over huge
reasons why they get it probablythe most important reason.
But are there any also cool saycool, but like effects that if
a child gets this when they turn18, the plan can kind of Go
roll over?
Justin Gaines (22:30):
Yeah, like you said, we talked about the
primary reasons.
I typically, given the timehorizon of the child and
statistical probability thatthey're not going to pass away,
I usually use an index universallife policy on them.
The reason being is that thecash value in the policy can be
tied to the stock market.
We've talked about indexuniversal life in previous
podcasts, so go check that outif you want to learn more about
(22:52):
this.
But it allows for more upsidepotentials.
You're able to get moreinterest on that.
So, effectively, what you cando with this juvenile policy is
you can treat it like a 529college savings plan, where
you're putting money in there.
When they turn 18, you cantransfer the ownership to the
child.
The child now owns the policy.
They can take a loan out, whichmakes it none of the gains are
(23:16):
taxable.
John Proper (23:16):
They can take a loan out against the policy.
Justin Gaines (23:18):
Instead of going to the bank for a student loan,
take a loan out against thepolicy to pay for some of their
college or all other college ifyou've really funded this,
overfunded tremendously.
Now the benefit to thisstrategy versus a 529 plan is
529 plans can only be used forcollege If your child decides to
(23:39):
go into the trades, decides tonot go to college, decides to
start their own business,decides to go into the family
business and not go to college.
Any scenario where the child'snot going to college, that 529
plan is going to be penalizedfor that.
This plan isn't, because it'snot a 529 plan.
It's not set aside specificallyfor college.
That money is set aside forwhatever you want it to be.
(24:01):
They could sit there, theycould go get an apprenticeship,
become a plumber and then, fiveyears in, they're 23 to 25, they
want to buy their own house.
Because now they're making goodmoney.
They could borrow against thispolicy for the down payment for
their house.
John Proper (24:18):
That's a no-brainer , then with everything.
Justin Gaines (24:22):
That's where you need a professional knows what
they're doing to structure allthese things properly and have
that conversation with you tosay what makes the most sense,
what's the best plan for this.
Because, effectively, what youdo, if you structure it properly
, you can have it where it's apolicy that takes care of and,
from ages six months to 18, it'sa policy that would replace
your income as a parent ifsomething were to ever happen,
(24:46):
so that you can grieve and mourn.
The minute they turn 18, youcan transfer ownership or you
could retain ownership andmaintain yourself as the
beneficiary.
That part really doesn't matter.
There's nuances to why we wouldor wouldn't do that, but the
money can be distributed fromthe account tax-free in the form
of a loan to the child forstarting a business, buying a
(25:09):
house, going to college, buyingtheir first car, any of these
major capital expenses.
It's not like we're just buyinglife insurance for a plan
that's really only good for me,just six months to 18.
Once they get to their 18thbirthday, we can flip this and
(25:29):
now use it as a financialstronghold that we've developed
for the child.
John Proper (25:34):
No, that sounds like.
One thought I've always had isit's always tough to imagine,
when you're having a child andall the new expenses there, to
also start a fund for them.
But obviously the earlier thebetter.
That just seems like afoolproof way of tons of
protection because you'regetting life insurance, for many
people might come back at youand say a very unlikely thing,
(25:55):
which it is statisticallyunlikely but terrible if it
happens.
But then that argumentcompletely goes out the window
if structured properly, becauseI'm sure most people at 18 are
not set up that well.
No, that's cool.
Justin Gaines (26:12):
Yeah, if it's structured properly, you can do
it.
The other nice part about usingan index universal life policy
is that the premium on thatpolicy is variable.
Like you said, if we're havingthis conversation with a newborn
, expenses are high.
You're trying to balance yourbudget, trying to figure out all
of these things.
You could start with a minimumpremium policy and pay the
(26:37):
minimum to have just that purelife insurance.
We're looking for the deathbenefit option.
Start with the minimum, but thenthere's also structuring it
properly.
We want to put as much money inthere as possible, so there's a
max that you can put in inorder to maintain all your tax
benefits.
So we can start at a minimum tomaintain your budget and then,
as you get raises through workand you start to bounce out
(26:58):
getting used to having a child,that budget starts to work out
properly.
You can now increase.
You don't have to go minimum tomax.
You can slowly increase.
We can make adjustments, butyou can change that premium so
that you're putting more into it, so that you're achieving some
of these longer term financialobjectives to the policy.
Other big part to note on thisis, again, if it's structured
(27:20):
properly, you putting in thatextra money.
Some people get wary about thatbecause they're like well, I'm
going to put in the extra moneyand my death benefit is going to
be the same.
So if the child does pass away,I've paid more than I needed to
and I'm still getting the sameamount, but paying more.
If it's structured properly,that's not true.
Your life insurance willmaintain the same amount and
then your cash value in thepolicy will be added to that, so
(27:43):
you'll get both the cash valueand the death benefit back.
John Proper (27:48):
But, again.
Justin Gaines (27:49):
It's got to be structured properly.
John Proper (27:51):
Yeah, thanks for listening to our podcast.
Justin Gaines (27:54):
We hope this helps you on your balance
freedom journey.
John Proper (27:56):
Please share your thoughts in the comments section
below.
Justin Gaines (27:58):
Until next time, stay balanced.
Popular Podcasts
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
The Breakfast Club
The World's Most Dangerous Morning Show, The Breakfast Club, With DJ Envy And Charlamagne Tha God!
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.