26: Life Insurance: the Good, the Bad, and the Ugly w/ George Kamel

0:00Hey everyone, and welcome back to the Rich Habits Podcast, a top 5 business podcast on Spotify. My name is Austin Hankwitz and I'm joined by my co-host Robert Croak. Robert is a seasoned entrepreneur in his 50s with more than 200 million in company exits under his belt and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business and actively advise some of the most well-known fintech companies around the world. As the show name might suggest, every episode, we talk about rich habits as they relate to business, finance, and mindset.

0:37However, we try and bring you two unique perspectives along the way. One from an industry veteran, which is Robert, and the other myself, someone who's still in the process of building wealth and figuring it all out. Now, Robert, I know we have a special guest today, so why don't you introduce him and tell us what we'll be talking about in today's episode? Yes, this is very exciting. We've invited a self-made millionaire and fellow money expert to join us as we talk about all things life insurance, specifically where it does and does not fit inside your wealth building journey. So we're going to tackle the good, the bad, and the ugly here together on today's episode.

1:15George Camel is a self-made millionaire and Ramsey personality inside of the Dave Ramsey Network. Dave and I don't agree on most things, but we widely agree on how you should, but more importantly, should not use specific life insurance policies throughout your wealth building journey. We received countless questions in the DMs and live on TikTok about the different types of life insurances. So we want this episode to serve as the definitive truth about life insurance, when you need it, its purpose, and the potential cost if you get tricked into buying the wrong what. With that being said, George, why don't you go ahead and introduce yourself and take it away?

1:54Absolutely. Well, I mean, it's hard to top that. And first of all, honored to be here. You guys, I feel like a wiener in a steakhouse with you two. So I'll try to deliver as much value as I can. I've been on the Ramsey team now for a decade. So I've seen a lot of things. I've grown a lot. When I started here, I was$40 ,000 in consumer debt with student loans and credit cards. Couldn't get a handle on my money. And I followed those proven baby steps that Dave has taught for 30 years now. And I stand before you today, my wife and I, millionaires, not because we're so genius, not because we took out the right insurance policy, but because we just started investing for the future.

2:27Long-term in 401ks and IRAs, we thought let's pay off the house. That would be cool to not have payments in our 30s. And so doing all of that and living debt-free has just allowed us a really cool life. And I just wanna help other people achieve the same thing. So we're on different sides of the coin here, but we're all trying to help people get better with money. And I love what you guys are doing to show them the habits of the rich. Man, that is awesome, George. Thanks again so much for joining us. Now, we want this episode to be extremely simple to understand for our listeners, right? Because at the end of the day, life insurance is incredibly confusing and even predatory.

3:00To ensure our listeners aren't getting sold a life insurance lie, George, let's start by walking through exactly what life insurance is. Give us the breakdown. Well, you're in luck. I read on a fifth grade level and I think on a fifth grade level. So I'm going to speak as if you know nothing about insurance. I love it. When you think about life insurance, what it actually is, Before we talk about what it does, it's just a contract between the insured person and the insurance company. And that contract says if you die, there's an amount of money that the insurance company will pay you called a death benefit.

3:31And in exchange to keep that death benefit alive, quote unquote, you have to pay something called premiums. That's just a monthly or annual bill they send you. And you've got to keep those payments up to keep this thing afloat. So that's all it actually the intricacies of it. that's really as simple and as difficult as it gets. Of course, it gets very complex when you get into these whole life policies. But life insurance has one job and one job only. And if anyone tells you otherwise, they are lined through their teeth. And that is to replace your income if you die. So when you think about that, you're going, all right, to replace income if you die, then why are they trying to sell a life insurance policy to a baby with Gerber?

4:09So you see all these policies and now they're touted as wealth building tools. And so remind yourself, replace income if you die. So if people depend on my income, my kids, my family, my spouse, if something happened to me, I want them to be able to cover their living expenses, cover the debts, cover education, cover whatever for the future. I want them to just be grieving my loss, but not also wondering how we're going to put food on the table next week. And we can get into the right type of life insurance that I hope we all agree on is the right type, but that's it in its simplest form before you get more complicated.

4:39So what I'm hearing here is to replace income when you die. and just like I pay my auto insurance premium, right? In case something happens in my car, I crash it, this company, my auto insurance company is gonna come in and replace it. So just like I pay a monthly premium for that, I'd also be paying a monthly premium for insurance. But instead of, hey, something happened to my car, come replace it, it's, hey, I died. Here's the death benefit, right? So we got that part figured out. So if that's the case though, give me the walkthrough as to what whole life insurance is, the difference between whole life.

5:10I've heard of term life. I've heard of a couple of these different sort of scenarios, right? What is that and why do people seem to like it so much if at the end of the day, this is just a way to replace income when someone dies? So the big difference between whole life and term life is that term life is for a specific amount of time or a term. So just remember that. Okay, it's for a set term and it's going to be level, which means that the premium does not change. So if you're paying$20 a month, it's going to be$20 a month for all of those 20 years until the policy is over. Now, the difference with whole life, of course, you think whole life, it's for your whole life.

5:44It provides lifelong coverage. And there's this little thing called a cash value portion. So you have the death benefit. That's the amount they pay out if you die. But then there's this kind of like savings account on this side that can accumulate cash value over time in a whole lot of ways, depending on what policy you chose. And so that's the attractive part of it. People go, wow, how smart. I have a death benefit and I can use this to save money like a piggy bank. We'll get into why it's not such a great piggy bank in a little bit. But for over 30 years now, Dave Ramsey has recommended term life for everyone who needs to replace their income if they die.

6:19And he recommends 10 to 12 times your annual income on a 15 to 20 year level term policy. So that's very simple. And here's why 15 to 20 years are going, well, what happens after 20 years and I still need the life insurance policy? Well, there's this concept called being self-insured. And if you follow the baby steps all the way through and you actually do that 15-year fixed rate mortgage, you will have a paid-for house and a whole bunch of money in retirement accounts and very little expenses because you've done this the right way. And therefore, you're going to be able to cover all of the needs of your family if something should happen to you.

6:49They're going to inherit all of those retirement accounts. They're going to have a paid-for house with very little expenses. And so that is why we say 15 to 20 years is adequate for most people. You can get a 25-year, hey, if you're super, super young and you've got a lot of debt and you're like, hey, this is going to be a journey for me, you can go even longer with these policies. But here's the kicker. They're like 10 to 15 times cheaper than these whole life policies. So when you look at the math on this, you're going, I could pay$500 a month or$20 a month. Which one are you going to choose?

7:17You're going to choose the cheaper option. But the life insurance agents love to promote, well, here's why. The 500 bucks, that's going to make you a bajillionaire and you can take money out of that thing tax-free. It's what the wealthy do. And so they start talking fast with a lot of numbers on the board to confuse you at that point. But those are the big differences. Love that takeaway. And they definitely make it confusing for a reason because it keeps people fearful. And in that situation where they believe they need that agent to really coddle them through the process. And that's why the commissions are so high.

7:46But to touch on whole life policies, permanent policies, Let's touch a little bit on the benefits with estate tax or inheritance tax or even like succession plan help that that whole life policy would give. I've heard a lot about that for people that are very successful and they keep the whole life or the permanent insurance, not just for the death benefit, but also the succession plan benefits and the tax benefits. So let's touch on that for a moment. There is a place in time where if you are ultra wealthy and this is just something you're doing as part of your strategy, you've been working with a financial advisor, your investment pro, and they're like, hey, this can be a way.

8:23You've already maxed out every single thing possible. You don't want to touch real estate. You don't want to touch the taxable brokerage account. Some people use these as kind of a hedge. If they're kind of scaredy cats because you're not going to get the returns you would see in the market, but they want some safety, some people turn to these. I would still say if you have that much money, you have a lot better options. But there are people out there who use these to kind of pass down some of this wealth they've built in a more tax efficient manner than just having it sitting in a checking account.

8:50So that is possible. My guess is most 99.999 % of people, it's not them. And so everyone wants to say, well, that's me. That's who I'm going to be. So my buddy said, and usually the people who have these policies are the ones selling them, if that tells you anything about it. Yeah, and I think the key takeaway here is, is that a lot of times investment strategies should be simple. watching paint dry with ice cream coming at the end. Because at the end of the day, so many of these complicated projects like IULs and whole life and term life, it gets so complicated that you might be better off just putting your money in the S &P 500 like VOO, letting it rip for 30 years, and you'd be a lot better off.

9:29Okay, finally, let's go over the biggest hot button topic in the insurance industry these days, indexed universal life insurance, otherwise known as an IUL policy. I know we're all excited to dig into this and really kind of tell the good and the bad and the ugly about these types of policies. I am definitely not a fan of IULs and the ridiculous commissions and fees, but George, break it down for us and let's chop this one up. Yeah. So let me go through the different types that you can figure out how this fits into the other forms of permanent life insurance. So with whole life insurance, there are fixed premiums.

10:04So the premium does not change. There's a guaranteed death benefit that does not change. And there's that growing cash value. With universal life, there's flexible premiums and a flexible death benefit. There's still that cash value growth, and it's based on a minimum interest rate. Then you move into index universal life. So this is kind of a play on that universal life we just talked about. But the cash value here is tied to a stock market index. So it's not actually invested in the stock market. They're just saying, hey, if the market goes up 12%, your money's going to go up. maybe not quite that because the returns are capped.

10:36And here's the crazy part with these policies. The capped returns, that amount goes down every year while the cost to insure you goes up every year. Because remember, term life, the amount stays the same. The insurance companies aren't dumb. They know that you statistically have a higher chance of dying the longer you live. So with term life, they take the average. So if you're going to go from 30 to 50, that 20 years, they're going to take the average cost to insure you and then give that to you as 20 bucks a month. With these, they're called ARTs in the whole life world, annual renewable term.

11:03And so every year it's going to renew at a higher rate because it's now more expensive to insure you. And so that's what happens inside of these policies. They'll say, hey, your premium is never going to change. It's 300 bucks. Well, the problem is the cost to insure you has gone up inside the policy. Wire returns have gone down. And so now there's a chance of this whole thing crumbling in on itself. Because at some point in your life, it's going to cost more to insure you than your premium even covers. So that's just one of the really scary things with index universal life that happens. But the premiums are much more expensive.

11:32It's riddled with fees. And Jeremy from Personal Finance Club actually took out a policy just to see what is actually in the fine print here. And it turns out out of his$200 monthly premium,$96 went to fees. So there was like a 50 % front load on these fees. And then it makes sense why these insurance agents pitched this so hard because they're making buku bucks when they sell it. Yeah, I just never want to own a product where the person selling me the product makes more off of my money than I do. And that's why IULs drive me crazy because I think it takes like 20 years before the fees catch up to where they level out to a point where they're reasonable like having a fiduciary manager money would be.

12:13And the other part that the IUL sellers don't tell anyone is the surrender fees and all of the penalties. Let's say you set it up that you're going to do$3 ,000 a month towards this policy. If at one point down the road you go down to$2 ,000 or$1 ,000, you can be upside down in the policy and then find yourself having to surrender the entire policy and lose your money because the fees overtake the money ingested into the account. So that's why there's just been no one on earth yet, and they've all tried, that have been able to convince me that an IUL is a good strategy for anyone. Absolutely. And I would hope your listeners are smarter than that already.

12:54But these people have such good sales pitches. There's a reason they have to take you to dinner at a nice restaurant just to pitch this thing like a timeshare, if that tells you anything. The thing they use to try to get people to invest is they call it, they'll use terms like infinite banking. You'll hear that a lot with the whole life world. You'll hear words like they'll call themselves wealth strategists and tax-free growth experts. And you'll notice they never mention insurance at all until you fill out a lead form. And then halfway through the pitch, they go, and so that's why you need to max fund this index universal life insurance policy.

13:23And that's what you should have known you got duped earlier than that. But that's the moment where you go, oh, gosh, I'm an idiot. The people selling it make way more than the people buying it. You know, we hear infinite banking a lot, George and Robert. and I think what people, when they hear the tax-free wealth and things of that nature, right? They say, okay, I get to now put in$500 a month in premium toward this, if it's like a cash value, whatever's going on. And then, oh yeah, when you're ready to retire, you just borrow against it, borrow against it, borrow against it. What are the downsides of that, George?

13:52What are the downsides of borrowing hundreds of thousands of dollars? Of sure, it's tax-free money, but it's also debt. Why do people do that? Why do people have that kind of mentality that it's actually a good thing? Well, it's similar to like taking out a 401k loan and you're thinking like, bro, this is a wealth hack, man. I'm paying my self-interest. I'm not paying. And I'm going, dude, you just went further into debt. Like the goal should be to increase our net worth to become wealthy. And so the more we borrow against these policies, the further we're going into debt. And what are we borrowing for?

14:20That's another question that I always have. And usually it's not something worth putting your money into, or it's a flashy purchase and they want to flex on their friends. And so, you know, I have a very weird concept that we all should and can live debt free. And I know you guys, we could go toe to toe and have some fun with that another date. But I found that living a debt free life is just a higher quality of life for me and the peace that it brings me and the lower risk in my life is better. And so continuing to just borrow and borrow and borrow as some sort of wealth hack does not make sense to me.

14:52And so it's going to catch up with you. You're going to have to pay the piper. The policy is going to explode if you keep doing this thing. And everyone saw some video of Waka Flocka talking about how his buddy told him to open one of these policies. Now he's gaming the system, man. The government doesn't know that this is happening. So the whole thing is kind of hilarious if you can just sit back and laugh at it. Well, I think one of the key components of everything we're talking about goes back to one simple thing. And that is everyone wants a cheat code and everyone believes there is a cheat code to creating massive wealth.

15:25And at the end of the day, they don't realize, and that's why we named the podcast Rich Habits, is that if you implement these good tried and true habits over years and years and decades of time, you will become wealthy and debt free. But they all just want the cheat code and feel like people like us can provide it to them. So at the end of the day, I think that's why the IULs and the pie in the sky things that are being pitched out there with these paywall crazy, you know, commercials and TikToks and Instagram is because people want to believe that someone else has figured it out. And for the low, low price of$2 ,000, they're going to give it to them.

16:01So that's to me the ultimate reason why so many of these programs pop up and proliferate through society is because everyone wants that cheat code, that easy way to create wealth. 100%. Now, George, we've talked about term life insurance, whole life insurance, and indexed universal life insurance. But what should people actually be doing with their money, right? You mentioned a little bit of the term life stuff, but I want to better understand, like there's a difference between, you mentioned the$20 in term life versus the call it$400 on an IUL policy. Should they take that difference and do something with it?

16:37Absolutely. So that you may have heard the quote out there and, you know, almost everyone agrees with this quote who has a good head on their shoulders, buy term and invest the difference. That's the strategy here. So let's do some math on this just to kind of help your listeners get a picture. Because once you, it's so eyeopening once you see the numbers and you go, oh my gosh, why would I ever touch a policy like that. So let's say your whole life policy, whatever permanent life insurance policy you pick up is$300 a month. The equivalent coverage for term is$25 a month. That means there's a difference there of$275 you are paying to try to build this cash value.

17:09Because that's really what you're saying is I can do better than the market by investing in this cash value that's going to give my insurance agent 50 % returns and not me. And so when you do that, you take that$275, skip the whole life, let's do term, you have an extra$275 to spend now. Let's invest that into an index fund. I know you guys are fans of those. Let's say that an index fund over that period of time gets an eight and a half percent return. Now think about that from 30 to 65, eight and a half percent, 275. That's not a lot of money to most people if they have it to spend on insurance.

17:38Well, that turns into$700 ,000 later in life. Now show me the cash value policy of the equivalent account. You will be lucky to have anything in there because the thing probably imploded on itself. And so just thinking about it in terms of where do I want to be 30 years from now, 20 years from now, you want$700 ,000? Oh, and by the way, you have that money freed up in your life in the meantime. Let's say you're already investing. You have an extra 275 to put towards your goals, your dreams, investing, saving, paying off debt, whatever it is, versus making an insurance company rich. Because guess whose buildings are in the skylines?

18:11Banks and insurance companies. That's it. You paid for that with your stupid sky high premiums. And so do not fall for this stuff. And by the way, when that$700 ,000 is sitting in that account, you can give it and pass it down as an inheritance and you can have all kinds of tax strategies when it comes to that. And with these whole life policies, a lot of times the cash value doesn't go to the family. Most of these policies, it's not set up in a way where they get the cash value. They just get the death benefit, which means that 180 grand sitting in that cash value disappeared into thin air, into the life insurance agents pockets.

18:44So it's just one more reason to buy term and invest the difference. Stick to level term policies, 15 to 20 years, 10 to 12 times your annual income. It is going to be very inexpensive and you will thank us all later. This all makes so much sense. We're absolutely thrilled you were able to join us this episode and help us walk everyone else now through exactly what purpose life insurance serves as well as clearly outlining what it doesn't do. The highs, the lows, the soaring spirits, and the gut punches. The stock market's volatility throughout August has been a good reminder of why we diversify our portfolios.

19:18New data from UBS shows that private assets like fine art can be especially valuable when looking for low correlation as they have historically moved independent of stocks. Bloomberg reports, as equities cratered last year, art prices increased, along with the highest total sales ever for major auction houses. Now, the art market has actually passed its pre-pandemic level. But how can we take advantage? Well, tens of thousands of everyday investors already use today's sponsor, Masterworks, where you can invest without needing millions or even an art degree. I personally have invested into three pieces on Masterworks' platform, and it's been a very simple process.

19:59Every painting Masterworks has sold to date has delivered a positive return for their investors, including net annualized returns of 10%, 17%, and even 35 % all this year. Naturally, past performance is not a guarantee of future returns and any investing involves risk, including loss of principle. However, Masterworks' 15th exit, a Sicily Brown piece, was just a couple weeks ago for an annualized net return of 77.3%. Our listeners get special access to the platform and are able to skip their waitlist. So to do that, go to masterworks.art forward slash rich habits. Again, that's masterworks.art forward slash rich habits.

20:42And to read important disclosures, visit masterworks.com forward slash cd. We'll have a specific link in the show notes below for you to skip the waitlist. Again, that's masterworks.art forward slash rich habits. All right, we've convinced George to hang out with us for everyone's favorite section of the episode Q &A. Our first question comes from Amy Z. She says, My husband has been contributing 16 % to his 401k. The company match is 4%. Now, we're considering dropping it down just to the match and instead investing the difference toward the S &P 500 inside of our Roth IRA. We're conflicted, though, because the return in the 401k is 11.22%.

21:23What do you guys think about this new strategy? Amy Z, I think it's a great question. I would love to know more about what the time frame of that 11 % return is because generally 401ks underperform the S &P 500. But regardless of that point, I would say you're definitely on the right track. I would only match four for four so you get that free money. I would take the additional 12. I would get it fully maxed out in my Roth IRA into the VOOs, maybe QQQ, look at VT in that account. I would do that next because I believe over the longterm, it's just gonna outperform the 401k And every two, three or four percent of gain maxed out over those 10, 20, 30 years going into retirement is going to mean massive gains for you implementing that strategy.

22:11This is spot on. We've taught this simple strategy. It's five words. Match beats Roth beats traditional. And so that's exactly what's happening here as you kind of flow down this thing. Let's take the company match. That's four percent. And then we're going to move on to any Roth option. So a Roth IRA is a great place to go. Let's max that out. And then if we still have money left over, we can go back to those tax advantage, you know, the normal 401k account and all sorts of things. And it's also income dependent. There's a thousand questions I'd love to ask about her financial situation. But, you know, we recommend 15 percent until you've got that house paid for.