- Why Congress and the IRS are trapped
when they want to tax policy loans on life insurance?
By the end of this educational video episode,
you will understand why Congress
would have to tax all loan proceeds
if they taxed loans taken out on life insurance,
without drastic legislation changes.
Get ready, you're gonna be blown away.
(upbeat music)
So, I'm Doug Andrew,
I've been a tax strategist, a financial strategist,
and a retirement planning specialist
now for more than 48 years.
I've been helping people optimize their financial assets
and minimize taxes
and empower what I call their authentic wealth.
If you've watched very many educational episodes
on this channel, 3 Dimensional Wealth,
you will soon learn
that one of my favorite financial instruments
that allows people to accumulate money totally tax-free
for goals like retirement or working capital
for your business or college funding for your kids
or emergency funds or for estate planning, on and on and on,
and then be able to access money tax-free when you need it.
And when you die, it blossoms, it increases in value,
and transfers income tax-free.
Nothing else I'm aware of does that
in the Internal Revenue Code.
What is it?
A max-funded index universal life insurance policy
structured correctly and funded properly.
If it meets that criteria, which over 99% don't,
then it is deemed a laser fund, in my opinion,
which is the title of a bestselling book
that's been flying off of our warehouse shelves
that I wanna gift you at the end of this episode.
It's a 300-page book.
You do not need to pay $20 or more on Amazon.
I will gift you a free copy, so stay with me.
So a lot of times, people will say,
"Well, Doug, you talk about how money grows tax-free
"inside of a max-funded IUL policy,
"and you show actual examples,
"hundreds of examples, actually thousands,
"where clients have earned average rates
"of return of 7, 8, 9, 10%,
"some years as high as 16, 25, 61%, even 153%
"from 2020 to 2021, totally tax-free."
And they see this, and they go,
"Wow, I've never heard of these before, are they legit?"
Yeah, they're legit.
In my circles, these are the cat's meow.
But I realize,
most Americans sort of follow the herd, so to speak,
and just put money into the company's 401k
until they get to the end of the day, they're gonna retire,
and they realize they're not in a lower tax bracket,
which most people are not in a lower tax bracket
if they save very much.
And they go, "Well, this wasn't the smartest thing to do."
And so I have to sort of cure their tax disease.
When you're not at ease physically, we call it disease.
When you're not at ease financially,
we have a financial disease.
We're not at ease financially.
We might outlive our money.
We're gonna have to pay tax way more than we thought,
when we retired,
because everybody told us,
"Oh, you'll likely be in a lower bracket."
And that just has not been true now for more than 30 years,
but still, most people just get duped
into putting money into traditional IRA or 401ks.
It just blows me away.
So when I show people, "Now, here's what you do.
"You accumulate your money tax-free inside one of these
"index universal life insurance policies,
"and under Section 72 E of the Internal Revenue Code,
"the interest, the dividends,
"the growth is totally tax-free."
And that has been protected in the Internal Revenue Code
now for over 108 years as a sacred cow, tax-free.
Now, section 7702 of the code
dictates how you can access money
out of a max-funded indexed insurance contract
while you're still alive,
for any purpose, to buy a business or do this or whatever,
or to generate tax-free cash flow or income,
income that the IRS knows you're receiving,
'cause they know everything,
but they know is totally tax-free.
In other words, there's nowhere
on a 1040 tax return to put it.
And people go, "Are you sure this is legitimate?"
Absolutely, we have clients that have a million dollars
in their IUL portfolios,
and it's generating 80,000 to 100,000 a year
of tax-free income.
And there's nowhere on a tax return to put it.
But the IRS knows they're receiving it,
but they don't even get audited,
because it's always been tax-free
under section 7702 of the code,
'cause they're doing it the right way.
We actually have a person
that has over 800,000 a year of tax-free income.
They don't even need that.
They really only take out 300,000,
but they're earning 10% average on 8 million
that they've accumulated in their IUL policies.
And so, they could pull out 800,000,
they don't need that, so they only pull out 300,
but it's all tax-free.
There's nowhere on a tax return to put it,
because they're doing it the smart way.
Now, what is the smart way?
Well, maybe, let me start out by telling you the dumb way.
When you access money out of an insurance policy,
you can withdraw money, 'cause it's your money,
but that's actually dumb.
You're actually able to withdraw up to your basis
without paying tax,
because the tax treatment is called FIFO,
first-in, first-out,
whereas most investments, like annuities, are tax LIFO.
If you had a half a million, you put it into an annuity,
if it was earning 10%, let's say, to keep it simple,
it's earning 50 grand a year.
You start pulling out 50,000, you have to pay tax on that,
'cause the last money you're earning your interest
is the first money coming out.
Life insurance is one of the very few vehicles
that is taxed FIFO.
So if you put in 500,000,
and you're pulling out 50 grand a year,
it would take 10 years, in that example,
before you recovered the basis that you put in, 500,
now, after you recover your basis, it would be dumb,
because now, you're gonna have to pay tax on the gain.
The IRS says, "You don't have to do that."
Just change the nomenclature, what you call it.
You change it to a loan,
and some people get hung up on this and say,
"Loan, why would you borrow your own money?"
Because the insurance company says,
"If you borrow the equivalent of your interest,
"we leave your cash value there.
"And the cash value is your collateral.
"We will loan you the equivalent of your interest."
And so, let's say you have a million bucks in there,
and it's earning 10%, to keep it simple.
So if you're earning 100,000 in interest,
you just simply leave it there.
Now you have a million, 100,000,
and that's earning interest,
and then they charge you interest
on the 100,000 they loaned you,
because they have to charge you interest
in order for it to be construed a true loan
in the Internal Revenue Code.
Now, the minimum statutory interest rate must be charged.
So that's usually a nominal rate like 2%.
So there's two choices.
The insurance company can say,
"Okay, you can borrow the money, and we'll charge you 2%."
So 2% on a hundred thousand would be 2000 that year, okay?
If you borrowed a million, that would be 20,000,
they charge you 2%,
but they'll credit you 2% on the portion,
the 100,000 that you didn't technically withdraw,
you left it there as collateral.
And so, they're crediting you the same 2%.
They charge you 2, they credit you 2,
and that's called a zero wash or zero cost loan.
Now, you can do that,
but savvy people do it even a smarter way.
They use an index loan,
and that's where you borrow money out,
let's say at 4% or even 5%.
So I had a client in 2017
that borrowed a million at 5% out of his policy.
That's 50,000,
he doesn't have to write out a check for that.
It's not doing payable during his lifetime.
It's gonna be paid off when he dies, with the death benefit.
But he continued to earn on his indexed money,
the million that he left there,
that was collateralizing the loan,
he earned 25% that year.
25% was 250 grand, minus the 50,000 they charged him,
he netted 20% or 200,000 tax-free on his million
even though he had technically taken it
and used it in his business,
where he actually made 3 million extra dollars that year.
It's incredible.
Now, sometimes, congressional revenuers will do reports
like they did clear back in 1990,
and they'll go, "You know what, we ought to maybe tax
"the inside buildup inside of insurance."
And most of the time people say, "No, no, no, no,
"you will be killing the incentive
"for people to take ownership of having life insurance
"to be used for death benefit and living benefit.
"And we're gonna have to shell out
"additional welfare benefits for people
"that we're trying to be responsible and accountable."
But they go well, "Okay,"
but we think people are overstepping their bounds
when they take out policy loans.
Let's tax loans out of life insurance.
Well, the biggest problem is,
if they do that, they're sort of trapped.
Now, they have to redefine what constitutes a loan,
a taxable loan versus non-taxable.
A loan, if you borrow money to buy a car,
you have to pay tax on that loan, no, that's stupid.
You wouldn't buy a car.
If you borrowed money to buy a house, okay,
and you borrowed 500,000 for a mortgage on a house,
and they charged you 20% tax, that's a hundred grand.
That would be absolutely stupid for them to tax loans.
And so, they're sort of trapped.
If they are greedy
and want to tax loans taken out on life insurance,
they've got to redefine what is a loan,
and that's gonna be pretty tricky.
And so, every time they've studied it this far,
they've said, "You know what,
"let's just not open this can of worms,
"let's let it be tax-free."
It's usually because they're greedy tax revenuers
trying to fund their spending.
And this is where they look towards,
"Oh, here's a whole bunch.
"Here's trillions of dollars over here
"in insurance policies, and people are borrowing,
"Let's tax them on that.
"We think they're abusing it."
Well, it would shoot 'em in the foot to do that.
But also, you know what,
a lot of Congress people own these.
And they've also said, "If we changed it, you know what,
"we would grandfather people
"who already established insurance policies
"under old tax law,
"we would only change it on new policies."
That's why I always say,
if you're gonna get one of these, get one sooner than later
so you can be grandfathered if they change tax laws.
Okay, how can you learn
about how to max fund a life insurance policy
the way I've been talking?
Well, this is my 11th book, it's called "The Laser Fund."
It's been flying off of our warehouse shelves.
I wanna gift you a free copy of this 300-page book.
Why? 'Cause it's actually two books in one.
This side is 200 pages, 14 chapters,
with all the charts and graphs
if you're a left brain learner.
If you're a right brain learner,
you learn by stories and examples, you flip it over,
and this one's a hundred pages, 12 chapters,
with 62 actual client stories.
You can read both, of course,
but here's how you claim your free copy.
Simply go to laserfund.com, L A S E R fund.com.
Just click on the link below,
and you contribute a nominal amount
towards the shipping and handling,
I'll cover the rest of that cost,
but I want you to have some skin in the game,
and I will pay for the book.
I'll fire out a copy to you.
They retail for $20 or more on Amazon,
but no, you don't have to pay that.
But there's options there to listen and learn,
watch and learn, check out the online webinars
that we teach on a regular basis.
There's even an opportunity
if you want to talk to an IUL specialist
to see how this may apply
in your particular set of circumstances,
with no cost or obligation on your part.
Is that fair enough?
So, here's to you and your brighter future.
(ambient guitar music)