“Generally Speaking” and the Avenging Derringer – Part 3

Now we consider the case of the doctors Dr. Doctor and Dr. Doctor. Jimmy Don Doctor works very hard and sacrifices a great deal to make it through medical school. After completing his training and starting a thriving medical practice, he marries a doctor, Dr. Jenny Dawn Proctor, a proctologist, who also has a thriving practice. Several years and several children later, Dr. Jimmy Don Doctor, the oncologist, and Dr. Jenny Dawn Proctor Doctor, the proctologist, read “Generally Speaking and the Avenging Derringer” on the internet. (This is really weird to them because they see themselves discussed in this post. Yes, it’s a running gag.) The two Doctors Doctor also read The Wealthy Barber all the way through, as recommended, and then return to chapter 5 of the “Barber” book to determine the appropriate insurance coverage for them.

At first, the two doctors decide that they need no life insurance at all. Each of them makes enough money to cover all living expenses, pay bills, pay child care, cover the funeral costs, invest for the children’s education, pay extra amounts to attack debt, and invest for retirement in the event of the other’s death. Then, they realize that they have not thought their situation all the way through. What would happen if they both died at the same time? They do some research and find that they can obtain a term life insurance policy, renewable and convertible, that pays only if they both pass away at the same time. Since the odds of this happening are lower than the odds of one of them dying, the premium on this policy is less than the premiums would be on two individual term life policies.

Only after this policy in the appropriate death benefit amount with a good company with a solid rating is in force, do they cancel their old whole life and universal life policies. This money will, in the event of their deaths, be used by the custodians they have designated to care for their children. The residual funds will be handled by a named trustee for the benefit of their children. THERE WILL BE A POINT IN THE FUTURE WHEN THEY WILL BECOME SELF-INSURED BY THE GROWTH OF THEIR ASSETS SO THAT THEY WILL NOT EVEN REQUIRE THE “BOTH-TO-DIE” POLICY.

Yes, there are people who do not need life insurance at all. Their assets have either grown to the point where they have become self-insured or the circumstances of their lives are such that they just do not need life insurance. The ever popular and oft-mentioned chapter 5 of The Wealthy Barber will help you understand these life insurance issues. So, Dr. Doctor and Dr. Doctor calculate the difference between what they now pay for the one premium and what they were paying in multiple premiums and arrange for this amount to go into investment accounts by automatic deposits.

BOOM!!!!!!!!!!!!!!!!!!!!

Sorry “Ohio”, but somehow I don’t think your efforts to advance the cause of spit wad technology are more important than my fascinating diatribe on “generally speaking.” As “Ohio” does his Walter Brennan shuffle on the way to the hospital and as I reload the avenging derringer, we will continue our discussion.

Generally speaking, life insurance policies on children with large death benefits are survival crutches. This is a touchy area and I want to tread very softly here. The primary purpose of life insurance is to take care of those I love who are alive after I am gone, not so that I will be better off after they are gone. An insurance salesman will sometimes say, “Don’t you care about your children? If you don’t get insurance on these children, you’re saying that you just don’t care about them at all!” They will sell you a policy on a child with a very large death benefit, if you let them pressure you into it. Just step back a moment to get some perspective and think about what is being said here. If I arrange to receive a large amount of money when my child dies, this means I really love the child? Imagine that you go home after buying insurance on your 5 year-old daughter with a large death benefit. You say, “Honey, I did something really special and loving for you today.” “Really, Daddy? What did you do?” “I bought a life insurance policy on you.” “What is that, Daddy?” “If you die, I get $50,000.”

The transfer of wealth that would occur from paying the premiums on a whole life policy with a high death benefit amount would come to several hundred thousand dollars. This is money I could bless the child’s life with. If I take just a small policy of perhaps $10,000 on each child, I am planning on dealing with this contingency, but I am also planning on doing the best I can for this child by building up more money to bless this child with. I am investing in the life of my child instead of investing in my best interests, if the child passes away. I am planning on doing the best I can for this child by building up more money to bless this child with. I am also, at the same time, prepared for this contingency.

The issue that is frequently raised, when you discuss insurance on children, is insurability. You should get whole life with a high death benefit, it is argued, so your children will have insurance when they grow up, even if they have a disqualifying medical problem. If you wait until they are older, they may not be insurable. The percentage of people who are insurable in their early twenties, is in the upper nineties. It varies somewhat over the years, but runs from 97% to 99% when the statistics on this are checked. Still, it is argued, what if the child is in that tiny group that cannot be insured? Look at it this way. When they come after you when the child is young to get you to buy insurance, they do not offer term insurance. They instead offer weenie tax insurance, whole life, an insurance with a high premium relative to the size of the death benefit. Term life insurance tends to assist wealth building, while whole life tends to resist wealth building, as I stated earlier. This insurance that you take for the child in order to guarantee insurability is an insurance that is not a tool that will help the child become financially independent. Intentionally buying whole life is a way to say that one’s life is just something to get through, to just survive in, not a place of excitement and achievement.

If the child’s health is at least good enough to get a job, he will have insurance through work even if he is uninsurable. The death benefit will not be large, but it would not have been too large with a whole life policy either. If his health is so bad that he cannot get a job, HE WOULD NOT BE ABLE TO PAY THE HIGH PREMIUMS ON THE WHOLE LIFE POLICY ANYWAY!

If you are offered coverage on your children at work for free, by all means take it. You take anything and everything that is free. A standalone life insurance policy, however, one not obtained through your job, should never be more than $10,000 to $20,000 per child, or just enough to cover a funeral. It is more efficient in the long run to invest the money that would have gone into paying high premiums.

Generally speaking, life insurance policies on children with high death benefits are survival crutches. George has 4 children that are insured with whole life policies with large death benefits. He has just read “Generally Speaking and the Avenging Derringer” in a blog post. (This is really weird to him because he sees himself discussed in this post. This running gag has just about run itself to death.) He now understands that, generally speaking, life insurance policies on children with high death benefits are survival crutches. He has also only this week discovered that there is a rare disease that has been running through his family for generations. It hits a generation and skips two generations and then hits a generation again. (My family has always had a problem with diarrhea running in our genes.) His doctor has run tests and has determined that there is a high likelihood that 2 of his children will become ill with this rare disease and may not survive childhood. The doctor can not discern which 2 children will be affected. Generally speaking, life insurance policies on children with high death benefits are survival crutches, but George decides that life insurance policies on children with high death benefits are not survival crutches with the circumstances that operate in his life.

Well, we are almost through and………boy I’m tired……………..I must confess I’m ………….

having……. a …….. hard time ………….keeping my eyes open………… Just a little …….. …..

more…………and……..we’ll…….be………through………………I………………………………

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ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ

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Huh! What! Oh! I fell aslee…….. Well, I wouldn’t be a man of honor, if I didn’t do what I said I’d do!

BOOM!!!!!!!!!!!!!!!!!!!!

Sorry folks, I have to rush to the hospital! I caught myself sleeping and had to shoot myself in the foot!

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“Generally Speaking” and the Avenging Derringer – Part 2

Generally speaking, mortgage protection insurance and burial policies are survival crutches. It is simply more efficient in the long run to carry enough term life insurance to pay off all of your debt including the mortgage, cover the cost of the funeral, and provide the means for a comfortable living for your spouse and dependent children. Esther is a middle-aged widow with health problems that prevent her from getting term life insurance. She has the mortgage protection insurance that she was talked into taking after her husband passed away 10 years ago. She has the “weenie tax” insurance that she bought at a funeral home called a burial policy. These types of coverage tend over the long run to lock the purchaser in the survival mode by leaving less money to invest for the future. Esther has no insurance other than these two inefficient crutches and cannot get any other insurance coverage. Esther has read “Generally Speaking and the Avenging Derringer” on the internet. She now understands that these two coverages are, generally speaking, inefficient crutches. (Reading this post is really weird to her because she sees herself discussed in the article.) Generally speaking, these two expenses are survival crutches, but she decides that these are not survival crutches for her with the financial factors that exist in her life.

“Minnesota”, you’re gonna be putting a tourniquet on your ankle in a minute if you keep that up. I saw you journey to Snoreville for just a second. I have let you slide twice now. And “Ohio”, you have gone to the bathroom 3 times now while I was giving this scintillating lecture on “generally speaking.” Do you think that maybe you need to see a doctor about that? No, not that. I’m referring to the wart on your nose. Just kidding.

Now we consider the case of Mark, who has a whole life insurance policy. Mark is a Thirtysomething who reads that term life insurance is, generally speaking, wise, and that whole life and universal life are, generally speaking, unwise. He immediately cancels his whole life insurance. This action is, specifically speaking, just plain blankety blank unwise! Eighteen months later, Mark has still done nothing about getting term life insurance. On his way home from work, he is killed in an auto accident. The consequences to his family are financially catastrophic. Generally speaking, whole life and universal life are weenie tax policies and survival crutches, but specifically speaking, you must get the term life policy in the right amount with a company with a solid rating in force first before you cancel the weenie tax coverage. If your health does not permit you to get term life insurance, then you keep the insurance you have and thank God for it.

BOOM!!!!!!!!!!!!!!!!!!!!

Sorry “Minnesota”, but I wouldn’t be a man of honor if I didn’t do what I said I’d do. I caught you in a nod and shot you in the pod. While “Minnesota” hobbles off to the hospital and while I reload the avenging derringer, we will continue our discussion. And “Ohio”, I see that you’ve taken the book with you to the bathroom. Very good. And I wouldn’t light that cigarette, if I were you. There might be a ’splosion, as Ricky Ricardo would say.

Generally speaking, the following items are survival crutches: repair contracts, extended warranties, cash per day of hospitalization coverage, cancer policies, towing coverage on auto insurance, charge guard on credit cards, credit life insurance and credit disability insurance on finance company accounts, rental car reimbursement coverage on auto insurance, and carrying full coverage on old vehicles with low book value. A young buck and a young doe just starting out in life together would be wise to cut out all of these weenie tax amounts. They would then invest the money that would have gone into these inefficient crutches into an emergency fund until it is sufficiently large to cover the things that go wrong. Then, they would put part of it in the emergency fund and invest another part of it in their future. They would invest in their future by putting money directly into investments and/or by attacking debt.

Orville and Sonia, however, are not a young buck and a young doe. They are an elderly couple who will not be able to invest these amounts over many years to build up retirement wealth. Their health is such that they do not get around very much. They are not wealthy, but the financial resources they have permit them to do what they want. There would be no real long term value for them in cutting out these “crutches.” Generally speaking, each of the items listed is a survival crutch that goes to make up the total weenie tax that individuals or families pay over the course of their working lives. But for Orville and Sonia, these items are not survival crutches because it is simply too late in the day for them to benefit from cutting these items out. (And it would probably just hurt their feelings, if you tried to explain this to them.)

“Ohio,” are you going to read the breathtaking tale of “generally speaking” or are you going to make giant spit wads and try to get them to stick to the bathroom ceiling? What’s it going to be? Remember, I still have my hand on the avenging derringer!

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“Generally Speaking” and the Avenging Derringer – Part 1

When I suggest that something is a survival crutch, I am saying that “generally speaking” it is a survival crutch. For most people in most situations, it is a survival crutch. For example, generally speaking, it is better in the long run to accept a higher deductible on an insurance policy. You pay a lower premium. The amount you save for a year is usually more than the difference between the lower deductible you would have paid and the higher deductible you would pay now. But what if you have a deductible on a health policy and you are in bad health and have to go to the hospital several times a year? Depending on how the deductible is applied, you might decide that paying more money for a lower deductible is not a survival crutch in this case. If the deductible is applied to each stay and does not apply to the accumulated total for the year, you might reason that paying more for a lower deductible is justified in this particular circumstance. Generally speaking, paying more money for a lower deductible is a survival crutch, but you decide it is not in this specific instance. You have to apply your own judgment case by case as to whether or not something is a survival crutch.

Generally speaking, as we continue this discussion of “generally speaking”, it is, generally speaking, going to be boring, generally speaking, hence, the mention of the “avenging derringer” in the title above. I once led the singing at a very friendly church. We would do a peppy worship chorus at the beginning and have everyone shake hands while we sang. This was intended to last for 2 minutes. After 22 minutes and 57 repetitions of “I Want That Mountain”, I would have to shoot someone in the foot with my little derringer to break up the fellowship fest so we could get on with the service. I have a tiny gun and I will use it! If I see you falling asleep, Bam!, right in the foot. It will not kill you, but it will mess up the carpet. The “generally speaking” discussion, though boring, is monumentally important. If you do not grasp this really well, you could do something that would hurt you and your family very badly. So remember, I am watching and the reader caught in a nod will be shot in the pod!

Generally speaking, taking whole life insurance or universal life insurance rather than term life insurance is a survival crutch. It is simply more efficient in the long run to pay the much lower premium for term life and invest the difference from the higher premium you would have paid for whole life or universal life. Universal life and whole life are, generally speaking, “weenie tax” life insurance. Both types of life insurance policies have inefficient cash value accumulation features built in. “Weenie tax” life insurance tends to resist wealth building, while term life insurance tends to assist wealth building. Term life is so much lower in premium cost that you can accumulate a lot more money by taking term and investing the difference. You must, of course, go ahead and actually invest the difference. Today, a lot of people know about this strategy, but only execute one half of it. They take term life insurance, but just blow the difference.

You need to set up a way that is as automatic as possible to invest this difference into your future either directly into an actual investment or in a debt destruction engine. It is wise to pay a little more to add renewability and convertibility to the term life policy. You will still pay less than you would have for whole life or universal life, but you will be able to renew or convert, if necessary. Renewing refers to renewing the term after you come to the end of the term. If you have to, you can renew the policy when you have the renewability feature included in your policy. Converting refers to being able to convert the term life policy into a whole life policy, if necessary. “But, I thought whole life was bad?” you say. Generally speaking, whole life is “bad,” but there are certain circumstances, explained in the oft-mentioned chapter 5 of The Wealthy Barber, that would make it beneficial to convert.

So, generally speaking, it is wise to take term life insurance that is renewable and convertible rather than whole life or universal life. Generally speaking, taking whole life or universal life is a survival crutch. However, Bill has developed a health problem that prevents him from getting a term life insurance policy. The whole life insurance bill has now is the best insurance in the whole world because he cannot qualify for any other insurance. Generally speaking, whole life insurance is a survival crutch, but whole life insurance is not a survival crutch for Bill in his particular circumstances.

You see how spine tingling exciting this “generally speaking” discussion is? By the way, I saw you there in Minnesota. You started to nod off didn’t you? I’ll let it go this first time. And you, yes, you in Ohio, you put the book down and went to the bathroom. When you came back, you lost your place and started reading at “spine tingling exciting” and missed the whole exhilarating discourse on term life insurance! Generally speaking, this would be the moment when I reached for my derringer and exacted retribution, but I’m going to let it slide for the moment.

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The Survival Crutch – Part 3

Insurance Man: “Let’s talk about life insurance. Which is better, whole life, universal life, or term?”

Prairie Chicken: “I need insurance through my whole life. It would be stupid to take something that expires in 20 years. What happens at the end of the 20 years if I’m not insurable? I would rather pay the higher premium to make sure I can pay for my own funeral at the end.”

Eagle: “Taking term insurance is another way to become self-insured. If I pay a smaller premium, and take the difference between the lower premium I now pay for term life and the higher premium I would have paid for whole life or universal life and invest it in a disciplined manner over the 20 years, I will probably have an estate to pass on to my heirs at the end of the term. Even if I am uninsurable at the end of the 20 years, I will have, most likely, become self-insured with my own asset values.”

Please Note: (It would be wise to take the added precaution of buying term insurance that is renewable. You would pay just a little bit more for renewability. If things go wrong and you are not self-insured at the end of the term, you will be able to renew the policy for another term even if you are uninsurable. You should carefully read and understand Chapter 5 of “The Wealthy Barber” by John Chilton before making any kind of life insurance decisions. He discusses the importance of getting term insurance that is both renewable and convertible. He explains the decision-making process involved in determining who needs to be insured, what kind of coverage is required, and how much the death benefit ought to be.)

Eagle: “When you take whole life or universal life, you are saying that you believe the best you can do is to simply exist where you are barely holding your own against the things that threaten you. It is your goal to survive, simply that and nothing more. You are not planning on achieving financial independence. You are planning in advance on being a flat-busted broken down mouse. And you are structuring your financial life so as to make your mouse plan succeed.”

And so the discussion goes all day long. Doctor NaziSwinehart and the Insurance Man review the results of the experiment at the end of the day. They think about developing a gas that could be inhaled by millions of Americans to cause them to think like Prairie Chickens. This would cause chaos and inefficiency and would weaken the country. This would cause millions of people to be enslaved to debt and never achieve financial independence or do anything exciting with their lives. They capture many other Americans over the next few weeks and finally realize that there is no need for such a diabolical plot because MOST AMERICANS AND MOST CITIZENS OF THE INDUSTRIALIZED NATIONS RUN THEIR FINANCIAL LIVES LIKE PRAIRIE CHICKENS ALREADY.

A crutch is something you lean on to support yourself. What if you realize you are in the habit of leaning on something that is really unnecessary? What if you could fly up high like an eagle and look down on the effect these “crutches” have on your life and see the impact over the decades, and you could realize that they did not help you at all in the long run? They actually hurt you and transfer your wealth to someone else. These are false crutches. There are, generally speaking, better ways to take care of the problem of surviving than using these “survival crutches”.

WHEN YOU BUY SURVIVAL CRUTCHES, YOU TRADE YOUR FUTURE FINANCIAL DESTINY FOR THE ILLUSION OF SECURITY.

WHEN YOU CUT OUT THE SURVIVAL CRUTCHES, YOU TRADE THE ILLUSION OF SECURITY FOR YOUR FUTURE FINANCIAL DESTINY.

THERE ARE TWO PARTS TO THIS: CUTTING OUT THE SURVIVAL CRUTCHES AND MAKING SURE YOU DO NOT JUST BLOW THE MONEY YOU SAVE. IF YOU CANNOT PRACTICE BOTH PARTS, THIS WILL NOT DO YOU ANY GOOD.

The Weenie Tax

There are many more survival crutches that you will learn about in other posts and in my free books. An understanding of the Survival Crutch leads to the concept of the Weenie Tax. If you have never heard about any of this, you are not a weenie even though you are paying for these unnecessary survival crutches. You did not know and had no way of knowing.

But if you had heard about this and thoroughly understood it and still did not want to cut the survival crutches out of your life because of fear or complacency, you would be a bona fide weenie. “It’s too much trouble. I don’t want to mess with this! Just pay the man! I’m supposed to believe that I can do something to shape my destiny? Yeah, right!” If you are bewildered, confused, lazy, and pay all these amounts anyway, you have rendered a tax against yourself for being a weenie. The total benefit you have deprived yourself of because you are a weenie is your Weenie Tax.

Important Warning

NEVER, NEVER, NEVER, NEVER, NEVER JUST “HAUL OFF” AND CANCEL LIFE INSURANCE COVERAGE WITHOUT MAKING SURE YOU HAVE THE OTHER LIFE INSURANCE THAT YOU WANT TO REPLACE IT ALREADY IN FORCE. For example, if you have a whole life policy or universal life policy that you want to replace with a term life policy, make sure you have the term life policy with a company with a solid rating in force before you cancel or cash out the old policy. “There is safety in a multitude of counselors.” Speak to a host of advisers and make sure you understand what you are doing before you make a change like this.

And remember, you must read and thoroughly understand chapter 5 of The Wealthy Barber by John Chilton before you make any decisions about life insurance. This book is the perfect primer for anyone trying to get a basic grasp of personal financial planning. It is easy to understand and only has 10 chapters. You should read the whole book and then come back to chapter five to review the information about life insurance decisions.

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The Survival Crutch – Part 2

Prairie Chicken: “When I see $34 a month, I see $34 a month! It’s not $408 a year, not $2040, not $1 million, nor $6 million! It is $34! It is $34 and nothing more!”

Eagle: “Now that I see things with an eagle perspective, I see every multiple of $34 a month that could have gone into an investment stream throughout my working life as costing me from 1 million to 6 million dollars. Even if I think of the cost of each $34 a month as being, not 1 million to 6 million, but “just” 1 million dollars, a staggering transfer of wealth takes place over my whole life. When I write a check for $34 a month throughout my adult life, “only” $1 million disappears from my financial future. A check for $68 a month (2 X $34) vaporizes $2 million from my future destiny. A check for $102 (3 X $34) a month annihilates $3 million. When I write a check for $340 (10 X $34) in a month, I see $10 million in my mind being burned up in a huge bonfire off in the future.”

Prairie Chicken: “When I write a check for $340, I can’t see anything because of the tears! And I can’t see how $34 is $1 million and I can’t see how $340 can be $10 million! $34 is $34 and $340 is $340! You’re the kind of person who gets everybody’s shorts up in an uproar with all kinds of “seize your destiny” foolishness. It’s better to just “pay the man” and forget it. Go out and buy some lottery tickets and hope for the best. What kind of imbecile would believe that $34 a month could make a $1 million difference? And you are not even thinking about what would happen if you had more than one claim. You could have several claims during that 5 years that you say would cost $2040.”

Eagle: “OK, let’s look at that. I pay $2040 over the 5 years to get a deductible that is $250 lower. You are right to say that there could be more than one claim during these 5 years. How many claims would I have to file in 5 years to get my money’s worth out of this? Divide $2040 by $250 and you get over 8. I would have to file 8 claims in 5 years to get my money’s worth out of this. What would happen if I filed 8 claims in 5 years? My insurance would be cancelled! It is impossible then to get my money’s worth by paying $408 a year for $250 of potential value.”

Prairie Chicken: “I’m glad everybody isn’t as stupid as you are. If you file a claim, how would you come up with the extra $250 for the deductible?”

Eagle: “I would be saving $408 a year on my auto insurance. This money would go into a pool, so to speak. I would have to be disciplined enough to save the money and not blow it since I would have more money to spend each month. The pool grows over time. When something goes wrong, I pay for it myself. The money that is not spent on things that go wrong is invested and grows over the decades. And this would not apply just to paying more money for a lower deductible. I would not take towing coverage on my auto policy and I would not take death, dismemberment, and loss of sight coverage on my auto insurance. I would not carry medical insurance on my auto policy. The hospitalization insurance that I carry is in force whether I’m in a car or not. Special coverage tacked on to an auto policy is unnecessary. I would not carry coverage on audio equipment or full coverage on older vehicles with low book value. I would become my own insurance company FOR THE LOWER END OF MY LOSS. In other words, I would buy coverage for the higher end of my loss, but I would cover the lower end of my loss myself with my own money. The money I saved by not taking this coverage would go into my pool. I would pay for the things that go wrong out of it. I would invest what was left. Over the decades, I would become more and more self-insured.”

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The Survival Crutch – Part 1

Suddenly, you realize you are inside a Mel Brooks film. Brooks is a mad scientist evilly cackling in a contrived German accent about the dastardly deed that he is about to perform. “Why am I doing this?” he shouts. “I don’t know!” You are in a laboratory in the dungeon of a Transylvanian castle strapped helplessly onto a stretcher. You have a metallic beanie cap on your head with wires running from it to an ominous machine with sparks loudly hissing all around you. The machine is being revved up in preparation for the diabolical experiment to come. Wires run from the machine to another metallic beanie cap on the head of an eagle strapped onto another stretcher. “Now, the transfer begins!” shouts Mel as he pulls down a huge lever. After several blinding flashes accompanied by the smell of roasting human hair and burning eagle feathers, you feel a curious surge of power into the top of your skull. “What madness is this?” you shout as you pass out in pain.

When you regain consciousness, you are being carried on a stretcher into a room with a sign over the door: “Torture Chamber”. You are taken into the room, taken off the stretcher, and you are sat in a chair. Before you stands the most terrifying sight known to man, an Insurance Man! He is talkative, friendly (in a fake, gushing way), overbearing, and speaks through 12 square yards of teeth. “Doctor NaziSwinehart has asked me to help him with an experiment he is conducting.” As the Insurance Man speaks, he is interrupted by the appearance of another hapless soul being carried into the room on a stretcher. The Insurance Man continues: “The two of you have been chosen for an experiment which will help us figure out how to destroy the corrupt Western democracies. One of you has had the neural engrams of an eagle infused into your brain. The other one has had the engrams of a prairie chicken infused into your brain. One of you now has the perspective of an eagle. The other has the perspective of a prairie chicken. Let the experiment begin!”

You, the “eagle” person, and the “prairie chicken” man are sitting in chairs side-by-side looking at the insurance policies that the Insurance Man is sliding toward you on a table. “First, we will look at automobile insurance. Prairie Chicken, yes, I am talking to you,” the Insurance Man says talking to the man seated beside you. “Prairie Chicken, look at this comprehensive, collision policy on your car. If you are willing to pay an extra $34 a month on the premium (12 monthly payments a year), I can lower the deductible from $500 to $250. What do you want to do?” “That’s a stupid question, if I ever heard one!” says the Prairie Chicken. “I’d be paying $34 a month so that I will have to come up with $250 less if I file a claim. I am paying $34 for $250 of value. That’s a 7 to 1 return on my money! Of course, I’d pay more money for a lower deductible. What idiot would turn down a deal like that?”

Then, the Insurance Man looks at you, the eagle. “All right, Eagle, now it’s your turn. What would you do?” “It’s strange,” you say. “In the past, I might have paid more money for the lower deductible, but now I don’t think I want to do that. Let’s see, $34 a month for 12 months comes to $408 a year. I would be paying $408 a year to protect myself against a $250 loss.”

Prairie Chicken: “It’s not $408 a year. It’s $34 a month. It’s $34, not $408!”

Eagle: “Actually, you are right when you say it’s not $408. If you spread it out over 5 years, it would be $2040 to protect myself against a $250 loss.”

Prairie Chicken: “It’s not $2040. You’re looking at this all wrong! It’s just $34 a month!”

Eagle: “Actually, you are right again. It’s not $2040. It’s somewhere between 1 million and 6 million dollars!”

Prairie Chicken: “They really did fry your brain, didn’t they? How can $34 a month be 1 to 6 million dollars?”

Eagle: “You see, I used to think like you. A prairie chicken barely gets off the ground and only sees what is immediately around him. If you only think of the cost this month, it is just $34 a month. But an eagle flies up high and sees what lies out far ahead. $34 a month for 12 months is $408 a year. If I invested $408 a year in aggressive stock mutual funds throughout my entire working life starting at age 25 through age 70, I would accumulate somewhere between 1 million and 6 million dollars (depending on the return I averaged and on whether or not the growth of the funds were tax shielded). Now that I think like an eagle, I see things differently than before. The cost of the coverage I carry is not just the amount that I pay each month. The real cost is what the monthly payments would grow into if this money were paid into an investment over time. So this $250 of protection costs me from 1 million to 6 million dollars over by entire working life. When I see $34 a month, I see 1 million to 6 million dollars.”

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The Power of Replication – Part 4

There are three other factors that function as barriers to replication: the deception of “business opportunity” hawkers, changes in market trends, and saturation. Many of the “opportunities” advertised in the classified section of the newspaper are scams, in my opinion. The area of vending machines, in particular, is one that you really need to be careful about. These opportunity hawkers know that there are large numbers of people who have not prepared for retirement who are desperate to find a way to use replication (even though they don’t call it replication) to prepare for retirement in two to five years. (You need to replicate yourself many times within about five years or less so you can then put large amounts of money aside for retirement each year, amounts like $25,000 to $75,000 a year or more, for about 10 years. And most of the money you invest will probably not be protected from taxes because it will most likely exceed the limits of what can go into IRA’s and other tax-shielded investment vehicles.)

These “business opportunity” hawkers will proclaim glowing tales about how you can keep creating additional increments and walk your business up to a million dollar enterprise. A lot of times, these “opportunity” sellers will get a one-time payment for this “amazing money-making vehicle”. Why would they sell this thing, whatever it is, for a one-time payment when they could simply do what they’re telling you to do and build this giant cash-generating machine for themselves? If what they’re saying is true, they could make a lot more money by just doing what they’re trying to get you to do than they could by getting a one-time payment for the so called “business opportunity”. This “industry”, business opportunity selling, preys upon the Working Schmuck Near Geezer, the working man or woman, 55 years old or so, who has done nothing to prepare for retirement.

A second barrier to replication that has to be avoided has to do with changes in market trends. Imagine that you had started a route of pay phones in the early nineties. What was happening right around the corner that would affect your attempt at replication? Cell phones, PCS, and the like were getting ready to zap you. As more and more people have cell phones, there will be less and less use of pay phones. You can invest your time, work, and money in replication and then an introduction of a new technology can wipe out the market trend that you were depending on.

A third barrier to replication is the matter of saturation. A wealth induction loop like ATM’s, for example, can work well during a particular stage of expansion until a certain level of saturation is reached. A point can be reached where a new machine produces very little profit or a loss simply because there are too many of these in a market area. Saturation is an important issue in MLM, as well. There are only so many people in a population who are seeking a business opportunity. Out of that group, there are only so many that will decide to enter your MLM organization. It is a finite number at any particular point in time.

The classic example that’s given for MLM goes something like this. Assume that only 5 people come into your down line. Now there are 5 people in the level just below you. Each of them tries to recruit new members and each signs up only 5 people.

In the down line two levels below you, there are now 25 (5 X 5). So you now have 5 (one level below) + 25 (two levels below) = 30 people in your total down line.

Each of the 25 (in the level two levels below) recruits only 5. Now there are 125 (25 X 5) in the down line three levels below. So now you have 5 (one level below) + 25 (two levels below) + 125 (three levels below) = 155.

If it had yet another level down, each of the 125 people (three levels below) would sign 5 people each. You finally have: 5 (one level down) + 25 (two levels down) + 125 (three levels down) + 625 (four levels down) = 780 in the total down line.

So if you make even just a tiny percentage of the sales of everyone in your down line, you have used replication to create a large continuing income. Many of these plans have built-in residual income opportunities. So, is there a downside to down line building?

When you have this many levels, the price of the product or service has to be elevated because so many people receive a “cut” out of its sale. Often, the only people who buy it are those who are in the MLM organization or sympathetic relatives and friends. The product or service may not really be competitive and a good value in its own rite. If it were being sold in the market place as a standalone product or service without the impetus of MLM marketing, would anyone buy it? How many people are exposed to this opportunity in order to get the 780 in your down line? It would vary, of course, but for the purpose of illustration, let’s say it is 10,000 in the case of a particular MLM organization. There are only so many multiples of 10,000 in a population. Eventually a saturation point is reached and new people coming in have a much more difficult time building their down line through all the levels necessary for them to make serious money.

Have you ever noticed that an MLM organization will receive a lot of publicity and you will hear from a lot of people you know who are involved in it and then, just five years later, you don’t hear any more about it? Very often, it no longer even exists. MLM tends to benefit those who come in early. Those who come in a little later have to work harder to build the necessary down line. Then those who come in very late really struggle to build the down line and usually only those who are high-powered salesmen-types can do it at this later stage. Those who understand this and like it are always looking for a promising MLM opportunity that is in its early stages.

But the issue is not just whether or not you can come in early enough to make money. What about those in your down line? Capitalism is a matter of having people who leverage on my efforts and having people whose efforts I leverage on. I am used and I use. But if I recruit people into my down line knowing that they will probably not be able to build a down line for themselves, I am not just using them. I am abusing them. A decent human being will take care of those who take care of him. So the matter of saturation means there is an ethical question involved in deciding whether or not to use MLM for replication.

Finally, it is important to have an exit strategy in place before you invest in anything, whether it’s a mutual fund, a stock, or some other kind of wealth induction loop. Map out a way and an appropriate time (based on a set of circumstances) to get out before you go in. As you plan your escape hatch, keep those you will use to replicate yourself in mind. Make sure your exit strategy also protects the interests of those whose efforts you leverage on.

You can see why I said that this approach to preparing for retirement can be fraught with peril. It is possible to build a large income-producing vehicle or organization in five years or less. Vast financial empires have been built with replication. There have been numerous entrepreneurs in there 30’s, 20’s, and even a few in their teens, who have replicated themselves as described above. If you have any time to work with at all, you can prepare for retirement by investing over time, but why not add the weapon of replication to your arsenal? If time has pretty well run out for you, then you may have no choice but to do your research and gather your grit and use the power of replication.

Who was the greatest practitioner of replication in human history? May I submit that it was Jesus of Nazareth? He replicated Himself in 11 guys. Each of these 11 guys was also a replicator. If you take everyone who calls themselves a Christian of all persuasions together as a whole, the organization that came out of His ministry is the largest institution, albeit sometimes having been corrupted, on earth. Whether you agree with Christianity or not, whether you like it or think it’s disgusting, the fact remains that its size and influence are testimonies to the power of replication.

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The Power of Replication – Part 3

“Where no ox is, the crib is clean.” Say what? This is a proverb in the Bible. An ox is an animal you use to get work done – hooked up to a plow, a wagon, or a tree stump (to pull it out). You use the ox to till the ground, to get production out, to make money. There are things and people already in your life or that you can bring into your life that can be oxen. Like any ox each of these people and things can create wealth for you, but makes a mess and is a hassle to deal with. There is nothing about replication that is clean, easy, or hassle free. You are out plowing and the ox pulls over to the side and runs over the fence. The ox is out grazing one day and meanders over into your neighbor’s field and destroys your neighbor’s crop. The ox leaves “Tootsie Rolls” in the stall where it stays. You have to clean up these deposits. The stall is the “crib” spoken of in the scripture. “Where no ox is, the crib is clean.” You have to constantly clean up after the ox, repair the damage it causes, maintain its environment, set its boundaries, and harness its power. Ox Rule: The only way you’re going to have a clean crib is to not have an ox. “Where no ox is, the crib is clean. But much strength is by reason of the ox.”

To replicate yourself or a unit of activity, you are going to have to do things that you don’t want to do. You are going to have to clean up after your ox while everyone else is relaxing after work. You might be on the phone talking to customers or potential clients while others are watching television. You might be promoting a nutritional product sold by an MLM network – going to meetings, sending faxes and e-mails, making sales calls, when you would have otherwise been at the golf course or on the lake. It is frequently this issue that prevents replication from being carried to a successful conclusion. You are not spending the money you make because you are saving it to acquire additional units of business. The only way to motivate yourself to continue is to have an image in your mind of what your future will look like.

You receive little gratification here and now. Few people, when it really gets down to it, can do this. Most of us can understand this concept and talk about it, but we are not really willing to grind away even for just two or three years for a future reward. This is one of the problems, probably the biggest problem, with replication. This is why it is important to use the advantage of time before you run out of time. If you fail to start early, you may end up having to pull off a major replication project late in life. It’s doable, but it “ain’t” easy.

With janitorial contracting, for example, you have to get people to do something that most folks don’t want to do. You have to motivate them to show up for work every night and to do the job right or your business will suffer. You have to pay them a low enough wage so that you can make money. You have to cover for people when they call in sick, just don’t show up without even calling, suddenly quit, or when you have to fire them. Are you really willing to do this? Do you even have the right set of skills and personality to do this? If you try to replicate by acquiring rent houses, for example, you have to deal with tenants who don’t pay their rent and some who tear the place up. You have to make your payments on the property even if your renter does not pay you. Anything that can benefit you will have its own set of attendant problems. Are you willing to contend with the Ox Rule? Yes, you can use replication “late in the day” to prepare for retirement, but IT IS HARD. So, whatever time you have left, squeeze every conceivable ounce of financial investing result you can out of it. Prepare for your retirement without having to use late stage replication, if it is at all possible.

The average entrepreneur fails 12 times before succeeding, as we mentioned earlier. You might very well run out of money, credit, health, or time long before you successfully manage to replicate.

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The Power of Replication – Part 2

Jeremy has now, as discussed in the previous article, replicated himself 10 times. He has 20 operators working for him and he profits from the labor of each person at the rate of 50% of what Jeremy would make if he were just running the one van himself. His replication factor is 10 because 20 operators multiplied times one-half or .5 is equal to a replication factor of 10.

But, and this is a big ugly butt like what you would find on a Sumo wrestler, he has to cover for his guys when one of them is sick. He has to supervise, manage, promote the business, keep records, fire, and hire, which is fine and is, of course, the price of success. “Me thinks”, says he (only because he always wanted to say “Me thinks”) “that I will accept a smaller replication in return for having someone else handle these matters for me”. He hires a supervisor from among the 20 operators and agrees to pay her one tenth of what each van produces in profit. The supervisor’s first assignment is to hire and train an operator to replace her since she is advancing into management. The supervisor makes four times what an operator makes and has to balance everyone’s sick days, vacations, hiring, training, firing, the whole mess. So his replication factor has dropped to 8 now: the 10 times replication minus the quadruple operator’s salary (the total net of two vans) paid to the supervisor.

So, if we add another crew of 20 operators managed by another supervisor, we add another replication factor of 8. So, if our Replicator, Jeremy Laramie, builds up 2 crews with 20 operators in each crew with one supervisor over each crew of 20, he has replicated himself 16 times. If he scales the heights and builds up 5 crews of 20 with one supervisor over each crew, he would have replicated himself 40 times. Then, he would hire a business manager to oversee the 5 crews and the 5 supervisors. If he paid him, say, 10 times what an operating van made, then his replication would back off from 40 to 30 (the 40 replication factor minus the salary of 10 times paid to the overall business manager). The business manager would probably be hired from the supervisors.

In real life, it would not work exactly this way. For an organization this large, there would be administrative people involved in payroll, record keeping, and other functions. And a supervisor might not be able to handle 20 people. It might require one supervisor for every 10 people. The replication factor might back down from 30 to 20 or some lower amount. And sometimes, it goes the other way. In some organizations, economies of scale are achieved by adding management people and administrative employees, and the replication factor goes even higher instead of going down. This example just serves to illustrate the basic idea of replication. If you look hard enough, you can find a way to replicate yourself.

If you did manage to replicate yourself by a large factor in 5 years or so, what would you do then? If you were like most people (of prairie chicken mentality), you would just live high and blow all your money. If you have the eagle perspective, you might expand your lifestyle a little, that’s perfectly legitimate, but most of the extra money would be poured into your future. You are going to spend the rest of your life in your future and want to make it large enough to accommodate your dreams.

Let’s look at another form of replication – that of replicating a unit of activity. I once, in 1997, looked into leasing an ATM. Buying a particular ATM would cost $15,000 or it could be leased for $3000 down. (It was, of course, not called a down payment, but it was money going out in a lump sum to initiate the lease, so that was what it really was.) If this activity made money and you operated it as a wealth induction loop, you would take most or all of the profit and save it until you could buy or lease another ATM and put it in another location. You would keep doing this until you had a large number of these set up in successful locations. At some point, you would harvest the profits for investing. In other words, you would stop putting most of the money into acquiring new units of activity and start putting most of it into your financial investments. By the way, I did not invest in ATM’s. This just illustrates the process. This would be a wealth induction loop that would grow by replication.

Another area in which people try to use replication is janitorial contracting. I looked into this in the mid-eighties. Most companies required a fee of $1000 to $2000 upfront. Then increments of business were purchased at the rate of 2 to 1. For example, $500 of business per month would cost $1000. $1000 of business would cost $2000. You would, of course, also have to purchase the equipment. Most of the janitorial franchises wanted you to start at just $500 of business a month to see if you would handle the account(s) appropriately. Then, if you worked out, you were allowed to purchase additional increments either by paying for it directly or by using your monthly profits to purchase additional accounts.

You would build this up until it was getting too large for you to handle on your own. Then you would hire someone. Then build up another increment and hire another person to handle it. If you are willing to recruit, hire, train, and motivate people to work for you, you can build a large organization through replication. This is again another example of a wealth induction loop that grows by replication. You can eventually hire supervisors and a manager to oversee the whole thing for you.

You can see the appeal of this for the Working Schmuck Near Geezer, a working man or woman, 55 years old or so, who has never done anything to prepare for retirement. Just wait until it is late in the day and then just do this. Right? Before we accept this notion, let’s look at what I call the Ox Rule.

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The Power of Replication – Part 1

Jeremy Laramie is a Working Schmuck Near Geezer, a 55 year-old working man, who has never made any preparation for retirement. He decides to use replication as a way to prepare quickly for retirement, a pathway, by the way, which can be fraught with peril. Over the last 3 years, he has tried unsuccessfully to start 2 previous businesses. He hopes that this third effort will work. If it does, he will be ahead of the national curve. On average, the average entrepreneur fails 12 times before she/he achieves business success. With replication, the “fragment of your life” employed is measured primarily in terms of time, not money.

Jeremy investigates a mobile oil change franchise. With good credit, he can put $3,000 down and purchase a mobile oil change van and a territory. The system uses a technology that most people are not familiar with and this concerns him. There are two tanks that contain the 2 types of oil required by most vehicles. There is one tank for the oil that is extracted. The same pump operates the vacuum system that draws the oil out through the dipstick and pumps it in through the oil cap. An oil change can be done much more quickly than the traditional oil change and the technician does not have to get under the vehicle. The oil used is a high performance lubricant used and promoted by several successful racing teams on high profile national racing circuits.

An oil change retails for 49.95. The franchiser gets 24.95 out of this, leaving a gross profit of 25.00 per oil change. There are, of course, expenses to be subtracted from the gross profit generated such as the monthly van payment, insurance, fuel and maintenance, promotional costs, and record keeping expenses. You “gotta do beaucoup” oil changes (you “gotta” blow and go, hump and jump, run and gun, and every other stupid rhyming phrase you could think of) to make serious money. And you still have to make the van payment if the business doesn’t make it!

It is claimed that the oil will last effectively twice as long as regular oil between oil changes (6,000 miles) and that the engine runs dramatically better on this oil which causes the business to grow by the positive “word-of-mouth” that occurs as the customers tell all their friends about the improved performance. The product is supported by a top quality website where customers can order oil changes. Operators are informed via a palm pilot-type device about the orders that are in their territory.

To make a long story medium length, he checks the company out every way he can think of. He goes to other cities and speaks to operators in those cities. He is determined to know everything he can before he makes his decision. Finally, he decides to take the plunge and dives into his new business. “Lo and Behold! Praise the Lawd!” It works. Quicker than you can say, “Dog my shucks!” he’s making so much money that he develops a hernia trying to carry it to the bank.

So, to make even more money, he works even longer and harder: 60 hours a week, 70 hours a week, 80, 90, 100, 110, 120 hours! No, he doesn’t. Instead, he replicates himself so that he can make more money without working more and more hours. After he gets the first van up and running successfully full time, he hires and trains an operator and pays him one half or 5 tenths (.5) of what he would make if he ran it himself. So he has replicated 5 tenths (1.0 – .5 = .5) of himself.

He then acquires another van and territory and builds another successful operation. He hires and trains another operator and pays her the same one half (5 tenths). Now he has replicated himself once (2 X .5). When he manages to get 4 operators working fulltime, he has replicated himself twice (4 X .5 = 2). He manages to ultimately get 20 operators working for him fulltime so that he has replicated himself 10 times (20 X .5).

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