Life insurance and your money, with Zac Townsend

Welcome to Complex Systems, where we discuss the technical, organizational, and human factors underpinning why the world works. Howdy for everybody, my name is Patrick McKenzie, better known as Patio11 on the Internet, and I'm here with my buddy Zach Townsend, who is currently the CEO of Meanwhile. So what does Meanwhile do? Meanwhile is a life insurance company. We...

are a fully regulated licensed life insurance company in Bermuda. Bermuda is something somewhat the insurance capital of the world. We can talk about why that is. We are, you know, full-fledged. We have an independent board and, you know, a chief risk officer and chief compliance officer and built a policy admin system and do all the things of a life insurance company from scratch.

And then what's unique about the company is that we have a go-to-market around Bitcoin.

So right now, this Bermuda insurance company is entirely in Bitcoin. It takes premium in Bitcoin, pays claims in Bitcoin, does our audited financials, our solvency calcs, all our regulatory filings in Bitcoin. And You and I might have a whole discussion about whether Bitcoin is going to be worth anything, but I think that basically what we do is we are using that both as a way to provide a critical financial service to

everyone who does think that Bitcoin will be a long-term store of value. And we also... Got to build a fully functioning life insurance company with policyholders, which is a pretty hard thing to do in dollars. So it was just a really fun way to learn and build in this. Ancient, boring industry. Mm-hmm. So the ancient pouring industry is a sub-collection of industries, and I think both of us are saying this in a...

somewhat jocular and joking fashion. I think the life insurance industry in particular has created one of the best things in the history of the financial industry, which is that term life insurance is a policy. It's an upgrade on civilization.

Just to scope our discussion somewhere, we were talking before the call on how there is a vast difference between life insurers, property casualty insurers, and health insurers. And for the benefit of people who haven't been in the industry, can you just sketch out why they are so different from each other? And then we'll focus most of our time on life insurance. Yeah. Well, I think actually the first thing that people probably know about or think about is property and casualty so

PNC is things like auto insurance, you know, homeless insurance, slip and fall insurance, professional liability insurance, director and office insurance. So basically all those liabilities that get created in the world, you know, related to. property or casualty. The distinction that is made in Bermuda I actually find really useful, which is they don't call it property and casualty and life. They call it general business and long term.

And that distinction is that most PNC contracts are for one year. So you buy auto insurance. You're buying it for a one-year term and then you either renew or you shop around and redo whatever. And then life insurance is long-term. So there's life insurance, there's annuities, there's long-term disability insurance, there's all this different stuff.

So that's the distinction. And then actually when you get licensed, whether it's In a state like Illinois or California or in a country like Bermuda, they tend to be entirely different licenses. And actually the actuarial math and the actuarial training is different.

Even if you're a member of the Society of Actuaries, which is the U.S. Professional Association around actuaries, you can either be an expert and take a bunch of tests around PNC or you can be an expert and take a bunch of tests around life insurance.

then health is completely off on its own. I presume it must be a sort of embedded payment system than it is a true insurance offering, right? I think that's right. I mean, in theory, where all these things have in common is that we all each of us or every business we have this like little thing we're walking around with which is like a negative number on our personal balance sheets and we just don't think about it but that's like the liability that some risk is going to happen.

And when you think of it that way, the way The expected value of that liability might be pretty small, but the absolute value of that unlikely event might be very high. So the reason you buy insurance from a personal perspective is to cover off this little liability you have on your personal balance sheet. And then how that works in the aggregate, just say life insurance, right, is We're all going to die, but we don't know when.

And it could be tomorrow if there's a very small number or a very small probability that it's going to be tomorrow. But it could be tomorrow, or it could be next month or whenever. And what life insurance does, whether it's term or whole or whatever, is it says for any... specific individual, we don't know when we're going to die. But when you start to aggregate the number of individuals off and you basically through

the law of large numbers, you get to have a pretty strong statistical sense of how many people in a population are going to die. So although I don't know when I'm going to die, if you make a thousand similarly situated people... As me, you can say, okay, well, I don't know, two of these thousand people are about to die.

or $20,000 of $10,000, and then you can sort of like pool that risk together. And the same thing is sure of homeowners, insurers, the same thing is sure of auto, is that like risk pooling against catastrophic, but low probability events is an important civilizational event.

The differences between term life and whole life are that term life lasts a certain term, like 10 years or 20 years or 30 years. And particularly if you're young, you're very unlikely to die in the term of 10 years or 20 years or 30 years.

So the ratio between the amount of money you might pay and the payout you might get is very high so i forget offhand i think i pay maybe like a thousand dollars a year and have two or three million dollars of coverage on my life right because i'm i am eating less young every day but i'm you know relatively young relatively healthy and i'm like gonna die in the next 20 years

And just as a finger to the wind for people, if you're in your 20s or 30s, you can get a million dollars in coverage and term life for low tens of dollars a month in the United States. Yes, that's right. it's a wonderful product you should have more of it than you think you need well you by the way yes you should have more of it than you think you need although you can't have it unlimited amount

Yeah. Life insurance companies also don't like it when you suspiciously want to buy a huge amount of life insurance on your life vastly disproportionate to your wealth. or your potential income. Can I give my quick

Use your skies to life insurance for professionals in the tech industry. One, you definitely want to have term life regardless of other financial decisions you're making unless you're so rich that no possible expiration timeline for yourself would matter to your family or causes that you care about. Two, it's very possible that your employer offers insurance, either life insurance or professional disability insurance through work.

That might or might not be a thing that you want to buy, but definitely have policies outside of your employer. The reason being that you can lose your employment as your health declines in a variety of scenarios, but where you don't... simply get to buy a car and then also the pricing tends to be better outside so it's And so...

To avoid both of those things, get a policy in your own name, which the insurance company will have a responsibility to rather than the company you might no longer be working for in six years. When you're thinking of a 20 or 30 year policy term, how long do you have it for?

In the tech industry, if you're thinking about this question and can't come up with a number, 20 years is a fine number to think of. But you probably should optimize less than that and just make sure you have something versus nothing. And similarly, how much should it be for? General rule of thumb is like 25x times expenses.

for what you think your family will need and every time that you have a major increase in in your outgoings over the course of the next couple of decades of your life when you have a new addition to the family or you otherwise become liable for something, you can get a new policy. Or if you know what your plans are for the next couple of years, just assume that you know that your expenses are going to increase and then map it out from there.

And then my final micro tip, which is specific to the tech industry, due to that factor about underwriters really not wanting to give an excessive amount of life insurance coverage, to prevent people from making poor decisions by incentivizing those poor decisions. you might need to sort of argue through your agent to an underwriter that you should be allowed more insurance coverage than their standard rule would allow you to get.

two magic phrases if you are in the industry for this are one i work in the tech industry and might have options exercise will help get an underwriter to saying yes to approving you for more coverage than your current income would necessarily support. And the other one is I have a closely held business.

which for similar reasons gets them comfortable with, okay, the business might have outgoings or need to pay out a partner or similar. And then, all right, I can see a way to approving this person for a few more millions of dollars of coverage than I would ordinarily.

So that is my quick user's guide. None of the following was insurance advice, which of course I'm legally prohibited from giving because the law says that only people who have clicked through the requisite number of screens in their annual training are allowed to sell insurance. Yeah. The only micro addition I'll have is actually the first time I bought Term Life was around the time that my wife and I got a mortgage.

And our theory around that is we have this new 30-year liability that's dependent on our incomes. And if one of us died, that would be quite catastrophic for our ability to pay the mortgage payments. And conveniently, a 30-year term life aligns perfectly with our 30-year fixed income mortgage. But in general, it's quite inexpensive if you're young.

is providing a real service. I mean, one of the things that's tough, I think, about the mental model for term life is the most likely scenario is that you live and then you just never gonna pay out so people can feel like well what did i pay for and we're just not i think well equipped to think about the protection like you're protecting yourself against this small probability like very high

terribleness thing that could happen and it is definitely worth tens of dollars a year hundreds of dollars a year the reason i give my annual exhortation to people who follow me on twitter to make sure that they have term life in force is i've been around the industry for 20 years now and am i social individual although a bit of an introvert and so i've had conversations with a lot of people who work in tech and ambiently know a lot of people and then actuarial mouth

20 years times knowing a lot of people means I know some people who passed away with young families and in some cases ended up in a pass the hat situation. Pass the hat for people who don't understand this idea. Before this risk was moved into the financial industry, it was often dealt with in a semi-socialized fashion via churches or similar, where if someone passed away, a community leader

would pass a hat around the room and everyone would put in money to support the family of the person that had passed away. And that's where the pass the hat idiom comes from. These days it's probably GoFundMe or something. But regardless of that, you... probably don't want to be in a circumstance where in

With a very low probability, your family will in the future depend on the kindness of strangers and or on tapping your extended social network to do a GoFundMe. And so life insurance can formalize that and make it much more predictable for you. And it will. And the vast majority of teachers, you will lose your bet with the insurance company that you die early and be very happy because you will still be living and your family will still see you at the dinner table every day.

Exactly. Basically, the big tax benefit of eternal life is there's a tax-free debt benefit or a base income tax, general income tax-free. And then the reason that people buy permanent life insurance policies like...

whole life and the point of whole life well they're called permanent life insurance because they're permanent and since you will eventually die there will eventually be a payout so these are much more like intergenerational and in product and they... in some ways they're more Okay, so then whole life products tend to just be very straight down the middle. It lasts your whole life. You put in a certain amount of money. Maybe you're paying for...

10 years, maybe you're paying forever. And then whenever you die, your beneficiaries get a certain amount of value. And then there's more complicated variants on whole life like universal life or indexed universal life, which are like indexed universal life is like indexed to the value of the S&P 500 or something like that.

And the two big reasons that people do that Well, one, I should say, if you're running a relatively small policy, these tend to not be very... good you know you didn't probably just get like better returns and the S&P 500 directly there's there was this whole movement in the 60s and 70s which is like don't buy permanent life insurance by term and like invest the difference in the premiums as you become wealthier and you've really like tapped out and I'm

You've maxed out your 401k and you have done this tax vehicle and that tax vehicle. The reason that people end up buying permanent life insurance policies is the contents of permanent life insurance policies. grow if they're structured properly they there's like a value inside the policy and that value sometimes called the cash value or the surrender value. That value is growing and accumulating tax-free. You can withdraw from the policies in a tax-managed way if you want.

Well, the big thing you do is you can take policy loans against your policy and those are tax-free. So what people will do is Particularly if you have investment strategies, this is not true for most people in tech, but you have investment strategies where there's a lot of intermediate income tax.

right so you're doing high frequency trading or you're don't let me a partner in a high frequency trading firm or i don't know cryptos open farm so at the end of the year when you get your k1 you've just like you've lost half your returns to income tax because it was all this short or i should say you lost all your your returns to short-term capital gains tax So what people will do is you take that LP commitment and you wrap it inside a life insurance policy.

And then it's essentially accumulating tax-free. And then you can, when you need value from the policy, well, you die and then your kids get the, you know, or whatever, your loved ones get the policy. Or you can take a tax-free loan against the policy. And then there's a lot of structuring that people do where like you front load premiums into a policy and then like you have 10 years where you're not paying a policy and then you can like, oh my wow.

But to go back to the very beginning to say these tax rules were written in the case of life insurance for the reason that the government wanted people to be able to plan, so that their kids wouldn't start if they died. and then what gets built around that is like products that shoot

different levels of wealth all the way up to the wealthiest people in the world so that you can protect assets or investments inside of life insurance policy. And then similarly with annuities, What happens is almost no annuities in America actually annuities. That means that most people don't opt to turn the value of their annuity into a stream of cash payments between now and when they buy.

instead like you patrick or me like i don't know approximately 40s or 40 or something you you you've again you've matched out your 401k and you've done your backdoor IRA or whatever. And then what you can do is you can buy an annuity and then that annuity is like a 401k and the contents of that annuity are compounding tax-free. Over time, maybe you have a wide range of different investment strategies that you can put in them.

And then you don't actually, when you turn 65 or 75 or whatever, you don't turn, you don't annuitize them. Instead, you begin withdrawing them, which you can do after 65 on a tax advantage break. So it's like another investment account. The challenge with them is that you're, again, the principal agent problem is your agent wants to sell you something like needlessly complicated that might be high margin for that. I know what you want.

is something that is straight down the middle and not particularly complicated. But I would say as people's tax and estate planning gets more complicated, life insurance and annuities tends to be a part of that tax and estate plan.

My understanding is that there are some insurance lines where it is less risk pooling and more just enforced savings and similar. So for example, dental insurance, and I believe auto insurance generally believes that they're going to pay the premiums back to the customer that paid the premiums rather than distributing some to the unlucky winner of the dental lottery. Yeah, I think in the case of auto, your loss ratio, that is the ratio of payouts to pay runs.

it's such a competitive market it like does approximate to 100 and then you make money through the warren buffett style like you've paid The policyholders have paid you to hold their money for a certain amount of time, and that time itself is valuable, and then you can go make investments with it. And then at enough scale, that float is so significant.

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Mercury is a financial technology company and not a bank. Banking services provided through Choice Financial Group, Column National Association, and Evolve Bank & Trust. Members FTS. you do you mind if i geek out for a moment on years that people would know if they read more insurance regulatory filings

So the loss ratio is the payouts in a year divided by premiums I collected for the year. Premiums being what you as the person buying the insurance pays the insurance company typically periodically. And the combined ratio is, so the loss ratio only considers losses, the combined ratio considers losses plus claims expenses. right so if they need to send an adjuster out to your house to

figure out how much the hurricane actually costs. Or if there is a back and forth with regards to a selection of company to haul away debris, then the people doing that back and forth in the insurance company need to get paid. And so that goes into the combined ratio.

one of the things that insurance regulators do as a primary activity is to manage those ratios. So they don't want insurance to be too profitable. And so particularly in certain lines, as the loss ratio or combined ratio gets... further away from 100%, the regulator gets more concerned about whether the insurance company is pricing incorrectly.

And so they would like it to be enough of a margin such that the insurance company can absorb some variation risk and get a bit of a profit, but not so much that they are not paying out claims. So I think one of the things that I think... People uninvolved with insurance companies most believe is that the job of an insurance company is to say no to all the claims all the time. Insurance companies never pay off for anything. And that is just incorrect.

extremely regulated, extremely deterministic with regards to whether they will pay out claims. They're often annoying to deal with, depending on the particular company, but somebody files a quarterly report with the insurance regulator that will say down to the penny what the total number of claims paid out for the quarter were. That is all absolutely correct. And then I will say...

that all of those ratios and the way of thinking about that are much more, is very much a like PNC there. So in some ways, life insurance, Yeah, so let me just completely agree with that. And then, like, how is progressive or AAA or whatever?

thinking about and how the regulator is thinking about them is definitely like loss ratios and combined ratios and that's the financial and most of the regulatory reformers. When you get into life insurance, and this is an endlessly merry topic right you're you're actually operating much more like a bank but you're you're somewhat better than a bank and that you're a lot better than a bank because your liabilities are much longer in duration than your asset.

So the problem with banking, which I think you've written a lot about, is that you have really short-term liabilities in your deposits, and then you go invest those in mortgages. So you have this duration transformation in banking. and life insurance companies It's somewhat of the opposite, even with term life, right? You're making a promise for 30 years. You're getting paid premiums now. In the case of a whole life contract, it might be 40, 50 years, depending on how old the person is.

So you have these liabilities that are lasting a really long time, but you've also gotten paid the capital now, the premiums now, which you then put as capital. And then you invest in a bunch of assets, but other than like 30-year treasuries and mortgage-backed securities, most of those assets do not have duration equal deal viabilities. So you end up with a bunch of ratios that sound a lot like banging ratios, right? Like a liquidity ratio and a risk-based capital ratio and a surplus ratio.

And all of the machinery of the regulation of life insurance companies is basically you do a lot of work to estimate. like what is the present value of all of your liabilities and then like what is the riskiness of all of your assets and then making sure that you have enough capital to account for potential inaccuracies in your models of the world.

so the sort of intellectual slash historical movement to have regulation for insurance generally which actually predates to my understanding most regulation for banking was that back in the day the notion of like hey you pay me money every month for 30 years and then i will give you money back

has a bit of a failure mode and that someone can credibly make that promise for 29 months and 11 years to a lot of people and then not have the money. And so that has been historically the... what's a single largest locus of like regulatory concern with respect to life insurers although there are other ways to get in in the troubles the life insurer one

I will drop a link in the comments to this, but there was a lamentable time in United States history where it was common practice among many industries to in dishonorable fashions with regards to customers who are black. And there were a bunch of insurers that sold small-dollar life insurance policies to black Americans using door-to-door sales force and then conveniently forgot those policies existed. And when insurance regulators found this, they said,

You have to open your books up for 80 years, and we are going to go through them line by line and find everybody. So insurance regulators are not one of the most exciting parts of the regulatory state, but one of the higher competence parts generally, I think. Yes. What's fascinating about that actually, if you want to think about the mental models, is There's a lot of principal agent problems in insurance generally to take that in life insurance.

They sort of run in both directions, right? So when you walk in the door and you say, I would like to be insured for 30 years, there's just a, the insurer is sitting there saying, okay this is clearly this is but potentially an issue of adverse selection. This person knows a lot more about their health. than I do as a life insurer. So I need to go through a lot of diligence to make sure that this person is in fact healthy because I don't want to write a life insurance policy.

on someone who's going to drop dead the next day, because there's this, like, Prince Legend problem. And then the reverse is also true though, which is that the policyholder is trusting that the insurance company will be there, trusting that the investments will be prudently invested and managed over time. So in that way, the insurance company is also an agent of the policyholder and their funds and sort of this mortality coverage. Can we speak briefly about how the insurance companies

are a bit of quirky market structure relative to many other fields in that there's sort of a supply chain that gets you an insurance contract with a particular carrier. And the person that you're talking to as the you know unsophisticated retail user might assume really is called an agent yeah

Yeah, so what's the difference between, say, an agent and a captive agent, for example? Yeah, okay, well, let's take a step back to your first question, which is like, what is the supply chain of most contracts? So the supply chain of most contracts is that, you know, maybe you go online, but even that person, a little company is an agent. So you have an agent. which is, there has to be some named individual somewhere, so it's like a broker or an RIA. and that agent

usually, as you said, can have one of three relationships in the world. One is they can be like independent agents or work for an independent agency. So this might just be like a person or 10 people who were like having to still have sons. The other is they can be like part of like a big agency or what's called a managing general agent, or there's a lot of different terms for it. But, you know, they, that human being is like part of.

you know either as independent or as like part of a larger independent agency or they're captive which means they like work only for one company right so new york life and northwestern mutual or mass mutual they have a lot of captive agents who really only sell their product And what... And then, great, so agents can actually sell life insurance products and have not a fiduciary duty, but are supposed to have some duties to the user, the wholesaler to do the right thing.

And then the next level is there are carriers. So carriers tend to be the like names I mentioned, like New York Life or Mass Mutual. Meanwhile, as a carrier, those are on the life insurance side. On the homeowner's side, you've got Allstate and Progressive and Ken and stuff like that.

so those are the companies that really like manufacture the product and like usually to simplify or making like underwriting decisions deciding whether we really are gonna like get the product whether you qualify what your pricing is going to be And then they also handle claims. They do all the investments, right? And then there is another level of the business that is reinsurance.

So these are insurance companies for insurance companies, and many of those are based in Bermuda, but they have big names like Munich Re and Swiss Re and RGA. And then what's interesting is Oh, there's just so many things. Okay, so on the agent, one of the things in life insurance that's curious is there's a principal agent problem there, right? So what do agents want to do? They want to sell you products that have high margin.

Because then they want to sell you products when they get big commissions. And they get big commissions on products that have high margins. And then high margin products tend to be like super complicated, right? Because the way you have high margins is it's like if Goldman Sachs calls you and is offering you, you know, Caller option strategy you should be really suspicious It's got to be too good to be true. And that's basically true with a lot of life insurance products.

they are like needlessly complicated it's like you know you get three times the returns of the S&P 500 but it's floored you know and blah blah blah but like you know This is a way of life. complicated financial products packaged into annuities or life insurance. So your agent doesn't necessarily have your best interests apart.

although frequently they do and then the reverse is also true which is the life insurance company really wants to you know they want to sell life insurance products at their manufacturing but they don't have a right to sell those products out in the world. The agents do. So even your captive agency, you're beholding to the sales force that you don't really control and that can be saying whatever, who knows what they're saying about your product. So there's also a principal agent problem there.

There's also an angle of it where Are you getting the truth from the agents slash customers? It matters quite a bit. Insurance fraud is big business.

And, well, i don't think there's probably any industry anywhere that thinks that sales that people make exactly the right decision every single time if someone missells SaaS and that typically ends up with a business purchasing software they didn't need and perhaps regretting that decision but if they you know don't tick the right boxes on helping you get through your questionnaire

then the insurance company could be out an awful lot of money in a few years. And a funny little nuance of life insurance contracts in particular, at least in the United States, by regulation, in most states, there is what's called a contestability period.

where this is a useful factoid to know for people who have life insurance policies. Your life insurance policy has a tiny bit of risk embedded in it for the first two years. That's if if you pass away for any reason in the first two years after you get a life insurance policy.

Your insurance company has the right but not the obligation to say, oh, wait, we think there might have been a fit here on the policy documents that they misrepresented their health status or... that we were adversely selected because someone took improper risks or attempted to terminate their own life or similar.

After two years is up by law slash regulation, the presumption is against the insurance company that the period under which the policy was contestable is done. And now, like, if they're dead, you must pay out the claim. Period. And so why do I mention that? Well, one, the insurance company needs to make sure that its people give them correct information to underwrite because they have that two-year period during which they can put claims back on the customer and then after that, can.

period. The claim must be paid out. And two, as a user, don't turn life insurance policies that frequently you definitely want your policies to be past the two-year mark yeah yeah the only that's absolutely right and then the caveat i'll say is that that is definitely true in the united states and then not true in many other jurisdictions in the world. Maybe the best advice I can give you on this particular point is

Just tell the truth on your life insurance application. That's your best bet if you want to ensure that the policy is going to be paid out by your life insurer. Yep. So obviously no one passes away at a time convenient for them to pass away. Many people are likely to not pass away at a time convenient for them to pass away. But life insurance bundles are two very different risks, right? Or maybe bundles is not quite the right word. It addresses two very different risks.

One is you could have a catastrophic outcome and pass away much earlier than you expected to. And the other is the opposite. Can you talk a little bit about that trade-off? Yeah, so... In general, life insurance companies tend to be in the business of selling life insurance and annuities. And if we took a step back and said, okay, what other...

One of the risks that I have in my life is that I'm going to die before I expect to. That's really what life insurance was originally designed to invest. So we all get together, you know, 10,000 of us. Some of them are going to die. We don't know who.

Let's all pull our capital together, pay our premiums, and then 30 people will die this year and get payout over the next 30 years. So that's life insurance. And then that's often, from an insurer's perspective, thought of as mortality risk. So I'm taking on the risk that these people...

are going to die and then an annuity although we can sort of talk about how both of these products end up being a lot about taxes annuity in principle is you know i don't know how long I'm going to live and that I could live a lot longer than I expected. So I'm going to live higher or I'm near retirement or I'm just thinking about retirement now. The mortality table is saying I'm going to live to 87. What's going to happen to my poor family if I live to 100 and I expect to live?

So you buy an annuity and then that annuity pays you like every month until you die. And if you live to 100, that's the life insurance company's problem. And there's risk-pulling here as well, right? So you take 10,000 people, they're all, you know, supposed to die, seven or whatever, supposed to lose and that kind of works. And then, you know, you can get some statistical regularity.

on that and that is called longevity risk from the perspective of the life insurance company but these are just the flip sides of the same thing like you often want to like match your mortality and your longevity risk i guess there's two like just big picture things here that are worth thinking about that we can talk about one is Society has decided, and governments decide, that having orphans and widows starve is bad.

So, which I think we can all agree on. So what happens is most societies and governments that have taxes choose to give tax incentives to people to buy life insurance. or to buy annuities. But then what happens, like every complex system, is that honorable reason for getting tax benefits to these products.

means that then there's an entire industry and much of life insurance and annuities are built around actually those tax benefits. So whether or not you're actually like trying to protect yourself. per se, against the mortality risk or the longevity risk. So it's my general understanding that the Life insurance decisions are actually made both by customers and by companies.

are heavily influenced by tax considerations. And I know this because they heavily influenced my own purchase of life insurance in Japan, but the tax regime there is very different. Can you explain to people

what's the reason that there is a tax consideration advantage in life insurance sort of a priori as a matter of social choice and also like sketch out what does U.S. practice look like on this? Great question. So basically, As we've been talking about, you know, risk bullying really protects people from either dying before, you know, what happens to your family if you die before you're supposed to, and then what happens to your family or your loved ones if

you live longer than we're supposed to and you know how this is sometimes expressed is like what happens to like orphans and widows in the world so there's just historical precedence for Basically, every government in the world that has taxes has made a decision to incentivize and offer tax advantages to life insurance annuities.

complex system involving taxes the original reason i think has a real societal purpose and then over time it grows and becomes a you know benefit onto itself um so life insurance policies are often used as long-term savings and tax vehicles and the same thing with annuities that they have tax benefits and these are different in different countries and then those tax benefits are can be like quite profound and they're

Just to give you some fun history here, in the 60s and 70s, people were doing really crazy things with their life insurance policies where they would put yachts in and put family farms into their life insurance policy. And then back in a time when Congress still could think about hard problems on some level and pass sensible laws as part of the Reagan tax reforms.

They wrote a bunch of rules about what is and isn't life insurance and what those tax benefits are. But in principle, on the life insurance side, you the benefits of policies whether that's term life or whole life are income tax free for your beneficiaries and that is obviously good because you've just, you know, you've died and your, you know, wife gets a million dollar payout on a term life policy and, you know, it's good that it's not, you know, there's no income tax.

I understand from a tax management perspective that this is probably worth it for some people to put cycles into at some level of wealth and or income and probably not worth the time it takes to think about it for people below that level of income. Indicably, finger to the wind.

Whereabouts would that breakpoint be? You know, my initial reaction is probably like single-digit millions of dollars in net worth. I think it's interesting when I now get asked a lot of questions about life insurance for obvious reasons.

And I would say among my tech friends, it really splits. Like, it's almost like, how are you thinking about your money, right? So if your money is this, this election of stuff that you're like doing a lot of optimizations around and you're the type of person who loves to optimize and like despite having 10 million dollars of net worth you're still like on the points guy and like doing credit card points and then like 100% you should do this.

If you were early-ish at Stripe and you have a $10 million net worth and you're mostly sitting on... i don't know stripe stock treasuries and like doing angel investments for fun and like the thrill of optimization is not like what you live for like and maybe you don't want to do it like so I wouldn't say it's one of the first five things you should do in your tax and estate planning, but it is one of the first 10 things you should do there.

So inheritance tax hasn't come up yet, and unfortunately I'm much more familiar with it on the other side of the Pacific than I am here. Those inheritance tax interact with the tax consequences here is more about income tax optimization.

I'm not your tax lawyer or your tax advisor, nor is my insurance company. And I'm not assidling you with state planning services or life insurance. What I'll say is that The way it generally works is that it's income tax-free, but it's not a safe tax-free to get a death benefit.

So then there are like three optimizations that people engage in. The first is if you are wealthy enough that you have a trust for your kids or your loved ones outside your taxable state. So you have an irrevocable trust. you have a diagnostic trust often people will set up that trust will buy a life insurance policy on their life

Because it's a way to turn a little bit amount of money in the trust into a larger amount of money through a life insurance bond. So that's like one thing that people do. And then there's this whole class of things called a... irrevocable life insurance trusts, which again, if you're in the business of like X optimizing your LP commitments to DE Shaw or some high frequency trading funds, then you might be in the business of getting an outlet.

That's one thing. The second is actually some people deliberately put life insurance policies to cover estate tax burdens, right? So imagine that you have a hundred million dollar farm or company and you're gonna die and you're gonna leave that to your you know wonderful kid Or even you're the founder of a tech company and you're going to leave a bunch of stock to your kids, right?

You can end up in this weird scenario or this unfortunate scenario where your $100 million business that your kids are going to inherit while there's a $20 million. To simplify the map, there's like a $24 million estate tax exemption. So then you owe estate tax on the other $76 million.

And what are you going to do with this illiquid asset? Are you going to sell it to cover the estate tax burden? So it's like a real problem. So what people will do is they'll buy life insurance equal to the expected estate tax burden. And then whole life insurance. And then you die. Your estate gets the business. And it gets the life insurance payout. You use the life insurance payout to pay the estate tax. And then you do not sell your business.

So this is a thing that people don't. And then the third thing is The problem with buying a life insurance policy and putting it in a verifiable trust is then the policy alone. That is the borrowing value out of your policy ends up not being something that you can access and is something that the trust can access. Sometimes people just deliberately buy permanent life insurance policies. because they're planning to borrow against the policies later in their life.

in this tax-advantaged way and they'll just, like, eat the estate tax burden. But if the policy loan is why you're doing it, then you, like, just need to leave it in the estate. Mm-hmm. I think there's another form of lending which is relevant to insurance, although I'm not positive I have this mechanic right.

So for the example where someone has a closely held business which will pass to the next generation triggering estate tax and they don't want to break the business up to pay the estate tax. Someone might borrow money in the present day to put the loan proceeds against the insurance premium. Yes, yes, yes. Premium financing. Yes. Premium financing. Can you say a few? Well, expand my thoughts.

borrow money from a bank or similar in the present day, use the proceeds of the loan to buy an insurance policy, and then essentially they get to reverse annuitize themselves and pay down the loan for the rest of their life rather than getting paid money by an insurance company for the rest of their life. When they pass away, that will leave a lower net present cash burden to their heirs to deal with the inheritance taxes and similar. Yeah, or you just do this because

Let's imagine a life insurance company or, you know, you're indexing your life insurance policy, the S&P 500. You expect those returns are just higher, even net the, you know, fees and expenses that the life insurance company is taking.

than the your cost of borrowing against your your business so obviously if the life insurance company or the we'll just say the life insurance company will pay you you know net eight percent returns and you can borrow against your business at four percent returns then it's like just a good deal and the reason that the bank is willing to do that is you actually have two pieces of collateral you have the business

or whatever that asset is and you have the cash value of the insurance policy so you end up like over collateralized in a way that like lower borrowing can can be good Yeah, I've thought about this. This is like a whole business idea that like someone should run with or I'm happy to, you know, do an angel investment. Which is if you take like employees of late stage companies, they...

they're like somewhat cash poor but they're like asset rich and it's like another one like product where like You don't always want to lend against that, but maybe you do a dual collateralized loan where you say, I'll lend you $100,000 or whatever against your million dollars of... Stripe stock and the value of this policy. And then you just have to make these like regular cash payments or just take out increasing loans.

No one's done that yet, but part of the challenge with some of those things is it's like a feature but not a product, but then it's like not... It's also quite complicated. But there are a lot of little ARPs. There's a whole world of agents that specialize in high-network individuals.

i think one of the reasons that uh the The wealth management industry dices up the population of the world into a few buckets, and there's a group of people without investable assets, and then there's the largest group of people with investable assets, which are called the mass affluent in much of the industry in the United States. and there's high net worth individuals and The financial industry has gotten very good at solving the problems of the mass affluent over the last couple of years.

The prices of index funds have asymptotically approached zero. They're getting much better products to use than they used to be. The tax advantages are getting built into them as well over the course of the last couple of decades. And as a result, if you're someone who has the typical life path at a typical income level, You probably get that through your brokerage or similar these days or through 401k at work. Click the obvious buttons and you're done.

The products that we're talking about here get sort of crowded out of the market for the mass affluent. forget what the personage number is it'll it'll be plus or minus like 50 percent of the population i think up to like the 95th percentile of wealth in america and then maybe 90th these days good news we're getting richer all the time but then the people who have good problems to have but still problems greater than that they get a

innovation done on their behalf by the insurance companies and others yeah it's interesting i agree with that that basically there's like people who have like no wealth or or little wealth there are people who have like Different people categorize these things different. The last one was often a net worth from $500,000 to $2 million. And then there's having a net worth of $2 million to...

25 million and there's 25 to 100 and it's like 100 plus right and actually if you're in 100 plus or even 25 plus like yeah lots of people are holding your hands you have a lawyer you have accountants you have like a private wealth person who's not terrible And then if you're mass affluent, maybe $500,000 in net worth to like whatever, 2 million, you really, the right thing you should do is like,

Well, you should buy index funds, you should do direct indexing, you should have a will, you should have a living trust, you should do some basic things, but they're very common.

It is interesting to look at what is going to happen to people who have $2-25 million in net worth, because you're not particularly, in my perception, You're not getting the hand-holding that you get when you're richer than that, but also you do have some more space to do more sophisticated things, but you're not necessarily... getting the specific advisor and we'll see because you know all the big

BlackRock, Blackstone, Fidelity, Apollo, they're all making this push to get folks in that bucket to buy more quote-unquote alternatives, which is basically just code for private equity and private credit funds. and like we'll see how wise that is but it is the case that there's something of a democratization of asset management strategies. I think similarly with life insurance, one of our long-term theories of the case is that if you take these products and you actually make them simpler.

And somewhat standardized. They could, even the complicated products for hot net width or also hot net width individuals, And you package them up and you made them like relatively thin Morgan and that there could be a larger population of people who want them. Now, my intentions, I think.

in my belief in that are like you know true and honorable and hoping that we can like provide more access and like tax structuring for folks but you know that is always a double-edged sword of like as you make a product more accessible. If it's a complicated product, it's a way to convince people that they are more sophisticated than they are and they should engage in this risky activity to the benefit of the manager rather than the benefit of the individual.

There have been a few regulatory settlements over the years with asset managers and others who have successfully sold a wealthy but unsophisticated individual on products which are just the totality of circumstances but not support the actions that were taken.

One case, which I'll link to in the show notes, someone sold someone an annuity and turned them out of the annuity every year and because of the way that the annuity was structured this earned the the salesman a three percent or whatever commission every year but there's no way to pay a insurance salesman three percent commission every year and have that be a good thing for the person paying 3% every year. And, you know, eventually the math comes out, and of course they were...

was not simply selling someone something that was not in their interest, but not being fully transparent as to what they were paying for under the hood. And that's another factor here, as you mentioned, that A term life product is very easy to understand. You can explain the mechanics, if not the exact actuarial math that goes into a pricing to a right 10-year-old.

as you get to you know it's index linked with cap and etc etc etc you could be a professional in the financial industry and fail to diagram it given several hours to try well and actually i mean i could think of some cases free to put in the show notes there There have been tons and tons of settlements, even with really big life insurers over the last 15 or 20 years, around the issue of illustration.

which is basically how you, when you're presenting a product to a user, how do you present their potential upsides and downsides in the product? And this has become an issue of intense regulatory focus because if you illustrate them in certain ways, then it looks like, oh, there's no way I'm ever going to lose my money and I'm going to get 10% returns every year.

which they would never quite write down, but the diagram would strongly suggest that. So the New York state regulator in particular has been really... really open arms about that interestingly and less for a societal context than for an interesting poor decision made in capitalism that at least one insurer is still struggling with

There was once an insurance company, I believe in Europe, that had the bright idea that policy innovation is happening all the time because insurers are in a competitive market with each other.

there are rich people you want to go out and sell them things so you sell them things that that sound good on paper and an insurance company said we will let you you know essentially buy mutual funds within this insurance policy and we will let you essentially pick which fund you bought after the markets are closed for the day. You gave that offer to Goldman Sachs. Goldman Sachs would quickly say, oh, free money for me. You're like conceding a lot of option value. That sounds awesome.

But the bigwigs at the insurance company in Europe thought, eh. Notionally sure, but it's not like anyone is going to actually exploit this, right? And they have one policyholder who has, for the last couple of decades, kept them to the letter of that agreement and taken them for an absurd amount of money. Matt Levin has written about this better than I will. I will drop a link to it. I will say, yeah, that really touches on something interesting, I guess, on two sides. One is

So if we talk a little bit about reinsurance and life reinsurance business, what you're doing is you're buying these big blocks of business if you're a reinsurer, right? So there are all these people sitting in a arena.

and Brookfield and Apollo and others, and they buy blocks of business. And one of the things you're doing when you price a block of liabilities or a block of life insurance is you're estimating... i guess how like how many people will optimally execute it or like how many people will do the riders or this and that and those estimates are always quite low and they really impact the price of the blocks but it it's just the case that a lot of contracts have like

some embedded optionality or like a rider you can agree to or something. And very few people are optimally executing their contracts back to sort of realistic home food. We mentioned this in a previous episode about the mechanics of credit card reward. where there are relatively few people who optimally execute their usage if they chase after reserve points. And so on a portfolio basis, the bank can model the math and in credit cards.

There are less people scattered around the right tail of having millions of dollars of potential to pull out of the bank if they execute optimally. Even if someone executes optimally, it'll be the difference between making hundreds of dollars of money of margin on their account in a year or potentially losing hundreds of dollars of margin on their account in the year.

But in insurance, again, we're writing seven-figure, eight-figure insurance policies that could work out very badly if someone does their math wrong. And so is that the reason why we have reinsurance and life insurance? primarily to insulate the insurers against a mismodeling risk? Or is it that there could be a COVID sort of scenario where

they have vastly more claims among 30-year-olds in 2020 and 2021 than they expected. Well, let me start by saying, I think that actually most life insurance It is quite similar to what you're saying in credit cards, which is like the relative size of individual policies is small.

If the entire portfolio is optimally managed by the users, that would be quite catastrophic. But like any individual optimal management, although obviously when the policies get bigger, you have to think more carefully about these things. It's also the case that life insurance companies don't fail very often. There are far fewer life insurance failures than there are bank failures.

Of the big failures in the U.S., I think the biggest one was executive life in the 90s. They're almost never about liability. They're almost always about mismanaging assets. Though, Executive Life, I think, was one of One of the junk bond guys bought a life insurance company and then pivoted the whole portfolio into sub-investment grade stuff, and it blew up. But it had nothing to do with their liability management.

The big mispricing that's happened in the last couple decades, which was sort of coming to... head right now is people who are a bunch of life insurers run a bunch of long-term care insurance so this is insurance or if you're going to go to a nursing home. And all of the long-term care that was written and sold in the...

like 2000s or the 1990s was completely mispriced to the explosive expense of like nursing homes and other long-term care. So all of those books were Really nice pricing, actually, if you pay attention to life insurance, quarterly earnings, which, you know, is a passion perhaps of mine but not other people's. Tons of billions and billions and billions of dollars of additional capital has had to be posted by certain insurers over the last couple of years to account for the mispricing of that book.

a related but not quite life story was long-term disability insurance which by the way is something that you should definitely have If someone is dependent on your income and say you are a professional for a variety of complicated reasons, professionals are much more insurable for long-term disability insurance than other people working in the economy. Long-term disability insurance used to be absurdly cheap for professionals, and then there was a genuine change in risk.

around the time of particularly the AIDS epidemic. And a lot of insurance companies found that they had greatly underpriced policies, which obligated them to pay for, you know, professional's wages for the rest of thankfully what is now a survivable set of circumstances, but for a very long time for a larger percentage of their insured base than they had modeled prior to that being a thing in the world.

And I think there was some concern about during the COVID years with the experience of long COVID of, is that going to be a second wave of long-term disability that insurers will be on the hook for? Yeah. One of the interesting things about life insurance for me, I guess,

two things just briefly that you mentioned one is it rhymes with so many other parts of him So like the more you, I learned about the business, the more sort of like rhymes with the things I knew about banking and payments and like these, complex systems i guess like all particular finance to end up being quite similar and the second thing is for me we don't have to dive into this but like life insurance feels a lot to me like payments did in 2013 like there have been a few startups

They all, in my opinion, did interesting but slightly wrong things. But it is an industry where trillions of dollars are sloshing around globally. It's like 3% of global GDP.

but there's really not a lot of software and a lot of technology so it just it feels quite you know ripe to think about in the way I think that you and Patrick think about things and then like build technology around it i'll have to drop a stat in the notes because i don't have one cached off the top of my head but the portion of all financial assets in the united states which are ultimately owned by japanese people through life insurance policies is very very large

Oh yeah, much larger than people's baseline expectation of it. And that is also because Japanese people buy it. like globally high and out of life insurance yeah i have a fascinating anecdote for that by the way the so we talked about the principal agent problem the the life insurance industry was kicked off in Japan by a notion that some executives at companies would need a post-retirement job and

if your best asset as an executive at a company is that there's a lot of people who know you and trust you and have been addressing you as, yes, sir, right away, sir, I will do whatever you need, sir, for the last couple of years. And they no longer do that because they don't work for you anymore. you should go back into that office where everyone trusts you and does what you tell them to and say, you know what you should do? Buy life insurance. It'll help your family.

And so a lot of the large Japanese insurers have a second career workforce that is essentially selling them using their social capital.

funny Japan story. You're not a real company in Japan until you have your own insurance company. And so a policy that I still have enforced in no way compensated for the following the sony corporation of japan it's like why are we leaking margin to to an insurance company when we have a hundred thousand employees we should just have our own insurance company And they were like,

We have an insurance company. Why are we not making money from an insurance company when we have a consumer brand name that people love and trust? will sell sony insurance policies all over the country and so yeah sony insurance policy it does what it says on the tin you should definitely get them if you need term life from the japanese market or you know consult someone who is regulated to sell your japanese insurance products i'm not permitted to that

Yeah, actually, one of my investors is MS&AD, which is owned by Sumitomo. Sumitomo, yeah. Which is the... The Japanese proclivity towards conglomerates is something that my poor American mind can understand.

so in continuing on the fun oh what is reassurance yeah i was about to ask you what is bermuda but yeah continuing on the international issues why does so much of the industry the reinsurance industry in particular i find itself clustering in bermuda

Yeah, well, first of all, Bermuda is such an interesting place. It's like a i don't know a thousand miles east of new carolina it's not we're like really in the middle of nowhere it's not in the caribbean so it's not like anywhere near the bahamas or janeca or whatever and it used to be like the tourist destination if you were in new york because you were like getting a boat and it was the closest island and then once there were airplanes like

Why wouldn't you go to someplace that's warmer than Bermuda? So in the 50s and 60s, basically a group of enterprising Bermudians created the insurance business there out of Hulk's office.

As an aside, Brigitte has a really fascinating history of how they have survived on this barren rock in the middle of the ocean. So they've been a penal colony. They ran a ruthless salt monopoly in the Caribbean. They were like... uh bootleggers during the civil war to the south they just they're a very scrappy set of folks out there and They really started by creating the captive insurance business. So to your point about large companies building insurers, often large companies will build

captive insurers, which is like owned insurance companies to handle their PNC risks. And that was really their business for a long time. And then they got into PNC reinsurance and then life reinsurance is really just starting to.

play a big role on the island in like the last 10 years but it's a very interesting place to go and visit and i'd like highly recommend it to anyone who has an interest in in these sorts of topics because it's 60,000 people on an island and like 30,000 of those people are actuaries, lawyers, and accountants. is not your mental model of an island nation. It is a very well-developed, very low poverty, not that much tourist.

professional island of people who think about things like taxes and stuff so what i like to say about bermuda is they've really positioned themselves as being an upstanding, hard-nosed regulator. offshore regular particularly when compared to you know Cayman or the Bahamas or BVI or Gibraltar or Channel Islands or whatever but they're just a little bit more on the two things that insurance companies care about.

So they do all the stuff right on the regulatory side. They're really respected by the National Association of Insurance Commissioners, which is like the U.S. body that like thinks it off such matters and they have like solvency two equivalents which is this they have like they're restricted by the europeans and they're basically the two differences are when you're calculating your liabilities They let you be just like...

a little more creative and i wouldn't even say maybe creative is the wrong word but they They, instead of just following the rules by the letter of the law, They have this concept of like a best estimate liability. which is basically that you really just have to think hard about every liability is you have to justify them to your auditor and your approved actuary and stuff so it's not like super lucid you see but

you really can think about what are the present value of these liabilities, and that can be just a little bit more permissive than the US or European rules. And then similarly on the asset management side, They're just a little bit more permissive in your ability to, like, not take the entire insurance company's balance sheet and, you know, bet it on black or put it into venture funds, which are actually, like, quite crazy as an aspect of an insurance company.

but you know instead of having 40 of your balance sheet in treasuries and 40 in investment grade bonds and 20 in private credit you know maybe you can have

20% in treasuries and 50% in investment grade bonds and then 30% in private credit. But when an insurance balance sheet like a bank is levered right like you put up a hundred dollars in capital you can write you have like a hundred or a thousand dollars in assets from all the premiums you write and stuff, that can make a big difference on your return equity to be just a little bit more permissible.

So the reinsurance business in general, like the original idea is like what you mentioned, it's like risk spreading, it's diversification, like I run an insurance company. in minnesota you know now that's northwestern neutral but it used to be like the upper midwest so you like actually did have some genuine concern about localized underwriting failures or pandemic mortality or like i'm just not big enough

So the idea was, okay, you have this global, larger reinsurer. And the other thing is that even if you are a relatively big carrier in the United States, or wherever, you might want to re-insure because it's a more effective use of

it's like capital really for balance sheet optimization right like if i am a hundred dollars and i can only write like b 8x levered or 10x levered then once i am 10x levered on my hundred dollars of capital like i'm tapped out like i can't write any more life insurance But if I sell a bunch of that to someone else and they're reinsuring it, I maybe am getting a little bit of economic exposure, but I have a lot. I'm using a lot less of my capital for that exposure.

Yeah, so that's the original reason. But then in practice, what's happening now is lots of people, even big name brand companies, We'll reinsure. offshore to get that slightly more permissive liabilities and slightly more permissive on the asset management side.

It's interesting how many parts of the financial market end up being a, well, a regulatory objection. I was trying to look for a different set of words. Historically, there's two ways to make money in financial services, bundling things or unbundling things, and then often, you know, helping things like flow to... flow to the lowest permissible levels of riskiness etc or you know efficient points on the curve some of the underlying economic impetus there

So, linking on the question asked about... Oh, yes, you mentioned private equity a couple of times. One, obviously, it's a thing that an insurance company can potentially put a percentage of its assets in.

But as you've mentioned, private equity firms have recently decided having an insurance company is a wonderful business to be in. What's the justification there? Is it simply like we'd love to have a pool of permanent capital or semi-permanent capital? It is that we would love to have a pool of permanent capital. So I guess I say private equity, but a lot of private equity firms are now also private credit firms.

So like Apollo now is a big, you know, is almost more a private platform than a private picture. And what these folks have realized is that if you can be in the business of writing long-debted liabilities, that is a set of permanent capital vehicles. then you can invest like if you're in the business of doing various flavors of fixed income all the way from like managing treasuries to like 10% or 12% return, private credit, that actually is exactly what an insurance company wants to invest in.

So the Apollos and Blackstones and Goldman Sachs and even of the world now have a huge business and investing in being an asset manager for insurance companies. And then they realized, well, okay, we're in this business of managing the assets for an insurance company. Why don't we actually just like own the insurance company? And then we'll in some ways be managing our own assets. So there's been a whole... And Apollo really...

I don't know, originated the strategy on some level by building Athene. Athene, I think, is the largest seller of five-year annuities in the United States. and then they reinsure all of that annuity business from their US affiliates into Bermuda, which allows them to be like a little more permissive on what they can invest in. And they invest all of that into, you know, Apollo credit strategies.

And in fact, like what Apollo does, I think now is they say like, oh, we have this credit opportunity and then they allocate that credit opportunity to like the Athene bucket and the fund bucket and like the principal capital bucket. And so this has led to, like, KKR owns Global Atlantic, Blue Owl bought Kuvar. You know, you go down the list, Espita is owned by, I'm forgetting the name, but, you know, these are all... like the biggest providers of annuities in particular in the United States.

are all life insurers owned by these private credit funds. primarily out of And again, the rationale for this is that there are some firms in the economy that would like to borrow money over a long timescale, which means someone needs to put up the money over a long timescale. We've been moving long duration assets out of banks for a while because they...

Funding those assets with deposits causes bank failures and uncertain times, as we most recently saw in 2023, with collapse of a couple of U.S. banks, including SVB probably relevant to both of us in some fashion or another. and it is less likely that 80% of the book of business of an insurance company could decide to either cancel their policy

or pass away in a period of 48 hours. And empirically, it is possible to move 80% of a very large amount of money out of a bank in 48 hours under the right or wrong circumstance. You do actually have to model this risk. It's called mass lapses. I think there's never been a mass lapse event in life.

At least since the 19th century when there were like insurance, you sort of mentioned that insurance was somewhat the wild west. There were just like tons of insurance companies sprung up and then like people would. sell policies door-to-door. The 1800s were a little crazy. I joke that life insurance was the crypto of the 1800s.

But that's absolutely right. What you're seeing... Actually, take a step back. The original reason I got interested in life insurance, it's not actually why we started this business.

But I went to Y Combinator with this company called Santa Treasury and Santa Treasury was doing like banking as a service. we ultimately like bank account as a service now there are like 10 people in this business but like we were early and eventually got bought by Silicon Valley Bank and Stripe Atlas. The bank account at SVP that Stripe Atlas would give you was like the API we don't buy.

In that company, we were thinking about starting a bank. And this was like before Monzo had started by Tom. And so we were looking at the UK and starting a challenger bank there. And we looked at the US.

And one of the big questions we had if we started a bank is like, what do you actually do with the balance sheet? Like our intention was sort of do like bank account as a service and payments. And like, that's where we came from. But like, what are you going to do in the bank with the balance sheet?

so i was thinking at the time a lot about like lending as a service and like white label bank account as a service which no one has really ever done well or figured out to this day and in the course of that thinking i was like wow Banks are... The best bank is a life insurance company. Like the natural owner of mortgages is an insurer, not a bank. Because they actually have these 30-year liabilities that they could match.

So after we sold the company to SVB and I went to Money 2020 and people were like, what are you going to do next? I actually was telling people, oh, I'm going to start a life insurance company. And the reason I didn't do that in 2015, 2016 is I couldn't figure out how to get to market.

Because although when you're big, being great at technology is amazing because you're turning a 15% return like new business into a 20% return like new business. And actually like lots of the stuff we talked about here are like, reinsurance or who should sell life insurance actually think it should be like

inside Wealthfront in an embedded API offering. There's tons of technology, but that doesn't help you when you're small. It just doesn't really matter when you're small. It really matters when you're big. So years later, when we were sitting down and the way we call this business is we were like actually thinking about crypto or Bitcoin in particular and saying, OK, we think there's going to be a Bitcoin economy.

And we are really good at regulatory BS. And we think that that's going to win, which was an unpopular position in January 2022, that the long-term winners are going to be people who can think about and do regulatory stuff. so we sat down and we wrote a list of like okay every functioning economy in the world they have a stock exchange and they have a payments company and they have a bank and they have this and they have that and Make sure you didn't have life insurance on that list.

And I woke up in the middle of the night two weeks later.

and was like oh there should be a crypto life insurance company which is in some ways like not intuitive at all and like some people think we're crazy because we're doing this like incredibly conservative long-term like boring thing with bitcoin But to bring it just to life insurance, it has allowed us to build this company and have a product that people want to buy, despite the fact that we're small and have all this homegrown technology.

There is another life insurance company in Bermuda. They are older than us. They have raised more money than us. They have a much more experienced team than us. And they don't have a single policy folder. Because nobody wants to trust a brand new undercapitalized life insurance company for their run-of-the-mill, commoditized, off-the-shelf dollar product.

But we have this product that no one else has, which is bitcoin whole life insurance which i'm not currently selling to you but just describing and and that product no one else has so then like we have policyholders and we have people who believe in us and then we're able to like build a policy admin system we're willing we're able to like build a regulated entity and then like the hope is over time to

launch additional companies maybe in stable coins or additional companies maybe in dollars and it all starts from having a product no one else has which we just by mistake that we were doing like after wanting to build an insurance company for the crypto

By the way, that's how it works so much about insurance. I think that's a thing we see over and over again in fintech is that the math is very punishing and you have to get good distribution or you have no business. And then the... getting good at distribution often means getting you know good at the advertising machine etc etc that the incumbents are very very good at and know exactly what they can pay for the marginal lead and if you don't achieve massive

scale doing that you have a lot of difficulty in making headway as a fintech business and it is difficult to achieve massive scale simply by building a better mousetrap unless it's in a place that literally no one can follow you for whatever reason. And that can unfortunately be written as the epitaph of a number of fintech businesses over the years, but that is what it is. I'll drop some.

perhaps more considered thoughts in the show notes on it so zach thanks very much for the interesting discussion today on the ins and outs and insurance where can people follow you on the internet oh on x i'm at

Z. Townsend. And then our websites, meanwhile.bn.bn being the Bermuda. Still there. Well, thanks very much. And for the rest of you, I'll see you next week on Complex System. Thanks for tuning in to this week's episode of Complex Systems. If you have comments, drop me an email or hit me up at patty11.

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