What Does It Mean To Be Self-Insured?

The bulk of time that the idea of this buy term, invest the difference, self insure yourself at the point in time when you would be okay to wave goodbye to your typical term insurance. That idea hasn't been around for multiple generations. I mean it's really only 45, maybe 50 years in the making. It hasn't even really gone through a proper cycle of lifespan. Now everyone, you're self insured, but all your money is in registered accounts which is fully taxable or it's in some other type of taxable account, which means you might have the value that's equivalent to the insurance that you might have had, but you don't have the net value because the net first of all depends on the market condition the day that you kick the bucket, which you don't control. And secondly, it depends on the tax rate at the day you kick the bucket, which you also don't control. So those two items can hack that insurable value down pretty substantial basis.

I want to address this topic of.

Self insured in relation to what? Because we could talk about two different variations. There's like self insured in Nelson's book, which is not what you're talking.

Yeah.

So not, not what you're about to lose your mind and start chopping down like trees or whatever on today. In today's rant.

Yeah. I'm referring to what I've heard over the years from financial sectors. Yeah.

And.

And entertainers. Let's just say, hey, when you get to a point where you're ready to retire, you should have put yourself in a position where you're self injured. And here's what's interesting. Warren Buffett famously comments that if you want to become wealthy, do what the wealthy do. You can attest to that wealthy must.

All be self insured.

AJ and.

He shares, he also shared. He was, he was asked this question decades ago. He was asked this question around what should people are maybe in a lower middle income class or maybe poor. And Warren Buffett also remarked if someone doesn't want to be poor or in the lower middle class anymore, begin to do what the wealthy do financially and you will gradually and incrementally work your way into much more abundance financially in your life. Basically I saw on social media somewhere there was a discussion, a conversation. The Dave Ramsey was talking about the topic of self insurance and just went on how you should be self insured by that point in your life. And it just got me thinking because you know, everything begins with the way that we think. So it just got me thinking why would it be that the largest purchasers of dividend paying, participating, whole life insurance and age 65 plus are wealthy? Wait a second. If Warren Buffett says, if you want to become wealthy, do what the wealthy do, the wealthy who are doing that more, more so than anyone in that age category are either really stupid or they know something that majority don't. Which one do you think it is? So when you're dealing with someone who's wealthy and affluent, they have more money than they'll ever need, their passive income alone exceeds all their expenses, but yet they're lining up to purchase this form of permanent life insurance. Why would they be doing that?

It's clearly not because they're self insured.

Aren't they self insured?

Yeah, if they have enough revenue and assets and whatever to, to quote unquote, take care of all their final bills and stuff, then yes, there would be, according to the Ramsey style definition, self insured. Here's the thing that drives me bat crazy is the idea that first off, the whole premise of becoming self insured rests and hinges on the ability for someone to generate a reasonably consistent rate of return in a very sketchy marketplace. I don't care what marketplace it is. If it's the real estate market, if it's the stock market, if it's options trading, like whatever, pick a market. Like, I don't care because every market is slightly different and the timing is always different. There's no like perfectly steep incline hill that takes you to the promised land. I haven't seen that. Have you seen that one, Jay? That doesn't show up on the, what did Nelson call it? The mountain wave graph of lies. When you look at the index and a stock chart over a period of time, that's what he called the mountain wave graph of lies.

That's exactly what he called it.

And so, you know, yeah, sure, if you're for the long haul and you started at blank time and then you went all the way to this time and you looked at the, you looked at the graph and you were at this point and the graph was way up here. You probably did. Okay, but if you were any one of those other little points in the graph, you might have just been totally hosed. Like a lot of people are finding out right now. There's people who turned 65 this year and just got flipping obliterated in the marketplace and they're sitting there wondering like, huh, my term insurance is about to ride out. I'm supposed to be self insured. Oh, where'd all My asset base goes, it's, apparently it went bye bye with the market so there's no more self insurance available. And so now they have, not only do they have not enough for their retirement, they also have, they're fighting against increasing inflation plus increasing interest rates and they have nothing left to leave behind for their families. It sounds like a perfect scenario, doesn't it?

People want to preserve their entire estate value, not a portion of it. Just think about this from a completely different vantage point. Take the insurance element right off the table.

Okay.

If you're dealing with the current CEO of Apple, Tim Cook, Apple's got $48 billion of cash and they still finance their day to day operations using someone else's money. Aren't they self funding Tim Cook, Imagine that he sits down with all the key shareholders and the board of directors of Apple and he says, I was listening to Dave Ramsey on one of his shows and he told me that I need to self insure. And so I thought to myself, I'm going to take this a step further. We're going to self fund Apple. We're going to use Apple's own cash to finance the operations of this business. Not only would he not be CEO any longer, he'd probably be committed for a three day, 72 hour psychiatric evaluation by the board of directors to get his head examined. Because that would never make sense to anyone on the board of Apple or any primary shareholder of that organization. So when you're thinking about your personal or corporate balance sheet and you want to bolster that balance sheet, there would never be a period of time in your life where anybody whose job it is to really serve you, not someone whose job it is to never commit to or even seek to understand how this works, whose job depends on not knowing how this works. You would never experience a period of time in your life where anyone with logic and reason could sit down with you and say, you don't need that. My dad retired and fell into the self insured characterization. His financial advisor told him, you don't need that insurance. Oh, so right. So he surrendered it.

Was it like a separate plan or was it like the group plan carried over from standalone plan?

You don't, you don't need this anymore. And it wasn't a participating whole life policy that you could engineer today. It was the vanilla flavor.

Oh, it was a, it was a whole life policy. Yeah.

100% base, no paid up additions, nothing like that. His advisor said, Bob, you don't need this anymore. You're retired. You got a great Pension, Your pension is more than you're spending. And yeah, I know you want to go out and buy all those. My dad got into like, variety of activities all at once. He wanted to go from retired on day one to a pro golfer on day two, to a professional snowmobile race driver, day three to a professional angler on day four. So he needed all the equipment and all the stuff to go and do all those things because all he knew how to do was work. So the moment he retired, he filled his calendar with a bunch of stuff that kept him busy all day long. Where do you suppose he got money for a lot of these things? Cash surrender value.

He got the cash render value and cancel his policy.

Yeah. And almost a year to the day that he retired, he died. And so you could turn the snowmobiles and the boats and the clubs and all that back into cash, but you're not selling it at fair market value. That to me was just really bad advice. Knowing what I know now, it inspired me just to share that today because I agreed with the gentleman who kind of rebutted what Dave was saying. And you know Dave, have you ever seen the video of him walking on water? You should watch that. It is a marvel, it is a miracle that he is the only human being on planet earth that can never be wrong, that can never do wrong, and can never, ever, ever even dream at night of saying that he has something new to learn. He's learned everything there is to know. It's quite remarkable being the only human being on the planet that's done that. God forbid if you disagree with that human being.

But this gentleman berates you verbally on his radio program as though you're a bad person. And he's, you know, he's the, he's an angel of some nature. Right. And so it's frustrating that you know what 30 second sound bites of financial advice is, is like kryptonite. People's financial life.

I've never met the individual that anointed him as being the smartest financial human being on planet Earth. It's an interesting thing to be bestowed upon you. What's interesting, even more so, I agree completely with the gentleman who rebutted because again, it spoke to the Apple example that I used because, you know, Dave is very much a proponent of you should never go into debt for anything. If you need to spend a dollar, you save it and spend it and that's it. And he's purchased millions of dollars of real estate allegedly by paying cash, using his own resources, never financing Anything good for him. You know, there's, there's different ways to go about achieving a financial objective that just happens to be his way.

Good for him.

To say something that could really, really cause significant lost opportunity and significant financial harm is not only irresponsible, frankly, it's offensive.

And he's told people to get rid of insurance over the telephone all the time. Like what if there's whole life insurance or whatever. And like you have no earthly idea if that person's insurable. What if they go and follow your advice and call them, got rid of the policy the next day? They, maybe they have a taxable event because its policy is matured enough that it should materialize the death benefit. Maybe they're uninsurable, they can't get new insurance. You didn't instruct them to go get a new piece, new coverage first and verify their insurability before canceling the old one. People don't even know what they have. They might tell someone that they have a whole life policy, but how often do we hear that we found out that's not what they have, they have something else. They have the evil step cousin of whole life insurance or whatever. Like people don't often even understand the insurance that they already own. And there's many reasons for that. Sometimes it's like maybe that insurance company got bought out and sold and it got repackaged by. There's lots of reasons why people don't fully know and grasp what type of coverage they have presently to go and cancel insurance without having a good assessment. Have someone look at the statements, maybe see the details of the policy to get clarity. Like is there some extra riders on there? Is there some things that you should be aware of that either you're entitled to or that you would stand to lose. Like it's severely damaging advice to have to know that people are canceling a policy willy nilly without any second thought or consideration at all because of the whims of some entertainer who as far as I can tell generates his revenue with 30 second sound bites and yelling at people. Which is what entertainment is these days. It's like Jerry Springer Financial basically.

Yeah.

On a radio program.

It's just so crude and not productive and really not helpful.

There's another really crappy thing about this day. So I'm gonna jump in here and that's if you become self insured. The only way that you've done that is if you've put all of your assets are now in taxable accounts for the most part. Like in the period of time that, that's been predominant advice up until recently, at least in Canada, when there's, when there is a government sponsored plan that is tax free in its earning potential, there's a limited amount of money that you can put in that account anyway. But for the bulk of time that the idea of this buy term, invest the difference, self insure yourself at the point in time when you would be okay to wave goodbye to your typical term insurance. That idea hasn't been around for multiple generations. I mean, it's really only 45, maybe 50 years in the making. It hasn't even really gone through a proper cycle of lifespan. Now everyone, you're self insured, but all your money is in registered accounts which is fully taxable, or it's in some other type of taxable account, which means you might have the value that's equivalent to the insurance that you might have had, but you don't have the net value. Because the net first of all depends on the market condition the day that you kick the bucket, which you don't control. And secondly, it depends on the tax rate at the day you kick the bucket, which you also don't control. So those two items can hack that insurable value down pretty substantial basis.

There's a reason why we use fancy words like liquidity. You can hang out with the folks on Bay street if you know the.

Meaning of that word.

Like if you, if you just examine your net worth and you look at all of those assets and you examine it closely to say, okay, I know that liquidity means in essence how quickly can I turn this asset into cash? But we expand on that to say, how quickly can you turn that asset into cash without, without triggering any tax and without reducing any of the assets value? So if you examine all those assets on your balance sheet, your personal balance sheet, you say, okay, can I turn that into cash without triggering tax and without reducing any of that property's value? The answer is no. Move on to the next asset. Can I turn this asset into cash without triggering tax and without reducing any of the assets value? Probably wouldn't be surprising to know that of everyone that we've ever went through that exercise with, the result is less than 5% liquidity every single time. And so if you've done a great job, worked hard, you provide for your family saving money, you're storing that money inside of a tax, deferred tax, postponed account, and you think you've done really well, understandably so. And then you get to that stage in your life where somebody's indicating to you, boy, you're self insured now. And then death comes and the only way to turn that asset into cash is to trigger significant tax and to reduce the asset value. Whereas proceeds of the life insurance policy show up as a windfall of tax free money and you haven't reduced the value of any of the other assets in your estate. Somebody should purchase whatever Mr. Ramsey's favorite cup of coffee is and sit down and have adult mature conversation about something as rudimentary as that. Do you believe that the affluent, the ultra high net worth person has any difficulty taking care of a tax bill? The majority don't. Many do. But do you believe that the ultra high net worth affluent wealthy individual sleeps well at night knowing that the only way to take care of the tax bill is to liquidate assets by triggering the tax and reducing the asset value? How do you think they became wealthy to begin with? They follow rules. Like Warren Buffett sets out. Rule number one, don't ever lose money. Rule number two, don't ever break or violate rule number one. You want to become wealthy? Do what the wealthy do. Berkshire Hathaway loves insurance, creates an enormous cash float so they can go out and buy other sustainable, durable companies. Shocker. Could you imagine Dave Ramsey having a conversation with Warren Buffett about how stupid Warren Buffett is for being so highly insured? I think Warren Buffett would probably die from laughing so hard that nobody would allow that interview to happen. What Nelson told us time and time and time and time and time again, everything begins with the way that we think. And if you understand the problem, the solution will become clear. And if you really truly understand what's going on, you'll know exactly what to do.