Is Whole Life Insurance Ever a Good Idea?

Transcription – WCI – 488

INTRODUCTION

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.

Dr. Jim Dahle:
Welcome to the White Coat Investor podcast.

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All right, welcome back to the podcast. We're recording this right at the end of August. I'm actually trying to get a full day of White Coat Investor podcast and stuff out of the way so I can go rafting tomorrow. I'm excited. I'm going down on the Colorado. There's barely enough water to still run through Westwater Canyon, but we're going to do that. I'm excited about it. I'm taking a few people that have never been there before. It's going to be pretty awesome.

Meanwhile, Katie's up in North Dakota. This is her 50th state. She has done 50 of 50 before she turned 50. She's excited about that. She's also hit 50 countries before 50. She's checked off two of her travel goals. I have not been in North Dakota. I'm disappointed that I did not beat her to 50. I was ahead of her for a while, but I have not managed to get to South Carolina and I have not managed to get to North Dakota. She went to both of those places without me with friends just to have a great trip. I hope she's having a wonderful time up there mountain biking today.

We are going to have a great episode even without her here. We are going to be chatting about the things that matter to you. This podcast is totally driven by you and your needs and what you want to see. That's how we get people we interview on the podcast. That's how we answer questions. It's the questions you guys leave on the Speak Pipe. You can go to whitecoatinvestor.com/speakpipe. We'll answer your questions. We've got some interesting ones today. Listen on as we do that.

 

CORRECTION FROM EPISODE 485

Dr. Jim Dahle:
Before we get to those, I got to do a correction. This one's on podcast 485. That was three weeks ago when we ran this. This was someone who sent in a correction, said “AVGE and AVGV do actually qualify for the foreign tax credit unlike VT due to the unique funds of funds structure.” That's all I got. Then I had to go back to the podcast and search through the transcript and try to figure out what the correction was talking about because I recorded that a few weeks before it ran. It's been obviously a few weeks.

What we're talking about is we're talking about some Avantis whole world funds. I had been talking about VT, which is a Vanguard total world stock market index fund. Apparently, the structure of the Avantis ETFs and the Vanguard ETFs is a little bit different. The Avantis ones are funds of funds. The Vanguard one is actually an index fund. It's not buying other mutual funds.

Because the Avantis funds are doing that, it turns out that they qualify, that fund that's in the fund qualifies for the foreign tax credit. In order for a fund to qualify for the foreign tax credit, half of its resources have to be invested in international stocks. If more than half is in US stocks, you don't get the foreign tax credit. That is the case, at least right now, for the Vanguard total world stock market index funds. It's more than half US. You don't get the foreign tax credit for it. But you do with those Avantis ones because they are a different structure. They're a fund of funds to do that.

That is true. I am correcting that. And I'm going, “Man, no wonder most podcasters try not to get too far into the weeds. When I do, I always end up having to do a correction.” Here we are doing one.

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WHOLE LIFE INSURANCE

Dr. Jim Dahle:
We're going to talk for a few minutes about whole life insurance. This is something that I've been writing about and talking about for two decades. I don't hate whole life insurance. What I hate about whole life insurance is the way it gets sold. It gets sold to a lot of people who don't exactly understand what they're buying. Once they do understand it, they don't actually want it.

That's a problem. There are some people that know exactly what they're buying, and that's what they want, and it's doing what they expect it to, and they're thrilled with it. There are happy purchasers of whole life insurance out there. You may not have run into very many of them. When we've done surveys of WCIRs, about 75% of people who have bought a policy among White Coat Investors say they regret it. It wasn't right for them. Three out of four.

When you look at the Society of Actuary data, you see that about 80% of these policies designed to be held until death get surrendered prior to death. It's not just WCIRs that don't want them. It's a whole bunch doesn't want them.

Buying a whole life insurance policy is a little bit like getting married. It's either till death do you part, or it's going to cost you a lot of money and hassle to get out of it. You need to do a similar amount of due diligence like you would if you were getting married to somebody before buying the policy.

Let me explain the basics of how these things work. Whole life. It pays out for your whole life. Whenever you die, if you die at 25 or 45 or 95, it's going to pay out the death benefit. That's basically a guarantee. As long as the insurance company can do it, and it's usually backed by some sort of state insurance guarantee organization it's going to pay you when you die.

The problem is everybody dies. That's not so bad. The salesman might tell you, they're like, “You're definitely going to get paid a death benefit for this thing because you're definitely going to die.” That's true. The problem is everybody dies during their life. That's not the case of a given term for term life insurance policy. Maybe the term goes to age 60. Not everybody dies before age 60.

If you were running an insurance company and you had to pay everybody that died a death benefit, how much more are you going to charge for that policy than you're going to charge for a policy where most people don't die? You're going to charge a lot more. That's why a whole life insurance policy tends to cost something like 8 to 10 times as much as a term life insurance policy.

There's a few problems with that. One, some people go, “Oh, well, I'll just get a smaller policy.” Now they're underinsured. That's a real problem when you die at 35 and you've only got $150,000 in life insurance instead of $1.5 million or whatever. You just didn't buy enough insurance because it was so much more expensive. The agent maybe doesn't care that much. Maybe the commission was the same size or maybe even bigger for them. They sold you the wrong thing. They should have sold you a 20 or 30 year level premium, $1 million or $2 million policy. Instead, they sold you a $200,000 whole life policy. That's one issue with it.

The other issue is most people, including most doctors, being a doctor by itself is certainly not a reason to go buy a whole life insurance policy. Most people have better use for their money than a permanent cash value life insurance policy like whole life or its cousins, universal life or variable. They just have better use for their money. It might be maxing out their 401(k). It might be the Roth IRA. It might be down payment on their dream home. It might be paying off their student loans. It might be paying off their mortgage. There's all these other uses for money we have, especially early in our career that are probably better uses than a lifelong insurance policy with a death benefit we probably don't even need after age 60.

Those are the issues with it. It pays big commissions, of course. If you talk to the agents, the commissions on these things are something like 50% to 110% of the first year's premium. If you bought a policy you're paying $30,000 a year into, they might be getting paid $30,000 to sell it to you. Maybe the broker takes some of that so the agent doesn't get it all. Maybe they only got $15,000 in commission for selling you that policy. You can see why they're so motivated to sell it. They're going to keep talking to you about in that office until you literally stand up and walk out the door because it pays them so well. Even if they only actually get a sale from one out of 10 people they got into that office, they're going to just keep selling and selling.

Remember, these are not fee only fiduciary advisors you're talking with. This is a commission agent selling you a policy. It only gets paid if you buy the policy. That is why these often get maybe oversold a little more than they should be. That doesn't mean there's not uses for a whole life insurance policy. There are uses for a whole life insurance policy that are good uses.

If you value that lifelong death benefit, if that is really useful to you to have a death benefit that'll pay out when you're 60 or when you're 90, either way, that's a good reason to buy a whole life insurance policy. If you don't want the death benefit, it's maybe not an awesome thing to buy.

It's not that you can't do other things with it. These policies accumulate a cash value as they go along. You don't get both. You don't get the benefit and the cash value. When you borrow against the policy and access that cash value, that's subtracted from the death benefit if you haven't paid that back before you die. It's just one pot of money.

There are things you can do with it. A lot of people are like, “Well, maybe if I just need money for a few months, I'll borrow against my cash value life insurance policy instead of selling my taxable stocks and paying capital gains taxes or something. Maybe this is a way I can get some money to buy a real estate property without going to the bank. I don't have great credit or they're not going to lend me as much as I want to for a real estate property or something.”

There's other things you can do with it. Most of the time, there's a better way to do that thing. I've had agents try to convince me that getting a whole life insurance policy to pay for college is a great idea. You could do it that way, but you're way better off just saving a 529.

People talk about, “Well, use whole life insurance as another retirement account.” Well, you could do that, but a 401(k) and a Roth IRA and even a taxable brokerage account probably works better for that use.

What are these uses where this lifelong death benefit or this cash value that you can borrow against is particularly useful? Well, sometimes people are in a business, a partnership with somebody else, and they need to buy-sell agreements. If one of them dies, they don't want to be sharing the business with that person's spouse or their heirs or whatever. They want to have enough cash to buy out the estate, and so they get to own the whole business.

A policy bought on both of them that pays money to the business or to the remaining person that they can use to buy out the other person can be very useful. That's a reasonable explanation.

Sometimes people who are trying to avoid estate taxes put money into an irrevocable trust. What that does when you put money in an irrevocable trust is that money is outside of the estate. That's good. Any increase on that money is not taxable as far as estate taxes go.

One of the really cool things about whole life insurance is that it grows in a tax-protected way. The dividends that it pays out that you can reinvest, they're basically return of principle, so you don't pay tax on those. Your money is basically compounding in a tax-protected way like it would inside an IRA or something in that trust.

There's no taxable income in the trust. If all it owns is a whole life policy on you, and you're buying premiums for whatever the gift tax limit is per year, $19,000 a year or something like that, then you're not having to file a return for that trust. Trust returns can be a pain. Trust can be taxed relatively highly at relatively low levels of income. They say this would be a lot easier to have this just be a whole life policy in this trust to help me try to reduce estate taxes. It's not that the irrevocable trust doesn't work with other assets in it. In fact, it might work a lot better. We don't have whole life insurance in our irrevocable trust, but that is one thing some people choose to do.

The people who tend to choose it, though, are those who value the guarantee. If you die at your life expectancy, you would have been better off just investing in traditional investments, stocks and bonds and real estate and small businesses and things like that.

But if you die next year, you would have been better off just buying a whole bunch of life insurance. That guarantee of you're going to get this amount of money no matter when you die is really valuable to some people. That's why they buy something like a whole life insurance policy and are happy with it.

Another use that some people do is sometimes called by a brand name called infinite banking or bank on yourself or leap. I really hate the way these things are sold because there's so much hype around them. Basically, when you boil it down, you really dig through everything. What you realize is this idea of using a whole life insurance policy instead of a bank where you're borrowing against the policy instead of going to a bank to borrow money, in the long run probably gives you a little higher rate on your cash, a little higher rate of return on your cash. You're trading off for that with the downsides of having to deal with getting the policy in the first place and low returns in the early years.

If you're okay with that and you don't want to deal with banks, you'd rather deal with your insurance policy, I don't think that's a crazy use of a whole life insurance policy either. But just having somebody come into your residency program and selling it to you as a resident or selling to you as a new attending with $300,000 of student loans, I think that's pretty much malpractice. Those are not people who should be buying whole life insurance policies and that's where most of them get sold, unfortunately.

My problem isn't necessarily with the product. If you understand the product and you want it, great. Buy as much as you like. My problem is more with the way it's sold. Before buying a whole life insurance, make sure you understand how it works, number one. Number two, you're committed to holding it your whole life. Number three, you actually do want what it offers, that you actually do value the guarantees that it provides. I don't think that's too much to ask.

Now, keep in mind, a lot of people have bought policies, they maybe wouldn't buy if they could go back in a time machine and go back to that situation. But keep in mind that the crummy returns on the cash value are pretty heavily front-loaded. If you've already owned the policy for five or 10 or 15 or 20 years, you may be perfectly fine with the return on it going forward, even just using the cash value as some extra retirement savings.

You might be fine with that going forward because maybe even though the expected return over your whole life is only 2 or 3 or 4%, maybe going forward from today, you can do 5 or 6% off it. Maybe that's okay. Maybe that doesn't look too bad compared to your bonds and you're okay with that. Recognize the decision to dump a policy you've owned for quite a while is a different decision from whether to buy the policy in the first place.

 

WHAT TO DO WITH A WHOLE LIFE POLICY PURCHASED FOR YOU

Dr. Jim Dahle:
With that background, let's take a question we got from YouTube. This one says, “I'm 37. What do I do with the whole life policy my father purchased for me? He's been paying into it for 30 plus years.”

Wow. If you're buying life insurance from the same company that sells you baby food, you might be making a mistake. Even these policies that you've owned for a long time that you're like, “This might be okay going forward.”

As a general rule, those are policies that are well-structured and typically not tiny amounts. The ones that people tend to buy on their kids tend to be tiny amounts. When it's a tiny amount, when the premiums are very small, a huge chunk of it seems to go toward fees.

I bet if we actually calculated returns on this policy that has been owned for 30 plus years, they're probably terrible. They're probably terrible. Maybe they're even still negative, which is a real tragedy. Because imagine if this father who cared for their kids so much to put money away every month for his whole life, for his future, had invested that into a 529 or even a UTMA, or these days, a Trump account or a 530A account. It would almost surely have grown significantly faster. This person would be inheriting dramatically more money with a lot more freedom of what to do with it.

Going forward I just think if you're going to be saving for your kids, buying them a whole life insurance policy is not the way to do it. They're better things to use. I've saved lots of money for my kids. I got 529s and UTMAs and Trump accounts and Roth IRAs for their earnings. I like the cause. I just think the whole life policy is not the best tool to do it.

Now, what do you do with it? It's been around for 30 plus years. Well, the first thing you do is you thank your father. “Thank you for thinking of me. Thank you for being so diligent to fund this savings thing for me for so many years. I'm really grateful. I'm not starting from zero. I appreciate it very much.” Thank him because he may have been conned a little bit into buying this thing, but he did it out of love for you. Be sure to thank your dad for that.

Now, should you keep it? Probably not. Maybe you've got a medical problem now and this is the only life insurance you have. Maybe it's only a $100,000 face value, but it's better than nothing for your spouse or your kid who's dependent on your income.

Certainly, you want to get your real life insurance policy in place prior to canceling this thing, but chances are if you calculate the return going forward, and you should do that by getting an in-force illustration from the company, if you calculate your return going forward, you're probably going to conclude you don't need this hassle in your life. Your dad's probably been making some $30 a month payment or some relatively small thing. There's not a lot of cash value in this thing. It's a few thousand dollars or $15,000. You probably have a better use for that money even now at 37.

So, make sure you get your real insurance in place, and then you can go ahead and surrender this thing. Take the cash value. Hopefully, you owe a little bit of money in taxes on the gains. There might not be any gains, and then use the money for whatever better purpose you have for it. You don't necessarily need to tell your dad that you dropped the policy. Thank him for buying it for you. Recognize that he did it from a place of love.

 

CAN LIFE INSURANCE BE PART OF YOUR FIXED INCOME PORTFOLIO?

Dr. Jim Dahle:
Another question that came from YouTube says, “Jim, you didn't mention riders. Use of a pre-tax executive bonus from a business paid into a policy or the idea that the retirement income from policy could be considered part of the fixed income portion of your portfolio, allowing you to then take more risk, e.g. having a higher stock to bond ratio. I'm interested in your thoughts on this.”

This is kind of classic stuff that I get on anything we put out about whole life insurance, whether it is a blog post, whether it is a comment on a forum, whether it is a podcast or a YouTube video or whatever. Most of the time, this sort of a comment is coming from somebody who sells these policies.

He's like, “Oh, well, yeah, I guess a baseline whole life policy sucks, but if you just put these bells and whistles on it, it's awesome.” I don't necessarily agree with that. If you don't want the core thing that you're buying, you're probably not going to like it with the bells and whistles either. Those bells and whistles all have to come from you. You're the only thing putting money into this thing. You are the source of all returns on it. You're the person paying for all the bells and whistles. They're not a free lunch. Let's talk about some of these things.

Some policies have riders. Probably the most common one and maybe the one that makes the most sense is some of them have a rider that allows you to use the cash value to pay for long-term care. Sometimes, because the long-term care insurance market is so screwed up, sometimes this isn't actually any worse. It might even be better than using a long-term care policy.

I hope most White Coat Investors become wealthy enough that they can self-insure long-term care and don't have to buy long-term care insurance. If you do have to buy it, one of the policies you can consider is a whole life insurance policy with a long-term care rider.

There are other riders like return of premium riders. I'm not a huge fan of that. There are riders where you can accelerate the death benefit. If you get terminally ill, you can get access to the money. Well, you could always do that. You can borrow against the cash value. I'm not all that impressed with that rider either. Just slapping a rider on these things that didn't make sense in the first place probably doesn't make it any better.

It doesn't mean you shouldn't look at them if for some reason, you want the whole life insurance policy, but just having a writer or two on it doesn't usually change the game. That long-term care situation might be one of those situations where it does. The other thing that was brought up was this pre-tax executive bonus from a business paid into a policy.

Insurance agents have discovered it can be challenging to sell these policies to individuals because people have heard about whole life insurance. They heard, “Maybe that's not an awesome idea.” They tried a different tack to sell these policies. They tried going to businesses and saying, “Hey, you can use this to retain your executives or to retain your highly paid physicians. This would be cool. The business can buy the insurance.”

What ends up happening with these split policies is usually the business, the employer pays for some bit and you pay for some bit and it ends up buying some sort of a universal life policy or something like that. At the end of the day, if somebody else wants to buy me a life insurance policy, I'll say, “Thank you very much. I'll take it. I appreciate that.”

But if they're just getting me started on it, that's like your parents buying you a car and handing you the payments. That's not very cool. Even if they paid for 5% of the car, it's still not very cool. Because if you went out to buy a car, you'd probably buy a $8,000 used car you could pay cash for. You wouldn't lock yourself into some payments. That's the way a lot of these executive insurance policies work.

Everyone is a little bit unique and so you need to look at them. The more of it that the employer is paying for, the better of a deal it is for you. If they're paying 75% of it, you probably ought to take it because your returns on your 25% are going to be pretty good.

But the truth is, if you could talk the employer into using the same amount of money they're putting into this thing for something else, a cash balance plan or a bonus or a higher salary or something else, I'd probably take that because I'm not all that interested in owning a universal life insurance policy like most of these are.

There's a blog post about this. If you're really interested in reading it, you can find it on the website. It's usually called Split Dollar insurance just because you're paying for some of it, the employer is paying for some of it. It is compensation from the employer and so they get a tax deduction for the money going into this thing. But the taxation of it is actually fairly complicated. You can get more details in that post.

The other thing that this questioner brought up is probably an agent, quite honestly, is the idea that the retirement income from a policy could be considered part of the fixed income portion of your portfolio, allowing you then to take more risk, have a higher stock to bond ratio.

Long-term returns of whole life insurance do not compare well to high returning investments like stocks or real estate. If you invest your money in stocks, even after paying taxes on them, you're going to come out with way more money after 20 and 30 and 40 and 50 years than you would if you had “invested” in a whole life insurance policy.

Now, that's not the case if you die in year two. It is an insurance policy. It gives you a bunch of money if you die, when you die. If that's early on, you didn't invest much to get that big death benefit. But as far as waiting until your life expectancy type of age to get access to that money, it doesn't compare well to high returning investments. It also doesn't compare well to investing in 401(k)s, investing in IRAs, investing in some sort of a tax-protected account.

The only time the returns are similar to the returns on investments, and this is only long-term, in the short run, whole life insurance has terrible investments or terrible returns. Like your first year, you might have a minus 33% return. That's pretty normal for whole life insurance. That's the way it works. That's not a flaw. That's design.But if you're comparing it long-term, 30, 40, 50 years, yeah, the returns are going to be pretty similar to bonds in your taxable account.

So, you got a couple of options. You could buy whole life insurance, I guess, and get returns about like what you'd get in bonds in your taxable account and also have this death benefit. Or you can have more access to your money early on, probably get higher returns for the first 10 or 20 years. You can get tax-free returns if you want. You can buy muni bonds.

But it compares a little bit better against bonds, especially in a taxable account, than it does against stocks. And so, that's why people trying to sell it, try to compare it to that. And they're like, “Well, instead of buying bonds, you could buy whole life insurance.” Or you could buy bonds. Bonds are pretty darn easy to understand, pretty darn liquid. I don't have to go get my blood drawn. I don't have to have anybody take my vitals. I don't have to talk to a life insurance company to get access to my money when I own bonds. Bonds have their pluses as well. So, keep that in mind.

Now, as far as allowing you to take more risk, having a higher stock-to-bond ratio, well, if we're treating whole life insurance as your bond, and then you ignore that when you calculate your stock-to-bond ratio, that will allow you to have a higher ratio. That seems kind of salesy to talk about that.

If you got to play tricks like this to get somebody to buy a whole life insurance policy, you're probably not selling it to the right people. You should be ashamed of yourself or reevaluate what you're doing for your career.

There are some people out there who need and want whole life insurance, who understand how it works and they actually do want it. You're not going to sell nearly as many policies if you only sell it to them. But insurance can be a noble profession when you sell people what they want and need and treat them well and sell them the right thing the first time.

The right thing for most doctors, especially young doctors, is term life insurance and big chunks of it. So, sell people a $5 million term life insurance policy instead of $100,000 whole life insurance policy. Actually sell them what they need and know that you're taking care of people in a way they really do need to be taken care of.

Okay, enough about whole life insurance. Let's listen to this one.

 

GETTING RID OF A BAD POLICY

Speaker:
I bought life insurance about five, six years ago, $51 a month and I've had it for that long of a time and I need to cancel it because it's not going to help me at all. And they said, okay, we'll send you a refund, cash value of $1,750 some dollars. Now they're saying it was never canceled. They're taking the monthly payment out of the refund and they're not going to refund my money. And they're saying that I didn't cancel it, but I did. And they told me, okay, it's canceled and all this. It's Mutual of Omaha and they said I would get $1,700 something back and it's been about six months now. Please give me some advice and help me. Thank you.

Dr. Jim Dahle:
Okay, this makes me sad to hear this call because I have received the equivalent, usually in an email from doctors for the last 20 years. They were sold something they don't actually want. They've had terrible returns on it. Maybe they're having trouble getting their money back from the insurance company. I don't know what's going on there exactly in this particular situation.

But this is somebody that has $1,700 in cash value in a whole life insurance policy. The likelihood that this was the right insurance policy to sell to this person seems vanishingly small. I don't have all the details. I wasn't there when it was sold, but it sounds like somebody who sold some tiny little whole life insurance policy to this lady. And she tried to do the right thing to take care of her family and bought it.

You should be ashamed of yourself for selling this policy. This was a terrible thing to do to somebody. And you didn't even get much of a commission off it. She's been paying into it for years. Would you say six years or something like that? And she's got a cash value of $1,700. It's a tiny little policy. This is not something anybody needs, some tiny little whole life insurance policy. All the actual uses for whole life insurance are not tiny policies like this. That's just complicating your financial life to get this sort of thing.

So, shame on whoever sold this policy. You should be ashamed of yourself, really. I think you have made what could be a noble profession of helping people to get insurance look bad. And it's embarrassing, so don't do that anymore.

Okay, now what can I say to this poor lady that has this $1,700 that the insurance company won't even send to her once she realizes she doesn't want this thing? Well, this is a customer service issue. Sometimes companies don't do what they think you think they're going to do. Sometimes you thought you canceled something you didn't.

Well, you got to keep records of stuff like this. I don't know if you have to record the call or if you need to transcribe it or take notes from it or have a follow-up email the next day or follow up with another phone call in a week later to make sure it actually took place, but that's just kind of managing big companies. It's one reason to not be involved with too many of them is to not run into problems like this.

But this is going to be a classic he said, she said. If I went to Mutual of Omaha and asked what's going on, “Why didn't you give this lady your money?” They'll say, “She never actually canceled it.” And nobody has any records. Nobody can really prove what really happened in that conversation. Maybe she thought she canceled it. Maybe the agent thought she didn't. I don't know.

I think the likelihood that they're not giving her money or $1,700 bucks so they can make more profit at Mutual of Omaha seems really low. More likely it was a miscommunication issue. But the fact remains that here she is six months later still doesn't have the $1,700 bucks. And meanwhile, she hasn't been paying the premiums so they're taking the premiums out of the cash value. This thing's going to dwindle to zero within a few years and she's never going to get anything for it.

But if you want to cancel a life insurance policy, make sure it's actually canceled. Most of them you can cancel by calling them up. That's how I canceled the term life insurance policy not that long ago. But you want to follow through on it, and make sure that they're not still taking money out of your bank account every month or make sure that a few weeks later you got a check for the cash value of your whole life insurance policy if that's what you're surrendering.

So, you got to follow up on it. You can't wait six months. If they've really been giving you a hard time for six months, they're not going to give you your money. Maybe it's time to make a complaint. So, where do you go? Well, you go to your state division or department of insurance. It's easy enough to look up for my state. I'm here in Utah. And if I just Google Utah state insurance division the page that comes up at insurance.utah.gov/complaints starts with filing a complaint.

“Utah insurance department has a staff of insurance experts available to help you understand your insurance coverage and answer your questions. If you've been unable to resolve a problem with your insurance company or agent you may contact our staff for assistance or file a written complaint.”

So, if it's been six months and the insurance company is not doing what you think they should do you should call the insurance company and complain, yes but also call your state division of insurance or department of insurance or the ombudsman in your state or whatever it's called in your state and file a complaint. These guys know insurance. They get results much better than you do. And that's the next step.

Unfortunately, that is not me. And leaving your name and phone number and information about your policy on a Speak Pipe at the White Coat Investor is not going to be nearly as useful to you in getting some of your cash value back as filing a complaint with your state division of insurance.

Sorry, this happened to you. I'm probably not the right person to complain to about it but hopefully I've been able to give you something that will help you to get what you deserve.

Oh boy, there are a lot of people out there that just need some help in their lives. And a lot of you are doing that with your daily lives, your doctors and dentists and physicians, attorneys engineers, whatever. And I'm grateful for what you're doing out there. Your jobs are hard. Your high pay is generally very much deserved. You probably ought to be paid more than you are but let's see if we can manage what you are making so that you can still retire as a financially independent multimillionaire who doesn't have to worry about money at least after the early years of your career.

Okay, lots of insurance today. Let's take a question off the Speak Pipe about disability insurance.

 

DISABILITY INSURANCE THROUGH YOUR EMPLOYER

Speaker 2:
Hi Dr. Dahle. I just started a new job with a large hospital system in the South. And I have a question with regards to the disability insurance offerings. They partner with another company One Digital to offer short-term disability, long-term disability and survivor benefits.

My question is with regards to the survivor benefits they are offering variable universal life insurance. Can you please talk a little bit about that? What it entails? When it might be worth it, et cetera. For the life insurance payout, it's $1 million. And then with regards to the policy itself the hospital system puts in their premiums for 10 years. And then after the 10 years are up they recoup their premiums and you can have the invested portion. That is at least my understanding. All three products are grouped together and offered for a 2.5% salary reduction in the participating physician's compensation. Thank you so much and look forward to hearing your thoughts.

Dr. Jim Dahle:
Okay, good job articulating that question. We get lots of questions here on the Speak Pipe or by email where it just don't include enough details to really answer the question. You included enough details that I can answer the question.

Let's talk for a minute about employer provided insurance to start with. First of all, oftentimes there's a life insurance benefit some sort of term life. Maybe it's annually renewable term or something like that. Maybe it's a five-year term, whatever, but typically it doesn't pay a lot. It's usually a pretty small policy, $50,000, $100,000 maybe it's two times your annual income if you're lucky. So for most docs, this is probably less than a half million dollar term life insurance policy.

And it's fine as a benefit for your employer to offer that if that helps to retain their employees they can offer that. If they'd rather give that instead of more salary they can do that. And it's really beneficial for people who can't buy insurance because they have medical problems or they have dangerous hobbies or whatever at least they have something. Even if it's only $200,000 or $,500,000 or whatever, great. You got something, wonderful.

But for most White Coat Investors the amount of term life insurance you can get from your employer is not enough. You still have to go by an individual policy. You still have to have a physical done, they'll draw your blood and you're peeing a cup. And don't work out just before you pee in the cup by the way. I learned that a long, long time ago. I ended up having protein in my urine cause I came straight from the weight room to the insurance physical, not a good idea. I had to do another sample which didn't have any protein in the urine but just an FYI on that.

But you got to go get a real term life insurance policy. If you're like most docs and you need term life insurance because someone else depends on your income we're probably talking about $2 million to $5 million, not $200,000. It's just not going to fix the problem. Don't get me wrong. $200,000 is better than nothing. It's way more than the average GoFundMe. GoFundMe is not an insurance policy. It's not an insurance company. And the average GoFundMe is like $8,000 or $10,000 or something like that. Your family is not going to live for very long off $8,000 or $10,000. They'll live longer off a $200,000 group life insurance policy than they will off that.

So it's better than GoFundMe but it's not nearly as good as what you can get by just going to whitecoatinvestor.com/insurance meeting with one of our vetted insurance agents and getting $2 million or $3 million or $4 million of reasonably priced term life insurance to take care of your spouse or your kids whoever also relies on your income besides you.

That's the problem with the term life insurance offered by employers. It's okay to take it but you almost surely need something more than that if you actually need insurance. I think a lot of people if they were just offered more salary would just take that and go buy the insurance on their own. But some insurance agent talked to your employer into offering this as one of the benefits and that this would help retain your employees, blah, blah, blah.

The second thing is disability insurance. And there are a lot of employers that offer some sort of disability insurance. And the problem with this group employer offered disability insurance is you usually don't get as good of a policy. It's typically a much weaker definition of disability. It often has some exclusions and things like that. It's just not as good, but it's often dramatically cheaper.

Actually, when I had a need for disability insurance I had an individual one and I had a group one bought through my employer. And I really liked about the group one bought through the employer is it would pay out if I got injured rock climbing, which ended up being how I did get disabled was rock climbing only for a couple of months it wouldn't have paid. But it wasn't totally crazy of me to split my coverage between the group policy provided by the employer that I purchased through the employer. I always paid the premiums because I was a partner in the group as well as an individual policy.

So there are some reasons why people might want to buy a group disability policy especially if they can't get an individual one but recognize that individual one is a better policy. And it's more likely to pay, especially if your disability is something that's a little bit gray or if you can still do something. This is the problem with qualifying for social security disability. If you can do anything, it doesn't pay you. And there's all these other issues with a group disability insurance policy.

So just recognize what you ought to do when you go to meet with one of our vetted insurance agents about disability insurance is take your group policy with you, walk through it with the agent, have them point out what the weaknesses are and decide if you're okay with them or not. Maybe you are, maybe that's the only policy you need or want.

More likely you'll maybe keep it and you'll add an individual policy onto it. Or maybe you're just like, that's worthless. I'm going to spend all my money on the individual policy and I can qualify for it. So I'm just going to get that. You have all kinds of options but just weigh them and understand what you're getting into with that.

This third thing you're talking about I love that it's called the survivor benefit. Isn't that what life insurance is? It’s a survivor benefit. Somebody survives and they got paid. I don't think that's what a lot of people think of when they talk about survivor benefits though. Social security has a survivor benefit. You paid some money into social security and one of the things you earned was a survivor benefit if you die.

But that's not what this is. This is a split dollar life insurance policy. Some agent came to your employer and talked them into buying a VUL policy, a Variable Universal Life policy. If they'd come to you and tried to sell you this what would you have said? You would have said no.

But because they went to your employer and talked your employer into paying for it with employer funds that this would somehow help them to retain their employees and then they get their money back after 10 years. I don't know some sort of return of premium writer on this thing. I don't know exactly how it's set up. Every one of them is a little bit unique. They get their money out after the end and any earnings there go to you. And then you can keep the policy if you want, I'm sure. Because they'd love for you to keep it enforced and you start paying the premiums after 10 years or you can cash out and walk away with what you have.

But the problem is it would have been better for the employer to just pay you more money or to offer you a real retirement plan instead of this thing. And so, if they're already offering some awesome set of retirement plans, you've got the greatest 401(k) ever with mega backdoor Roth IRA options and low fees and great investments and you've got a cash balance plan and this is just something on top of it, great.

But really when it comes down to split dollar life insurance, you've got to ask yourself, “Am I coming out ahead?” Because it's too late now to go back to the employer and talk them into paying you more salary or giving you a benefit that you value more.

So your only question you have to answer is “Are you better off taking this thing or not taking this thing?” And what that usually comes down to is how much of it is the employer paying for? And in this case, I'm not sure the employer is paying for any of it because they're lowering your salary by 2.5% in order to give you these benefits.

Now it's all swirled together with the term life insurance and with the disability insurance and with this split dollar policy. And so, it's a little hard to sort out whether this is worth 2.5% of your salary. But I think if I were you and it sounds like you're actually paying for this policy, I think I'd probably just go to an independent agent buy myself some amount of term life insurance I need, buy the amount of individual disability insurance I need and invest the rest. Invest it in investments that are easy to understand in retirement accounts that are real retirement accounts not a universal life policy masquerading as a retirement account and walk away from it.

But if you were able to do the number to run the numbers and figure out that the employer was paying for 50% or 75% or 90% of this policy, then sure, I'll take that. That's fine. I might still cancel it and walk away from it at the end of 10 years and take whatever cash value I have because the return on the money I put in there for those 10 years is pretty good.

That might be worth doing but these things are so complicated you can't even figure them out. People send me dozens and dozens of pages of pamphlets on these things. And even after going through them I still don't understand what's going on. I'd have to sit down with the agent selling this thing to really understand how the policy works. And I just think that's a terrible way to try to retain your employees. Why don't you just treat them nice, pay them a little bit more in salary, give them real benefits they're going to value that they can't get somewhere else instead of doing split dollar life insurance. I hope that's helpful to you.

 

SPONSOR

Dr. Jim Dahle:
This episode was brought to you by KeyBank. KeyBank is one of the nation's largest full-service banks offering banking, lending and financial solutions for healthcare professionals at every stage of their career.

Key's suite of services includes student loan guidance and financial education tools to help clients find financial peace of mind. To learn more and for terms and conditions, please visit whitecoatinvestor.com/keybank.

All right, don't forget, podcast sale going on right now for the White Coat Investor online courses. This includes the No Hype Real Estate course. This includes the Continuing Financial Education courses. This includes all the versions of Fire Your Financial Advisor from the student version to the one that's eligible for CME. Use code PODCAST2026 to get 20% off the courses now through September 14th.

Thanks for leaving us five-star reviews and especially thanks for helping spread the word about the White Coat Investor. This is the way we have gotten the word out for decades about the White Coat Investor is mostly just one doc telling another about it, but it also helps to leave five-star reviews.

We had one recently come in from Mikey Mike Forever who said, “Weekly joy. I'm not a doctor, but this is one of the few podcasts that talks about the order to invest every dollar. I love the encouragement for individuals to strive, not just to make more, but to handle money in good ways and then spend without guilt.

I especially appreciate how Dr. Dahle blends together W-2, 1099 income, small business, real estate or investing and other ways to generate income. This podcast gives a roadmap for how to deal with the increase in income instead of focusing on cutting expenses. Thank you for maintaining this product.” Five stars. Thank you for the kind review.

Okay, keep your head up, your shoulders back. You've got this. We're here to help. We'll see you next time on the White Coat Investor podcast.

 

DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

Transcription – MtoM – 291

INTRODUCTION

This is the White Coat Investor podcast Milestones to Millionaire – Celebrating stories of success along the journey to financial freedom.

Dr. Jim Dahle:
Welcome to the Milestones to Millionaire podcast.

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Whether it's locum tenants or regular permanent position, visit whitecoatinvestor.com/comphealth and build your career your way with the power of CompHealth.

Right now, we've got a podcast-only sale. It's 20% off all of our White Coat Investor online courses, including the ones that are eligible for CME. If you use code PODCAST2026, that'll get you 20% off at wcicourses.com from now through September 14th. That means Firing Your Financial Advisors for Students is just $79. If you're self-employed, you may even be able to deduct the cost as a business expense.

The information you learn in these online courses can be applied to make a difference worth millions of dollars over your career. That's quite a return on an online course. Go to wcicourses.com, use code PODCAST2026 and get your online course now.

Whether that is Fire Your Financial Advisor, there's four versions of that. Whether that is No Hype Real Estate Investing, whether that's Continuing Financial Education 2026, it's all 20% off with code PODCAST2026 from now through September 14th.

 

INTERVIEW

Dr. Jim Dahle:
Our guests today on the Milestones to Millionaire podcast are Todd and Justin. Welcome to the podcast, guys.

Justin:
Thanks for having us.

Todd:
Thanks for having us.

Dr. Jim Dahle:
Okay, we have, it's a little bit of a unique milestone. We've done a lot of unique milestones this year, and that's great. I like to do something different every now and then. But let's introduce you to the audience. You're both orthopedists, I understand, correct?

Justin:
Yes.

Todd:
Correct.

Dr. Jim Dahle:
And what part of the country are you in and how far are you out of training?

Justin:
I'm in Charlotte, North Carolina, three and a half years out of training.

Dr. Jim Dahle:
Both of you come out of training together? You train together?

Justin:
We did, co-fellows.

Todd:
We did. We did train together. And I'm Todd for everybody to know. And I'm in Austin, Texas.

Dr. Jim Dahle:
All right. And tell us what milestone we're celebrating today.

Justin:
We're celebrating having raised over a million dollars for one of our AI MedTech companies.

Dr. Jim Dahle:
Very cool. So you started a company and you were able to raise seven figures for it. Very cool. Okay, you're not very many years out of training. A lot of people at this point would be focusing almost solely on their practice, increasing their clinical income and saving a good chunk of that and trying to invest it wisely and maybe rewarding themselves for some of the things they missed out on during med school and residency. You guys have kind of turned a little bit toward the business route and looking to do a startup. Tell us a little bit about the motivation to do that.

Justin:
We were co-fellows and our third founder with us is Nate Bowes. And during fellowship, we started a company called Morning Rounds Coffee. And we all kind of had that entrepreneurial bug and really enjoyed making a difference, building things together and saw an opportunity where there were things missing.

And so, my story is three and a half years out in practice, started in a major hospital institution, corporate medicine and hit the ceiling of what I could do already very quickly. And thought, “Man, I trained for 14 years. Is this it?” And I saw an opportunity where it's hard to move a yacht, it's easier to move a speedboat. And so, I saw an opportunity to kind of break free from that corporate world, start my own private practice, and then start this company really focusing on helping physicians by decreasing all the things that are making it hard to be a doctor today, which is lower reimbursement year after year and then rising overhead.

Todd:
Yeah. And I'll echo those in the sense of when we first started doing the coffee company together, we kind of started working more together. And then I started off in a private practice, which I'm happily in and started learning more a little bit about the business side of medicine and the difficulties.

And then my wife, who's a hematologist oncologist, we're all kind of getting that rude awakening of the finances and overhead and administrative burden. And when Justin was actually thinking about starting something to try to revolutionize practice and overhead a year ago, we were lucky enough for him to invite us along. I feel like I think it probably resonates with a lot of the listeners because like Justin, myself, my wife, we listen to all your podcasts. The things that we feel are all practices feel it's not just orthopedics. It's a lot of its primary care. And so, that's how this is kind of started and then kind of blossomed.

Dr. Jim Dahle:
So, Todd, you say you're learning business now. Do you have any sort of business degree? Did you take any business classes as an undergrad or anything?

Todd:
If you count learning how to use AI and Claude from Justin, then that's my business degree. But I think I've always had an entrepreneur kind of business kind of spirit, even since I was in elementary school selling bubble gum on the playgrounds, doing a textbook sellback program with my brother in college, all these kind of things like that, but no formal background.

Dr. Jim Dahle:
As you start this company, you looked around and you said, we need some capital. And you decided we're going to go elsewhere to raise that capital. Any particular reason you decided to do that, rather than maybe taking longer and bootstrapping it from your clinical income, etc?

Justin:
Yeah, that's a great question. I'm currently bootstrapping my life. I left a seven-figure salary with the hospital to now drop down to much less than that. And to really build a company the way we wanted to, you have to get some capital injection to make that happen. Software engineering, yes, you can use AI tools and vibe code things, but you absolutely cannot vibe code an entire EHR. When you're starting to deal with PHI, HIPAA regulations and so forth, it's got to be rock solid. And those software developers are expensive.

And when you talk about where to go for money to be able to grease the wheels of innovation and really build, there's a lot of different paths to go. And philosophically, we were building this because there's a lot of third parties that have entered medicine that have ulterior motives to clinical care. I thought, “Well, if we're going to build this for physicians, why don't we have physicians take a stake in this and help us build it in parallel?” Not only their capital investment, but also to act as betas and help us build this together.

And so we're very fortunate to be a part of Stedman Hawkins, which is our alumni. And we initially reached out to our alumni group and we're like, guys, this is our vision. We didn't even have an app to show. We had a logo. We're like, this is our concept. This is our build. Let's do it. I think we raised just around $600,000 just in the idea from our friends and family. We just asked all of our investors, somewhere between $50,000 and $100,000.

And I have no MBA. I don't think in 2026, you need an MBA to be able to run a company. I think we have knowledge at our disposal through AI tools that can tell you all the things that you need to know. Obviously, as you grow, it's good to get strategic advisors and so forth. But I built a Delaware C Corp, set up safe investments, all of our funding through safe investments. And we currently have $1.6 million raised and have our MVP and we're off to the races.

Dr. Jim Dahle:
For someone who has an idea and they look at it and they go, I need more money than I have to do this. What's the first step? Do you need to go meet with an attorney or an accountant? How do you get out of the gates?

Todd:
Yeah, Justin, answer that one.

Justin:
I personally use Claude. I use it as my business coach. I was like, “What are all the things that I need to know?” There are platforms now that have all the documentation, everything that you need to set this up. The built-in accounting, the built-in legal documents and so forth.

Now that we've matured and gotten bigger, we've had that capital because legal counsel is very expensive. Having an accountant is very expensive. Having a CPA is very expensive. I think part of it is being very mindful of your burn rate. As you get this capital, you have to deploy it very strategically. I think whenever you raise, you need to have an idea of what you're going to do with it. But two, being very cognizant.

Me personally, I'm only taking a very modest draw just to pay for my kids daycare and run this because I've stepped back significantly from my clinical time. I'm serving a non-compete, so the timing works out very well. But those are definitely considerations.

Todd:
One of the other things I think is pretty good is having different people you can ask and different people to mentor you. So we definitely have a mentor who's also a physician that's been helping us out with this. And then, obviously, our significant others, almost all of them are in healthcare in some capacity. And that's been, I think, really helpful at the beginning.

Dr. Jim Dahle:
It's been said that if you look around and all the other investors in a company are doctors, you might not be in a good investment. What do you say to that criticism?

Justin:
I love it. Well, I think doctors look for different things. They see the vision, the hope. They may not ask the same questions. I would say it is going to be the purest product. There was a book written, Why Physician Startups Succeed. And if you look statistically, startups that are created by physicians, for physicians, do much better and are at the top of their class in terms of success. And that's because physicians truly understand the pain points.

There's been a lot of innovation in medicine, but not directed by physicians. And they tend to fall short of the promising aspirations that they set out to be because it's hard. We're very siloed in medicine. You don't really understand the pain points unless you live it.

Dr. Jim Dahle:
If this doesn't work out long term, the market changes, whatever, you don't get the plane off the runway before you run out of capital, whatever it is, what does that mean for you personally, looking back on what you spent a significant chunk of your career and some friends and family money on?

Justin:
It's going to succeed. I'm very determined and I see a huge opportunity in this. And I think right now is the biggest opportunity for physicians, for startups, innovators, more than ever, especially with the tools of artificial intelligence and being able to create these things.

I think this is the most transformative technology in our lifetimes. And learning it, harnessing it, not only the knowledge, but the throughput and the capability of assimilating tons of data very quickly, I think is a tremendous opportunity.

You're exactly right. You alluded to it. We're now invested with some of our peers' capital. Obviously, you tell them, hey, this is a high risk investment, you could lose everything and setting that precedent up front. But that is obviously nobody's intention. Nonetheless, we are learning a ton. I'm having a blast doing this. It's all about the journey. It's the arrival fallacy is real in medicine. And so you've got to enjoy the journey. You've got to enjoy what you're doing. And the tools and skills that we learn and the connections that we're developing now will last a lifetime.

Todd:
I will say that I have nowhere the risk tolerance that Justin has. Neither does my wife. So, he stepped back from practice and went all in on this. And I got to hand it to him. And when people hear that he did that, it's pretty invigorating for a lot of people. But I'm still full in practice working hard. As soon as we got this call, I got a lot more patients to see.

And so my risk tolerance to be able to do that is obviously a lot lower. So I still got a full practice going. My wife is still full practice. We're still working full time. We got a young little boy named Hudson. He's everything to me. He's 21 months old. And I'm trying to balance that right now. I think that's definitely been pretty difficult for all of us on time management.

Dr. Jim Dahle:
In your application to come on the podcast, you said, “Find your mission, trust your network, don't be afraid to ask.” Tell me what you meant by that.

Todd:
I think it's kind of what we've alluded to a little bit. But I think we have such a strong passion to make some changes. And it kind of comes back to the coffee company. And we started it during COVID. And essentially, most of our profits went back to physicians and nurses during that time, because we all were chiefs during COVID.

And our goal at that point was, how do we give back to physicians? That's not going to be just a short term goal. We want something to go back to them long term. And so when we first started working together on that and had some pretty good success with that, I think it also lit the fire in us that we really can make some good changes here.

And now that we've lived medicine, and we're all in different facets of what type of practice we're in. Our other partner, Nate, was in one of the largest academic institutions in Texas. And now he's gone to the private practice. We all kind of feel the burden on physicians. And we want to make a change. And that's why we emphasize so much that this is built by physicians. And so I think that's how I took it. And that's how I felt with those words. Justin may have a different idea, but that's kind of how I felt.

Justin:
I think we all have our strengths. We're hyper-trained orthopedic surgeons. We have no business background. We were trained for a singular purpose. And when we came out of training, we're all bright-eyed and bushy-tailed and thinking that society would take care of us. But then the brute reality of business and the world that it is kind of hits you in the face.

I think we need to lean on those that have been there, those that understand the economics, understand your blind spots, be open-minded, learn as quickly as possible. I think humility is extremely important.

We don't understand everything about building the startup and so forth. But it's getting the right people in the right places at the right time, listening to it, parsing signal from noise, and just continuing to grow. This is a passion. This was done because it's not a want, it's a need.

Where we're heading in medicine is frightful, in my opinion. It's writing on the wall with continuous CMS cuts and further constraints on the way we're able to practice medicine.

And this, I was building it for myself and creating my own private practice. And so, I thought, “Well, if I'm going to build it for myself, there's going to be a whole heck of a lot of physicians that are going to want this.” And so we kind of just floated the idea. And there was a resounding, yes, build it. We will give you money. And that's kind of how this was all born.

Dr. Jim Dahle:
Well, congratulations to both of you. It is a not insignificant milestone. I'm very impressed. And I'm really actually most looking forward to a follow-up milestone in a few years when we find out how this has changed all of our lives. And obviously, it's going to have a profound financial impact on your lives as well, as this succeeds. So congratulations to you. And thank you so much for being willing to come on the podcast to talk about it.

Justin:
Thank you so much for having us.

Todd:
Thanks, Dr. Dahle. I will say the last thing is in residency, me and my wife got the book. We started then with our planning. I do a quarterly financial outlook of our net worth, which you speak a lot about on your different podcasts. I think the last one you said you recommended yearly, but we're doing it every quarter. And we really appreciate everything you've done for the physician community. There's so many people that are probably taking your advice that you never hear about like us. So, we really appreciate what you do.

Dr. Jim Dahle:
You're very welcome. It's our pleasure.

Okay, I hope you enjoyed that interview. I told them when they came on, I was like, “This can't be promotional. This can't be promotional for your company. I'm sorry.” They're long-time hardcore White Coat Investors, as you heard. And I said “We got sponsors. They pay to come on the podcast, to be mentioned on the podcast. And I can't just give you free marketing.”

And they were so good. They didn't even mention the name of the company. And I feel a little bit bad. They were so good about doing that. And I'm going to at least tell you what their startup is. It's called Turnkey AI Practice. If you Google that, you can learn more about it.

But what I'm hoping is it absolutely does change our practices, gives physicians more control over medicine, and helps us to leverage the power of AI to make the world better for ourselves, as well as our patients and our families.

Thank you to both of them for what they're doing. I love seeing doctors getting involved in business, because that's the only way to change a lot of things, is to get into the business world. And I know it's not comfortable for most of us who majored in molecular biology like me to get into the business world. But that's how change happens. If you never get into the business world, we just all end up in our own little silos, and in our little clinics, and bigger changes don't happen. So, thanks to both of them for coming on and sharing their milestones. Pretty exciting to be able to raise capital for a startup.

 

FINANCIAL BOOT CAMP: PAY OFF DEBT OR INVEST

Dr. Jim Dahle:
One of the most common questions we get here at White Coat Investor is whether somebody should pay off debt or invest. And that question can come in a lot of different forms. People talk about, should I prepay my mortgage, or how quickly should I pay off my student loans, or those sorts of questions.

But the bottom line is they're asking, “Should I invest this money, or should I use it to pay off debt?”, whatever the debt might be. Well, perhaps the best advice I can give on this topic is to avoid extremes. And what I mean by that is that most of the time, when you have this question, there's no right answer. Either one's actually fine. But perhaps, I don't know, 5% or 10% of the time, there is a right answer.

If you're giving up an employer match in order to pay off debt, you're probably making a mistake. You're leaving part of your salary on the table. If you're carrying around credit card debt with a 30% interest rate in hopes that your investments will outperform that, you're making a mistake. There are some extremes. So avoid extremes when it comes to this question.

But just about everything else in between, I can probably come up with a situation where it might make sense to invest, but where it can also make sense to pay off debt, no matter what kind of debt that might be.

Recognize these are both good things. Paying off debt increases your net worth because net worth is everything you own minus everything you owe. And paying off debt reduces how much you owe. Investing increases your net worth because it increases everything you have. And so, it works on that side of the equation. Both are good things to do.

So, don't stress yourself out trying to figure out which one to do. They're both going to increase your net worth. They're both good things. And heaven forbid that you choose the second best thing when you have two good things to choose from.

So, it's not that big of a deal. Take a deep breath, relax a little bit and recognize it. There might be one that's a little bit better than the other for you, but it's probably sixes most of the time.

The most important thing when it comes to building wealth, when it comes to reaching your financial goals, is to look at what percentage of your income is going toward building wealth, investing and paying down debt rather than consumption.

Let's talk about seven principles that will help you determine whether you should pay off your debt or invest. And the first one is probably your attitude toward debt. Some people just hate it, absolutely hate it, want to be out of debt just as soon as they can, will never go back into debt. I'm not quite that extreme, but I don't like it. I dislike it enough that it was a major factor behind why I spent four years on active duty in the military. The more you dislike being in debt, the more you are likely to want to pay it off instead of investing.

On the other hand, there are people who love debt. There are people who think you should stay in debt your entire life. And so there's a significant behavioral aspect to this. Sometimes the math would indicate you should carry debt and invest, but behavioral and cashflow considerations often argue for just paying it off.

Because yes, if the argument really is pay off debt or invest, you can have the argument, but too much of the time people don't actually invest the difference. They spend the difference. And so there's that behavioral aspect of paying off the debt. Your attitude matters.

The second factor is your risk tolerance. If you're not going to invest aggressively, you might as well get the guaranteed return available from paying off debt. If all your investments are things like whole life insurance and CDs and money market funds and cash under your bed. And you've got debt that's 4, 5, 6, 8%, it makes sense to pay off the debt. That gives you a guaranteed return higher than you're making on your investments.

The third factor to consider, the third principle, is what available investment accounts do you have available to you? This had a major effect on our debt versus investing choices over the years. For example, if we had a nice tax deal being offered to us by investing in a 401(k) or a Roth IRA or something like that, we usually took it instead of paying off low to moderate interest rate debt.

Yeah, we paid off our mortgage in less than seven years, but we never put an extra dime toward our mortgage until we had first maxed out all our retirement accounts, our HSAs, and as much as we wanted to give to our kids via 529s and UTMAs and those sorts of things.

The fourth principle to be aware of is your anticipated investment. And that's where the math comes in. If you're expecting to earn 10% on your investments and your debt is at 2%, even if it's a 2% variable, it seems kind of dumb, at least from a mathematical perspective, to pay off the debt. In this respect, perhaps investments with high expected returns get purchased before paying off debt and vice versa.

Bear in mind, of course, that the only returns that count are the after expense, after tax, after inflation returns. Market valuations might play into this as well. At the bottom of a bear market, maybe you're better off investing than paying off debt. And at a market high, there's been a market high for years, maybe that's the time to be paying off debt rather than investing.

So, there's a lot of factors that go into that. It feels like market timing, and it is, but there's no necessarily right answer to the question anyway, so why not try to time the market a little bit?

The fifth principle is the interest rate of the debt. This is the other half of that mathematical equation. If you've got 8% debt, that's a lot harder to out-invest, especially when you adjust for risk. The investments that tend to beat an 8% debt tend to be pretty risky. Whereas getting that 8% return by paying off the debt has no risk at all. And so, once you adjust for risk, the higher interest rates are a lot harder to out-invest.

So, keep that in mind. A lot of people talk about, “I'm never paying off this mortgage because it's 2.5%”, and that's what they're talking about. They're talking about the effect of that interest rate.

The sixth factor is the level of wealth. You're basically asking yourself, do you need to invest on leverage in order to reach your financial goals? And if you're just getting started in life and you're net worth $100,000, well, it probably makes sense to maybe invest a little bit on leverage, maybe carry that relatively low interest rate mortgage a little longer than you otherwise would, in order to invest more money.

On the other hand, if you're 55 and you've already got $6 million and you figure you only need $5 million to live for the rest of your life, well, you got to ask yourself if you want to keep playing a game you've already won.

Bill Bernstein would tell you, “When you win the game, stop playing.” What he's talking about is stop taking risks, like leverage risks that you have from carrying debt. And of course, once you have a significant number of assets, your debt is not really moving the needle anymore.

A 1% $30,000 car loan is not a factor in your life when you have $10 million. Even a $300,000 mortgage probably isn't a factor in your life at that level of wealth. The wealthier you get, the less you probably need to be trying to arbitrage the difference between your debt interest rates and what you're going to earn on your investments.

The last factor involves asset protection and estate planning. Just to make this decision a little bit more complicated. And not only is this one of the more common questions that White Coat Investors have, but it's one of the more complicated ones.

There's a lot of asset protection and estate planning considerations when it comes to your debt. For example, in Texas and Florida, your homestead is 100% protected from creditors and above policy limits, judgment not reduced on appeal kind of situation. Those are very rare, obviously for doctors, but it might cause a doc in Texas or Florida to pay off their mortgage faster because they know that home equity can't be taken from them if they had to declare bankruptcy.

Whereas if you're in a state like Utah, where maybe you only get $80,000 of your home equity protected in that situation, maybe you're a little more likely to invest rather than pay off that debt.

On the backend of life imagine an 85-year-old not in great health that has a bunch of taxable assets with very low basis, meaning the capital gains if they sold them would be very high, the capital gains taxes.

They might choose to borrow against the assets rather than sell the assets because the interest is not nearly as high of a cost as the capital gains. And the capital gains will be wiped out when they die and their heirs get a step up in basis. In that situation, it might make sense not to pay off debt. In fact, even to take out more debt rather than liquidating the taxable assets and paying those capital gains taxes. So lots of factors there.

But in general, you can make a list of the financial order of your priorities. And of course, you're going to put things like getting your employer match at the top of the list and paying off high interest rate debt, anything higher than 8% or so toward the top of the list.

And then you're going to get to things like maxing out your available retirement accounts and investing in assets with high expected returns like stocks and real estate. And then maybe you'd be interested in paying off more moderate interest rate debt, like debt at 4 to 8% before investing in assets with returns in that range, expected returns in that range.

And then maybe you get to the lower interest rate debt and the lower interest or low expected return assets when you make that list for yourself. But the bottom line is what really matters is how much money you're putting toward wealth building, not exactly where it goes. And just avoid the extremes when it comes to paying off debt or investing. You don't want to be borrowing at 12% to try to out invest it. And likewise, you don't want to necessarily pay off every cent of your 1% student loans before you ever invest a dollar. Don't do something extreme and you'll probably find someplace that's going to work just fine for you.

 

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DISCLAIMER

The White Coat Investor podcast is for your entertainment and information only. It should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.

Dr. Jim Dahle:
Let's talk for a few minutes about charitable giving. The first question, of course, is: Should you bother? Should you bother giving anything to charity? And a lot of people get confused about this. They think this is some sort of a tax play that they're going to come out ahead by giving money away to charity. That's not the way deductions work, right?

It doesn't make sense to give $10,000 to charity in order to get a $4,000 tax break. Okay, yes, you don't have to pay taxes on that $10,000 because it's deductible, but you know you'd only pay $4,000 of taxes on that income anyway. So it costs you $10,000, $4,000 of benefit. You're not coming out ahead. You have to actually want to give to the charity. If you don't want to do that, then don't think this is some sort of savvy financial play that helps you to have more money or to leave more money to your heirs.

There are some possible exceptions with charitable trusts, but even then, most of the time, you're still coming out behind compared to if you just had never given anything to charity at all. There is some data to suggest, however, that that is not as true as you might think it is. There's data to suggest that givers actually become wealthier, and the reasoning is not clear. You know, whether it is divinity blessing you, or whether you become a more pleasant person to be around and people want to do more business with you, or they trust you more, or you become a better person and you're thus better at your job and better at managing your money.

Or maybe because you give away 10% of your money, you actually have to add up how much you're making, and you pay more attention to your finances. Nobody really understands why that is, but there's some data to suggest that givers actually do come out ahead. But it's not a direct benefit from the tax deductions of giving.

So, should you give to charity? Well, I think you should. I think you become a better person, and part of the reason why is you become less anxious about money. Giving money away, whether you're giving it to charity, whether you give it to someone that can use it more than you, whether you're giving it to family or friends or employees or whoever, sends a subtle message to your psyche that you have enough, and there's a lot of value in that.

When you have enough money, you quit worrying about your money. You shift out of a scarcity mindset, and I think you are happier. Plus, you bless the world most of the time when you're giving money away. You're giving it to somebody that can turn that money into a whole lot more happiness than you can, and I think that's valuable as well.

So while you're giving to charity, you might as well see if you can get a tax deduction for it. Whether that means you get a little bit more money than you would otherwise have, or whether that means you can give more to charity, that's a good thing. So I'm a big fan of actually paying attention to the tax benefits of giving to charity. So let's talk about those.

If you're giving cash, one of the coolest benefits is that $1,000 given to charity each year is completely deductible from your income, whether you itemize or not. If you're married, it's $2,000. People think of this as an above-the-line deduction. It's actually a below-the-line deduction, but you don't have to itemize to get it. It was made permanent with the One Big Beautiful Bill Act back in 2025.

But that's the way the tax code is right now. You can give away $1,000, or $2,000 if you're married, without itemizing your deductions, without filling out Schedule A, in cash that you give to charity, and not pay taxes on that money. So that's a beautiful thing.

If you want to give more than that, you're going to have to ask yourself: Is it worth itemizing? Right? Of course, whether you use Schedule A or not comes down to whether you have more itemized deductions than the standard deduction. And also, back in 2025, the standard deduction went up, and it's indexed to inflation, of course.

So it goes up each year, but it's a pretty substantial deduction. It's over $30,000 for a married couple. Now that includes, for most people, some mortgage interest. It includes charitable giving, and it includes $10,000, maybe more, in state and local taxes. So if all that adds up to more than $30,000-plus or so for a married couple, then it makes sense to itemize. If it doesn't, then you may just take the standard deduction.

So it's possible you give a bunch of money to charity. You give $10,000 or $15,000 to charity, and because all of your itemized deductions don't add up to more than the standard deduction, you might not be getting any tax benefit for that at all. So you actually have to do the numbers there.

Another thing that happened in the One Big Beautiful Bill Act back in 2025 was that there was a limitation for those in the highest tax bracket. Their itemized deductions are no longer deductible at 37%; they're only deductible at 35%. That includes charitable giving. So the charitable deduction is a little bit smaller for the highest earners than it used to be.

Another limitation is the first 0.5% of your adjusted gross income is not deductible. So if you make $300,000 a year, 0.5% of that is $1,500. The first $1,500 you give doesn't have any deduction at all. That's above and beyond that $1,000 to $2,000 deduction that I talked about earlier that you can do without itemizing. So it's a little bit more limited for the highest earners than it used to be. But it's still quite a substantial deduction. If you're going to give to charity anyway, you might as well get that.

Okay, now is that always the most tax-efficient way to give to charity? No, there are even more tax-efficient ways to give to charity. Once you're 70 1/2, for instance, you can do qualified charitable distributions. These take the place of required minimum distributions from your IRAs and your 401(k)s once you're of RMD age. But due to some quirks in how the laws were written, you actually get to QCD age before you get to RMD age. So you can do it for a couple of years before RMDs are even due.

But the beautiful thing about that is you don't have to take the money out of the IRA, pay taxes on it, and then give it to charity and calculate out the deduction and all that, and make sure you're still itemizing and those sorts of things. It just goes directly from your IRA to the charity. You never pay taxes on it. There's no additional tax break because you never paid taxes on it.

So it's money you earned 30 years ago. It grew for a long time in a tax-protected way, and then goes directly to charity without you ever paying taxes on it. So it's a pretty beautiful thing. If you're 70 1/2 or older and you have tax-deferred money, that is the best way for you to give to charity, hands down.

Until that time, another thing to consider for those of you who have enough savings that some of it is not inside a retirement account, meaning you're investing in a taxable, non-qualified brokerage account, and you have appreciated shares that you've owned for more than one year, you should donate those shares. You should basically never give cash to charity again. You should only donate appreciated shares that you've owned for more than one year.

The beautiful thing about doing that is it flushes those capital gains out of your portfolio. You can buy those same shares back the next day. There's no 30-day wash sale or anything like that, and neither you nor the charity pays those capital gains taxes. So it's a really great way to donate to charity.

You get the deduction, the size of the value on the day you contributed it, as long as you owned it more than a year, and neither you nor the charity pays any taxes on it. So that's pretty cool as well. You can do that via a donor-advised fund, or DAF, or you can do it directly to the charity. Either way is fine. It works the same way.

So, common mistakes that people make with charitable giving. Well, it's never a mistake, I suppose, unless you give to a terrible charity that's wasting your money or that's, you know, spending it on themselves or has too much administrative work. You should definitely evaluate the charities using something like Charity Navigator to make sure it's the best charity for the cause you're trying to support.

But other mistakes have to do with not understanding how the tax breaks work for the charitable deduction. For example, somebody might donate, you know, $12,000 a year to charity and not recognize that they don't have enough itemized deductions to actually take the itemized deduction, to actually use Schedule A. They're just taking the standard deduction anyway.

In that case, what people sometimes do is they bunch their deductions. They give their charitable giving for this year and for next year at the end of December, and then they can take all the deductions in this year. Then next year they take the standard deduction, and itemize the next year and standard deduction the year after that. This is kind of a bunching strategy, and that can make sense to do sometimes for some people.

You also have to actually keep some records. If you ever get audited, you have to actually prove that you gave it to charity. This is one of the great things about a donor-advised fund. If you just give your money in one lump sum, some appreciated shares once a year, that's all you have to keep track of.

Even if you dole that money out from the donor-advised fund to 30 different charities and on 60 different dates during the year, all you have to keep track of is that initial donation to the DAF.

For the most part, though, it's like anything else in personal finance. You want to pay attention to the complexity, make sure any complexity you're adding to your plan is actually providing more value than it's costing you, both money-wise and time- and hassle-wise.

Donating to charity is a wonderful thing. Make sure you understand how the tax deductions available for charitable giving work. There are many. Whether you're doing this directly to charity, whether you're using a donor-advised fund or a charitable foundation or a charitable trust, it's important to dive into the details.

But for the most part, anytime you're giving to charity, usually you can use it to lower your tax bill at the same time. Thank you very much. The government says they want you to support charities, and so they're going to subsidize that activity for you, which is wonderful for those of us who are charitable. And I encourage you to be.

The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax, or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.