WCI #329: Why Mixing Insurance and Investing Causes So Many Problems

This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011.

This is White Coat Investor podcast number 329. Why mixing insurance and investing Causes so Many Problems if you're like most doctors, nobody taught you anything about personal finance or investing during your undergrad, professional school or residency. Even though your family and perhaps even your business rely on you to be the Chief Financial officer, you have never been given the tools to succeed. Enroll in WCI Financial Bootcamp, a free educational email series, and learn to convert your high income to wealth. You will learn the basics of investing, saving, insurance and more. Your high income alone will not lead to financial success, but as always, we want to help you on your financial journey. Go to whitecoatinvestor.com financialbootcamp to sign up today. You can do this and the White Coat Investor can help. All right, our quote of the day comes from index fund champion Rick Ferri. He said the longer an index portfolio is held, the better its performance relative to an actively managed portfolio. And that is the truth, especially after tax. And that's because the advantage of an index fund is that it beats most of the actively managed funds each year and, and that effect gets multiplied year after year after year after year, until once you've been in the investment for 20 or 30 years, you beat now 90% plus of the actively managed funds. But that doesn't happen in the first year. And the first year you might only beat 55% of them. The advantage really shows up over time, though. All right, let's talk about a sale. We told you about this last week. Now you got one day left. Okay, this is only for you. It's only for the podcast listeners. We're not telling anybody else about this. Don't go on Instagram and tell everybody about this great sale. Right? The code is podcast200. What it gets you is $200 off any WCI online course. Tomorrow's the last day, though. It ends August 25th, so make sure you use that. If you've been waiting for a discount on a White Coat Investor course, this is your chance. Okay, let's get into your questions, your feedback, what you're interested in talking about. Remember, this is your podcast really as much as it is mine. We want to talk about what you're interested in talking about. So we've been getting some emails lately about some insurance products and some problems with those insurance products. So we're going to be talking about some of these more controversial insurance products today on the podcast. Let's start with an email that came in about annuities. This is a fellow who's given me some negative feedback says you said once that email negative feedback is gold. So here's some on the off chance it's useful. One extreme there's Dave Ramsey who just repeats that it's really stupid to use credit cards, buy whole life, use non Roth accounts, vote Democrat, et cetera, but provides very little objective education to apply to your personal situation or they can age well as the world changes. The other extreme is maybe Wade Pfau, who is so agnostic and didactic you might miss what's weird and what's standard. My perception is your coverage of annuities is drifting a little too far towards Dave. Even if it's wrong for everyone, it's still nice to get some objective education. For example, when answering the QLAC question recently, you didn't mention that The Secure Act 2.0 increased the maximum to $200,000 indexed to inflation, which is pretty low for solving an RMD problem. Likewise for the Speak Pipe question. With a bad bond fund plus a 0.6% fee in a 401, why not mention that inside a low cost variable annuity such as at Fidelity, a total bond fund index fund is 0.39% as an expense ratio, a 0.25% annuity fee plus a 0.14 expense ratio. If someone lives in a state that protects annuities and if his bonds total over $1 million making the total expense ratio 0.24%, it starts to creep into reason territory. Okay, sorry, that was really specific, but just saying. It seemed like an oddly perfect chance to objectively mention a variable annuity. By the way, your negativity about the Fidelity variable annuity stopped me from buying it a while back, and I'm happy about that. Your raw opinion is appreciated. I enjoy all your content and hope this feedback was worth the time of reading it. Well, okay, it sounds to me like the feedback is more information. I can give you more information. We can do that. But I think it's also important to hear my opinion on stuff. So let's start with talking about annuities. Let's start with the opinion for those of you who won't listen to everything else. Almost nobody needs to buy an annuity. That's the truth of the matter. This is a superfluous financial product and many, many, many annuities are terrible Financial products, products designed to be sold and not bought. All right, so that's the general mindset you should start with when we start talking about annuities. Now, of course, as I get into the information, you might come up with some bizarro reason why you might actually want an annuity. And it's not that every annuity out there is a bad annuity, but you need to understand what they are. They come in many, many different flavors, but all of them are an insurance product with some sort of an investment characteristic. At its most basic level, an annuity is just a pension that you purchase from an insurance company. You give the company a lump sum of money, and in return it pays you a guaranteed amount every month or every year until you die. As an insurance product, the company generally pays a commission to the agent selling it to you. The agent, of course, often masquerades as a financial advisor. But at least when they're selling you that annuity, they're functioning as a salesperson and not an unbiased advisor. The annuity is backed by the insurance company. So if the insurance company goes away, so does the annuity, except as provided for by a state insurance guarantee organization. Those are not the state. They are all the insurance companies in the state, very different. All right? Now, generally works out okay, but they only protect a limited amount of an annuity's value. So you can only put a certain amount into an annuity and have any protection behind it besides that insurance company. So think about annuities in general as a way to spend your money, not a way to invest your money. And the reason why is because the investment returns are usually not that good. The reason you're buying it is because you find the guarantees provided by the annuity to be valuable. For example, if you were buying that classic annuity I mentioned, also known as a single premium immediate annuity, you find the guarantee that you will never run out of money to be valuable and you're willing to give up potentially better return you could get with more standard investments in order to have that guarantee. Alright, so annuities are taxable for the most part. Now, it's important to understand how they're taxed. How it's taxed depends on whether it's inside or outside of a retirement account. If it's inside a retirement account, there's no taxation due except on what comes out of of the retirement account. And then of course, every dime that comes out of that retirement account is taxed at ordinary income tax rates. Now, if it's a Roth account, that's not the case. But inside a tax deferred account, that is the case. If the entire IRA is invested in an annuity, the entire annuity payout takes the place of any required minimum distribution that you're required to take, starting at various ages, soon to be age 75. For everybody outside of a retirement account, an annuity has its own unique taxation. In this classic scenario where you're buying a pension from an insurance company, part of the monthly payout is interest that's payable, taxable rather at ordinary income tax rates, and part of that is just a return of your principal, which of course is tax free. So this ratio of principal payout to total payout, which is the principal plus the interest, is the exclusion ratio. And the exclusion ratio varies according to how much principal is used to purchase it, how long you've had it, and the interest rate on the annuity. So it's calculated to spread out the principal withdrawals over your remaining life expectancy. So that's the way a tax works. If you withdraw money from an annuity, like a partial surrender of a cash value life insurance, the interest comes out first. That's very different from cash value life insurance where you take out the principal first. In a partial surrender situation, when you partially cash out of annuity, you get the interest first. So it's not a very tax efficient thing to do. And of course annuities are supposed to be a type of retirement product, and so withdrawals prior to age 59 and a half are also subject to a 10% penalty. Of course, any growth inside the annuity, like growth in a retirement account, is 10 tax protected. So you don't have to pay taxes on the interest and dividends and capital gains as the money grows, only when it's taken out of the annuity. And remember of course, that it takes many, many years of tax deferred growth, tax protected growth, especially if the underlying asset inside the annuity is relatively tax efficient. To make up for this part of the taxation of annuities, when the money comes out, you pay ordinary income tax rates on the gains, not the lower qualified dividend or long term capital gains rates. Now, if you inherit a non qualified annuity, meaning one that's not in a retirement account, you can spread the withdrawals out over the rest of your life if you want, but you're still going to pay ordinary income tax rates on the gains when you do take them out. And so the sooner you want the money, the sooner you're going to pay the taxes. If you Also inherit an ira, though you can actually roll that annuity into the IRA if you like. Of course, then the money becomes subject to inherited IRA rules. And then if your annuity is inside a qualified plan, if it's a qualified annuity, it basically just follows inherited IRA rules as well. Okay, so the main issue I have with annuities is the same problem I have with whole life insurance, and it's the way they're sold. They tend to be a financial product that is sold, not bought, and often sold inappropriately. It's sold to people by making them afraid, make them afraid of higher returning but more volatile investments like the stock market or real estate, those sorts of things. It's also sold by pointing out all kinds of cool bells and whistles that get it added onto the annuity or a price. The problem with those bells and whistles is that they're not really worth what you pay for them. So that makes it difficult to compare one annuity to another in a fair way. So you do get some benefits, but they're really expensive benefits. So the commissions on an annuity are typically in the 1% to 10% range. And that might sound like a lot to you if you're used to paying $5 to trade a share at Vanguard or Fidelity. But it's actually dramatically less than what might be paid for whole life insurance, which is 50 to 110% of the first year's premium. The more complex the annuity, the more opaque its features, the higher the commission tends to be. For example, one type I really don't like is called a fixed index annuity. I don't know if they're trying to capitalize on the popularity of index funds or what, but that pays a commission of 6% to 8%. More vanilla ones I mentioned earlier, these SPIAs tend to have commissions in the 1% to 3% range. So those commissions are built into the price of the annuity, not a separate charge. But if you're. You're paying them nonetheless, more complex annuities might have other fees. Surrender charges, mortality charges, administrative fees, expense ratios, et cetera. You got to really read the fine print. It's really the most important print in the document, to be honest. Okay, so let's talk a little bit about the various kinds of annuities and when you might want to consider them. Okay, the first one we mentioned, the spia. If you want to guarantee you don't run out of money, buy a SPIA single premium immediate annuity, give them a lump sum of money, and you get A certain payout every month for the rest of your life. That payout is determined by how old you are. It's also determined by what current interest rates are. So you're getting a little more on these than you were a couple of years ago. But the way you make out well on that deal, of course, is to live a long time because this thing's going to stop paying when you die. If you die next year, it stops paying. The insurance company made out like a bandit. You live to 105. You do pretty well though. In general, people tend to buy these in the 65 to 75 year old range. It allows you to spend more money than 4%. And that's the real attraction for some people. They go, well, shoot, if I buy one of these at age 70, I might be able to spend 6% or more of that initial portfolio value rather than 4%. So that can be kind of attractive. You know, you got the guarantee of not running out of money. You can spend more of the money. And of course you leave nothing for your heirs. So that's the big downside. Okay. Another type of annuity that some people might find a benefit for is what's called a deferred income annuity, or a dia, as opposed to a spia. In some ways, a spia is longevity insurance, right? It insures against you living a long time. A DIA is kind of like a spia on steroids. Instead of paying you out immediately, when you give the insurance company the money, it doesn't pay you out for some time, maybe not for five years or 20 years. And because of that, because it doesn't pay you for a while, when it does pay you, it can pay you a lot more. For example, let's say you buy an annuity at age 50, that's not going to pay out until you're 80. What's the payout rate? It's about 26% a year of that initial amount that you put in. And that's because the money had 30 years to grow, right, for the insurance company to hold onto it and use it and grow it. So obviously lots of people die before they get there. But for those who do live that long, it provides this big chunk of money, big chunk of income at the end of life. And some people like that deal. They find that guarantee very valuable. It gives them the mental ability to spend down their portfolio a little more, knowing they've got this DIA payment coming late in retirement if they live a long time. And so they like that. They find that guarantee Attractive and buy them. Now, there is a specific type of a dia, and this was mentioned by the person who wrote in to give us feedback. It's called a qlac, a Qualified Longevity Annuity Contract. This is a DIA Insider Retirement Account. That's all it is. And when The Secure Act 2.0 passed, it allows you now to buy a QLAC with up to $200,000 of your retirement money. So you give the money now to the insurance company and they don't pay you for many years, any of that money. But the beautiful thing about it, for those who really hate required minimum distributions, is that you don't have to pay required minimum distributions on $200,000 of that retirement money because it's sitting in that QLAC. And so it's a way to lower your RMDs. Now, my argument about RMDs most of the time is they're really not that big of a deal. It's like the best possible financial problem to have to have RMDs that are more than you actually want to spend. I mean, what a great problem, right? But if you have that problem, this is one option, you have to deal with it. Another option might be a qualified charitable distribution, right? That counts as an RMD each year. You can give up to $100,000 a year. Not just 100,000 total, but 100,000 per year to a charity. And that counts toward your RMD. Bottom line is the Secure Act 2.0 did make this product, this QLAC product, a little more attractive than it was because it increased the amount you could put in it to 200,000. But the same act also made the benefit a little less attractive because now at least people that are my age won't have to pay RMDs until they're 75, starting in 2033. Another type of useful annuity is a multi year guaranteed annuity or a myga. And this is basically the insurance industry's answer to certificates of deposits that are sold at a bank. You pick the term, you put the money in, the insurance company pays you a guaranteed income as you go along and you get your principal back at the end. It's like a CD from an insurance company. CDs are backed by the bank and the FDIC. MyGas are backed by the insurance company and the state guarantee fund. You know, that's probably inferior to FDIC quite honestly, but if it's paying you a lot more than a cd, it might be worth it to you. One interesting thing about it is CD interest is paid out in taxed as it goes along. But MYGA interest is either paid out in tax or left to compound tax deferred inside the annuity. So you have this option, right, to not pay taxes on it till the end. You can also exchange it into another myga, further deferring the taxation. So that's kind of an advantage over a cd. But given those tax advantages of Mygas, you kind of might expect them to pay lower yields than a cd. That's not always the case, especially for longer time periods. You might actually get a higher yield on it. So if you're a CD investor, if you find the the proposition that CDs make to be attractive to you, you should also be looking at mygas. Okay? The last kind of annuity that is occasionally useful to people was also mentioned by the fellow writing in about giving us feedback. This is a low cost variable annuity. Now there are lots of variable annuities out there that are not low cost, that have bells and whistles, that have high commissions, that are products designed to be sold and not bought. In fact, if you just remember that variable annuities should be avoided, you're probably going to do just fine in this respect. But there are some uses of a very low cost one. The first one is when people realize maybe it was a bad idea to get into a whole life policy, but they got a huge difference between what they're going to get out of that policy and what they put in it. You can exchange the cash value of the whole life policy into a low cost variable annuity, let it grow back to the basis, to the amount you've paid in premiums, and then cash out of it. And essentially that growth from the cash value to the basis then is earned tax free. So you got to pay some fees to the annuity and deal with some hassle, but you get some tax free growth. It's probably worth it. If that is tens of thousands of dollars difference. If it's a few hundred dollars, it's definitely not worth it. So that's one use of it. The second use is for someone that just doesn't have very much tax protected space and they want to hold some tax inefficient asset classes. Maybe they want to put tips in there, REITs in there, or some debt real estate or something like that. Although I don't know that you can actually get debt real estate into a variable annuity is this gives you a chance to put the investment into an environment where it grows in a tax protected way. Now obviously it's an annuity. When it comes out, it gets taxed like an annuity, ordinary income tax rates, but at least that allows it to grow in a tax protected way for a while. And if it's a tax inefficient enough investment, it's possible you could come out ahead, assuming the fees on the annuity are low enough. But this is one other option for it. Okay. Things you should avoid for sure, right? Most variable annuities I mentioned to you, especially expensive ones, fixed index annuities. I see no reason to buy these at all. Really complex annuities. If you can't compare it to annuities from a bunch of other companies, you're probably getting ripped off. You want something you can compare like gasoline, right? If you can buy gas for three bucks a gallon, that's a good deal. At 3:40 a gallon, you're getting ripped off. It's very easy. You buy it by the price. And you can do that when you can compare annuities one to another. But if they're all totally different, you're comparing apples to oranges. You just can't tell. Alright, enough on annuities. I hope that was in the weeds. Enough for those of you who are looking for more information on topics like that. But still, you know, an annuity is something that you can just skip over. You don't have to have an annuity in your life and you'll do just fine. Okay, let's take a question here off the Speak bite. You guys are probably sick of listening to my voice by this time. Let's listen to somebody else's. Hi, white coat investor.

I'm considering taking at least a year off working to travel with my family. I'm healthy in my 30s and have an individual own occupation disability policy.

If I continue paying the premium and.

Get hurt while traveling, would I still.

Be eligible for coverage?

What other things should I be thinking about?

Thank you so much.

Well, that's a great question. I don't think I've ever had this question before. Well, here's the deal, right? If you get hurt in the beginning of that year, it's not going to be a problem at all. You just tell them I was on vacation and this is what I make. And now I'm disabled and that's not going to be a problem whatsoever. If you've been on vacation for 11 months though, that might be a little harder to convince them. Certainly the benefit of continuing to pay your premiums while you take a year off is that you still have the policy when you come back. And presumably you're not yet financially independent and you still need the policy. So I would probably pay the policy for that year. Even if you were worried or were sure that I wasn't going to pay you if you got disabled while you were on vacation. I kind of did something similar while I was in the military. I wasn't sure that my policy was really going to pay if I got disabled in the military, but I didn't want to have a chance of not being able to get one when I got back. I think the only thing it really wouldn't have paid while I was out there was getting disabled from an act of war. But it was still worth it to me to have the disability insurance policy. So I kept paying it during the four years I was in the military. But as far as this goes, what would they do? Well, that's a good question for a disability insurance attorney that spends time fighting for people who have received a disability insurance policy. And I don't know the answer. I think you probably would run into a fight if you've really not been working for a long time because they're going to go, well, what'd you make last month? What'd you make the month before? And now they've gone back six months and you haven't made anything. Well, maybe your occupation for this own occupation policy is vacationer and you should get paid like a vacationer. So they've got a pretty good argument there and I think you might have a fight if you have been not working for quite some time and then you try to get paid like a dental subspecialist or whatever you were doing before you went on your 12 month vacation. I don't know. It really depends. Maybe if it's an organized sabbatical that everybody does in your, at your university, you can argue more. It's kind of part of the job. But if you quit your job to go do this, I think you'd have a tough argument. I think there's a good chance they wouldn't pay you and you can get an attorney and you can fight it, but I think it's going to be tough. That said, I'd still go on the sabbatical. Your job is hard. I thank you guys all the time for what you do because it's difficult. So if you get a chance to go on a three month or six month or 12 month sabbatical, I'd still take it. Even if the possibility of getting disabled there and not being able to use your disability Insurance was hanging out there. I just think they're really good things to be able to do at mid career. You can do stuff at 40 that you're not going to be able to do at 80, so take advantage of that stuff. There's more to life than just optimizing all the finances and sometimes you got to take a little bit of risk. Okay, let's get back into my email box here. This one was titled Whole Life Insurance. I get a lot of emails with that in the title. I am not a doctor, but I am a high earning tech professional who's a victim. That's an interesting choice of words. Of a whole life insurance policy sales pitch sold to me by the brother of a trusted friend. Aren't they all? I wonder if the brother of the trusted friend worked for a company that rhymes with Schmorshwestern putul, but I suspect they probably do. That's kind of their general sales practice is to have you try to sell a policy to everybody you know. And everybody they know says, I recently found your website as I was reconsidering my policy. That is actually how a lot of people find the white coat investor. I purchased what I was sold to believe was an investment product that would help me with future caregiver expenses to care for my aging mother. It was sold to me as number one, a great way to save on taxes because I had already maxed out my 401 contributions and number two, something that would grow in value over time. The 2 million number for my beneficiaries of course seemed very attractive. I admitted I did not do the due diligence to research and really understand how the policy works. Again, it was sold to me by my friend's brother who is masquerading as a fiduciary financial advisor. So I wholeheartedly trusted him. I've had the policy for 13 months, paying a $3,000 per month premium. Ouch. $36,000 a year in whole life insurance premiums. Coincidentally, at month 13, my insurance agent friend's brother also left the insurance company, which it turns out does rhyme with Smor Swestern Putul. I have put in about $39,000 and the value is only $8,000. Wow, that sounds terrible. It would take another 11 years for me to break even. I am angry at my friend's brother, at the insurance company, and mostly at myself. Well, I can see why you'd be angry. You have had a what Dave Ramsey likes to call a stupid tax of $31,000 in after tax money So I don't know what he does or she does. I don't have a name here. I think it's a he actually. But you know, it takes most doctors a long time to earn $31,000 in after tax money. Do you have any advice on how I could recoup the money I've spent on 13 months of expensive premiums? Or do I have to chalk this up as a very expensive lesson in life and financial literacy? Thank you in advance for any help you can provide. Also, I'd very much appreciate if you were able to share my story as I hope my story helps someone else avoid ending up in this situation and could help someone experiencing the same situation. I'm appalled that this kind of practice is legal and happens every day to people who work hard for their money, regardless of business sector. Okay, so here's the tip. If you are talking to an insurance agent and the company they work for or the policy they're promoting has a name on it that rhymes with Schmorstern put should not buy the policy or talk to that person anymore. You should throw them out of your house even if they are a friend of your brother in law. All right, that's my tip for you today. And if that's all you take out of this podcast, I have saved a certain percentage of you because 40,000 people are going to listen to this and I don't know, Maybe I saved 1% of you. That's 400 of you. Tens of thousands of dollars. I just saved White Coat investors a million dollars in this episode. It's wonderful. All right, I'm sorry man. This sucks. I had a similar experience. I had a very good friend sell me a policy from this same company as a medical student. Luckily, I didn't have any money, so I couldn't buy a very big policy. It was a pretty small policy and the total amount of money I lost, I think was barely into the four figure range. Because of that. A company that rhymes with Smorsh Western Putul has probably lost millions of dollars in revenue over the years because I was treated so badly. In fact, I am told by good authority that they actually use the materials on the White Coat Investor website to train their agents now. So don't be surprised when they've got answers when you have concerns. All right, what can you do now? Well, you don't have a lot of choices. Are you going to be able to go back and sue this person for giving you bad advice? Probably not. They operate under the suitability standard, not the fiduciary standard, you know, can you call them up and say, what the heck, you cost me $31,000. Are you going to make any of that? Hold to me? And if they're a good friend to you, they might. But they probably don't have that much money because if they're leaving after 13 months, it's probably because they're not doing very well, they're not selling very many policies, they don't have much money and they're off to do something else with their life. Maybe they'll sell cars or something, I don't know. So that's probably not going to work. So you got two options. One, you can just suck it up and say that is the price of me becoming financially literate. Lots and lots of doctors have chosen that option. The other option I mentioned earlier on the podcast as a reasonable use for a low cost variable annuity such as those available at Fidelity, you could exchange your $8,000 in cash value. I think that Fidelity Annuity might actually have a $10,000 minimum or something like that though, so you might actually have to add some money to it in order to get this. But anyway, that's one option is to exchange into the variable annuity, invest it in some reasonable option at Fidelity and there are reasonable options there, wait for it to grow back until it's worth $39,000 and then cash it out. And at least what there is gained between $8,000 and $39,000 will be tax free to you. So that's a little way to make some lemonade out of lemons. But that's it. There's really nothing else. I mean, you could exchange it into a long term care policy, but you probably don't need one of those. You could exchange it into a better cash value life insurance policy, but you probably don't want one of those. Certainly holding onto this thing probably doesn't make sense unless there's some reason you can no longer get term life insurance. Obviously before you surrender it or before you exchange it into a variable annuity, you need to have adequate term life insurance in place. Don't make that mistake. You don't want to run around uninsured. If you have a need for life insurance. Better to have whole life insurance than nothing. But I'm sorry, this is common. This happens to doctors all the time. I have written two blog posts because I got so sick of typing this stuff into my email box over and over again. The first one is called how to Evaluate youe Own Whole Life Policy. It's on The White Coat Investor blog. The second one is called how to Dump your Whole Life Policy. You can search those terms, evaluate and dump is probably all you got to put in there and they will pull up. There are lots and lots of other members of this club that you are in now. Hundreds, maybe thousands, maybe tens of thousands. Most doctors have been pitched a policy mostly from this company because somehow they managed to get into residencies like crazy. But you know, it happens. Some of us make mistake, we buy it a few years later, we realize what we bought, we realize it's a mistake and we get rid of it. Now occasionally, if you've had it for a long time, if you've had these things for 10 or 20 years, even if it didn't make sense to buy it initially, it might make sense to hold onto it. And that's what that post how to Evaluate youe Own Whole Life Policy is all about is helping you to decide whether you want to hold onto the policy. Because all the crummy return years are pretty heavily front loaded and once you've kind of been through those, the returns not the worst thing in the world. So you got to run the numbers if you've had it for a long time. Okay, enough ranting about that. Let's talk about term life insurance. Here's another email I got on your blog. You recommend term life over whole life insurance. That is the truth. Although I do also list a number of reasonable uses for whole life insurance. They're pretty niche. You probably don't have one, but if you're curious what they are, you can look up that blog post. It goes on. I followed the Term for Sale link, that's one of our sponsors by the way, and found out that a lot of the companies selling term life insurance are not the popular insurance companies like State Farm and AAA Nationwide and Liberty. Is it advisable to buy life insurance from these popular companies or buy life insurance from a company that already sells disability insurance like Principal or Emeritas? Thanks for your time and response. Well, here's the truth. It doesn't need to be a popular company. It doesn't need to be a company that sells disability insurance. It needs to be reasonably financially stable. But that's about it. In general, when you use an aggregation site like Term for Sale, you want to pick the top two or three or four ratings. So in my book, and this is the default setting on Term for Sale, if it's rated A minus or better, it's fine to use. If you want a higher or lower standard of Financial stability, you're free to adjust that as needed. But after that, think of it like gasoline. Do you only buy Chevron gas or are you okay with non name brand gas? Well, for most of us to put into our car that we drive around every day, it's fine to use whatever kind of gas you know. If you're putting it in your trimmer, you know, you might go take the trouble to go to a special gas station that sells ethanol free 91 octane gas and you'll put some fuel stabilizer in it and you'll put, you know, premium oil in it so that that two stroke engine lasts forever. But for most of us you don't need the equivalent of that when it comes to term life insurance. You need the random Costco gas that you can just buy. And it'll be fine if you want the very highest quality, just in case that's going to cost you a little more. But in general, term life insurance is like a commodity. You buy it based on price. And if you're healthy, you can get that right off an aggregation site. It'll tell you what the lowest price one when you go to see an agent, you say I want this policy. If you are not healthy, you ought to have the agent shop you around a little bit informally before you apply because you don't want a denial on your record. That's usually a bad thing. Obviously if you're not healthy, you're either not going to be able to get a policy or you're going to get a policy that costs you a little bit more. Unlike disability insurance where they give you a policy that exempts something like my policy, I used to have exempted injuries from rock climbing. And so you don't tend to get that with life insurance. They just charge you more for the life insurance. They don't give it at all. They don't exclude, if you die from cancer, it's not going to pay. They don't really do that. Okay, well, I'm kind of burned out on insurance. We've talked about annuities, we've talked about whole life insurance, we've talked about term life insurance. Let's talk about something else. Here's a question on a different subject on the speak pipe.

Hi Jim, thanks for all you do. I have some questions regarding using a donor advised fund at Vanguard. The minimum initial investment is $25,000. I plan to open a DAF this year and use it to donate to my church in the form of tithes. I anticipate to have approximately $40,000 in quote unquote, donations accumulated by the end of the calendar year. My understanding is that the money that would typically be allocated to the church should be invested into my brokerage account according to my asset allocation, and then immediately donate the most appreciated shares from my brokerage account to the daf. My questions are as follows. One, do you donate all of your appreciated shares all at once at the end of the year when you know how much money you want to donate, assuming that the calculation is based on a percentage of your income? And two, if this is your approach, how do you reconcile your end of year donation amount when you have invested, say $40,000 over the course of the year that you would have previously given to the church periodically after each paycheck, when now by the end of the year, those investments have lost 10% in value?

Good question. A little confusing. We got really into a lot of weeds there. I'm just going to tell you what I do. I do make regular donations to charities as well as the church we attend. And I do that using a donor advised fund. And I fund the donor advised fund by donating shares of appreciated mutual funds and ETFs that I've owned for at least one year into the DAF. Once it's in the DAF, I leave it in cash because I don't really store a bunch of money in there long term. Once it's in there, a few days later, it generally goes to charities. And so that's kind of how we use our DAF now. Each month we know what we're not spending and pretty much what we do at that point and what we're putting aside for taxes as well. But pretty much everything else, including what we expect to give away eventually, as well as everything we're saving and investing. I invest because I know there's this huge taxable account sitting out there that I can use to make donations for charities. So once you get that taxable account to a certain size, you can do this as well. In the beginning, maybe you can't because the donation size is so big compared to the taxable account. But eventually, once that taxable account is big, you can do this. And then when it comes time to donate, I just transfer whatever's appreciated the most in there that I've owned for at least one year. You don't wait until you've owned it at least a year. You lose one of the significant tax benefits of that donation. So it needs to be something you've owned for at least a year. You don't have to use a DAF for that, by the way, you can donate directly to the charity. But the DAF not only makes it confidential, it just makes it really convenient. And so I think it's pretty nice to use. So in your case, you got a couple options. One, you can just put the money directly into the daf. That's one option. And just you can invest it in the DF if you want. But if you want to make sure it doesn't go down in value, just leave it in cash. You basically put it into a money market fund there in the donor advised fund, and then it won't go down in principle. So that's great. Another option you could do is you could just invest it like all your other investments. And knowing that, well, some of those investments are going to go into the daf, but it's got to be money you invested the prior year, right? Because it's got to sit there for a year if you want the true tax benefit of using appreciated shares instead of cash. So those activities, I think, have to be a little more disconnected, I think, than they are in your mind right now. As far as Vanguard, Vanguard's great. It's $25,000 minimum to start. I can't remember what the ongoing contributions are. I think that'd be $5,000. They don't let you donate less than 500. So it's kind of the high dollar, high roller daf, if you will. If you want to give smaller donations or you want to start with less money, use the Fidelity one. Fidelity one's pretty good too. It's slightly higher expenses than the Vanguard one. I'm kind of loyal to Vanguard. I got my taxable account at Vanguard. So it's convenient to us to use Vanguard and the minimums aren't an issue for us. And so we use the Vanguard Charitable daft. But if that $25,000amount or that $5,000amount or that $500amount all feel a little too high to you, then just go to Fidelity and use theirs. It's fine. In fact, you can make a donation from the Vanguard DAF to the Fidelity DAF and vice versa. So that's kind of a cool feature. All right, enough on dafs. Let's talk about something else. Here's a speak pipe from Adam, wants to talk about trusts and charitable contributions.

Hi, Jim, I was wondering if you could answer a question about calculating the amount to put on tax returns for charitable contributions when a trust is involved. I understand it's pretty simple. When donating directly to a charity or donating to a donor advised fund and then to a charity, you just take the deduction in the year that you donate. But for example, let's say I established a charitable lead trust with an initial $1 million contribution. Let's say I wanted the trust to distribute 5% every year for 15 years to my favorite charities and then the remaining amount can be passed on to an heir. In a scenario like this, when am I allowed to take the deduction for the charitable contribution? How much? 5% of a million would be 50,000, which after 15 years would be about 750,000. Do I take the deduction of 50,000 every year or whatever? 5% of the portfolio and the charitable contribution happens to be at that time and that year or is the initial estimated 750,000 total used in the year of establishing the trust as a deduction? Hoping you can shed some light on this question. Thank you.

Okay, the first thing I want to emphasize is if you are establishing a charitable remainder trust or a charitable lead trust, whether that is an annuity trust or a unit trust, you know, these are Kratz and Cruts and Cluts and Clats is how they're abbreviated. This is not a do it yourself project. You don't go out and just start one of these things. You go get an estate planning attorney and they help you with it. And you may have an accountant that assists you with it as well. Okay, this is not something that you need to calculate. They will calculate it. They will help you with it. Okay, so you're making it sound like this is something that's routine for somebody to just take care of on their own, like IRA rollover or something. It is not. Go get some advice on this sort of a thing. The deduction for both of those trusts happens when you establish the trust in the year you establish and fund the trust. That's when you get the deduction. But these are both split interest trusts or split interest gifts. And so you don't get a deduction for the entire contribution into the trust because some of that money is not going to charity. Only part of the money is going to charity. And they have ways of calculating exactly how much that is. And that's what you get a deduction for. So that's the point of these split interest gifts is to be able to get a deduction while still being able to use the money or making sure your heir gets some asset while still getting some sort of a charitable deduction for it. So get some professional help with that one and they can help you do the calculation. But no, it's not based on the value at some point in the future. It's based on the value when you establish the trust, you get the donation up front or the deduction for the donation up front. Okay, another estate planning question we've got here on the speak bite.

Dear Dr. Dali, thank you for everything that you do. Our question pertains to the efficient transfer of wealth from one generation to another prior to death. My husband and I are extremely fortunate to be in a situation where we expect to receive a sizable inheritance from my parents, who through their hard work, currently have an estate of several million dollars and continue to make a good income even in retirement. They have repeatedly expressed their desire to pass this money on to us and to our child. However, most likely this money would not come to us for at least 10 to 15 years. My husband and I are currently making a high income and thanks to you, save and invest wisely. As a result, we most likely will be in a very comfortable position 15 years from now. And thus, while an inheritance is always nice, the money would be way more useful and impactful and to our lives now than it would be in 15 years as it could help fund large expenses like a home purchase and child education. Is there a smart way to transfer assets from one generation to another that would be as tax efficient as receiving a step up in basis on death? Or is there no way to get earlier access to those funds without paying some sort of tax or premium?

Okay, good question. You remember when we talk about these sort of subjects, we are talking about two different types of taxes. The first is income taxes. Whether you inherit the asset or your child inherits the asset, there is a step up in basis at death such that no income tax is due. However, if you are going to be having an estate tax problem, which right now means that since you're married, it sounds like you're going to die with an estate of larger than 26 million in today's dollars. Although bear in mind that's set to be cut in half after 2025 if Congress doesn't act. You know, if you're not going to have more than that, you don't have an estate tax problem. And so that means that you could just inherit the money and you can give to your kids when you want. No big deal. You can give, you know, a couple million dollars at a time if you want. You're just using up your estate tax exemption. You got to file a gift tax. But that's fine. That's no big Deal. There's no tax due until your estate gets to be larger than whatever that amount is at the time of your death. Now, because Congress is not filled with complete idiots and the IRS is not filled with people who merely want to hurt you, they have spent great deal of time thinking about this and they have decided that, well, we don't want people to be able to just skip a generation and somehow get out of paying a bunch of estate tax. So they have put in place what is called the generation skipping transfer tax. So that's a federal tax that results when there's a transfer of property by gift or inheritance to a beneficiary other than a spouse who is at least 37 and a half years younger than the donor. And essentially what this is is it's using up, you know, your estate tax exemption for the middle generation, the generation that's being skipped. It closed a loophole that allowed the wealthy to legally gift money and bequeath property to their grandchildren and great grandchildren without paying estate taxes. It's the same rate essentially as the estate tax. It's a flat 40%. But obviously it's not going to apply to most people because most people are not dying with estates larger than the estate tax exemption. I suspect there are some states that may have some sort of generation skipping transfer tax as well. I haven't looked into all of those for the states, but there's still, I don't know, a dozen, maybe eight or ten maybe states that have their own estate tax, or sometimes it's an inheritance tax which is taxed on the person that receives it rather than the estate. But yeah, that's how they nail you with that. But you can always decline an inheritance. You don't have to take it. Then it goes to whoever's next in line, essentially. But good estate planning is a good idea here. If there's going to be millions of dollars transferred between the generations, you guys should go see an estate planning attorney in your parent state and really work this plan out in advance. Especially if you think there's any chance they could get up around those estate tax exemption limits, which could be as low as 13ish million. You know, Congress doesn't do anything after 2025. If you're like most doctors, nobody taught you anything about personal finance or investing during your undergrad, professional school or residency. Even though your family and perhaps even your business rely on you to be the chief financial officer, you have never been given the tools to succeed. Enroll in WCI Financial Boot Camp, a free educational email series and Learn to convert your high income to wealth. You will learn the basics of investing, saving, insurance and more. Your high income alone will not lead to financial success. But as always, we want to help you on your financial journey. Go to whitecoatinvestor.com financialbootcamp to sign up today. You can do this. And the white coat investor can help. Don't forget we got that sale going. It's just for you as a podcast listener. The code is podcast200. It's 200 bucks off all of our online courses. You can. It ends tomorrow, August 25th. So today or tomorrow you better get it done if you want to get that discount on a WCI online course. We've got some great courses. We've got our real estate course, very popular. We've got our flagship fire your financial advisor course. We've got a version of that that actually qualifies for cme so you can use your CME funds for it. We've got our annual continuing financial education courses. These are the ones we put together using material from wcicon. Those are also eligible for CME dollars. And maybe we'll come out with a few new courses as well. So any course, 200 bucks off podcast. 200 till tomorrow. All right, most recent review came in. It said, exceptional podcast. Jim has a wealth of knowledge and provides us with exceptional guidances with what I call no bias. Your podcast made a huge impact on my financial life. It is needed for many high income professionals. I highly recommend it. 5 stars. Thank you jaijav2015 for that. We appreciate those reviews. They actually help get the word out about the podcast. All right, we've come to the end. We're almost at the end of the summer. Your kids are probably back in school by now. Soon it'll be cooling off. I hope you've had a great summer. I know that I have lots of fun trips, but it's time to get ready for Labor Day. Have a great time out there. I hope you get some time off for it and if not, well, thanks for what you're doing in the hospitals, in the clinics and elsewhere. If you're working on that day, keep your head up, shoulders back. You've got this. We'll see you next time on the podcast.

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