Self-insure for tax-free living benefits. In this episode, we're
going to address the question "Why would i want to pay the most
premium into an IUL policy?" This is episode 14 out of 21 in a series
called Secrets To a Tax-Free Retirement
and I would advise that you invest a few hours
and view the entire series to empower you to be able to accumulate an extra
million bucks. Why? Because that million dollars
can generate an extra 1,000 a year of tax-free income
for as long as you retire. This is a free course.
So, at the end of this episode, I'm going to show you how you can
claim your free copy of my most recent best-selling book. It's a 300-page book
titled The Laser Fund: How To Diversify
And Create The Foundation For A Tax-Free Retirement.
It's actually 2 books in 1. One is for left-brained learners and it is
comprised of about 200 pages, 14 chapters with all kinds of charts and
graphs. And in that book in chapter 13,
you will learn how to self-insure the self-assurance of being self-insured
which i'm going to talk about in a little bit of detail in this
episode. You flip the book over and there's about 100 pages with
12 chapters with 62 actual client stories explaining how a max funded
indexed universal life insurance policy can be used not only for retirement,
probably the most popular use of the contract. But also for
a business, working capital, for college funding,
for real estate equity management, for lump sums for emergency funds and on and
on and on. But let me explain the concept that I
touched on in previous episodes at the beginning of this series
so that now that you've had some understanding, if you've been watching
these in sequence of how this came about and how it works.
So way back again when EF Hutton came up with the idea
of taking the least amount of insurance the IRS will let you get away with
and putting in the most premium. A lot of people said, "Well, why would you want to
do that?" It's because up until 1980,
most people took out life insurance for death benefit. In other words,
what's the least amount of premium? What's the cheapest premium
I can pay to get the amount of insurance I need? 2
or 3 million or 5 million or whatever because you want to have the
least expensive insurance in order to pay off the greatest amount
when you die. EF Hutton said, "Whoa! Let's flip those
objectives. Let's use it for living benefits." Tax-free accumulation
because it is a sacred cow in the internal
revenue code sections 72 E, 7702 and 101 A as explained in
previous episodes. And as long as you comply with the tax
citations TEFRA, DEFRA and TAMRA, this turns into
a tax-free sacred cash cow. Now, people always say, "Well, why
would you want to pay the most premium?" Because your objective is for living
benefits. You want the highest internal rate of return.
So that you might earn a gross of an average of 11%, you want to
net 10%. If you earn 16, you want to net 15. If
you earn 8 you want to net 7. You want only one of those
percentage points to sort of go out in
the spigot on the bucket when you see an illustration of an insurance
contract. I often show a bucket. And there's a
spigot at the bottom. And that drains out a small cost --the
cost of the insurance that the IRS says has to be there or
it moves from the tax-free sections of the code under insurance over to the
taxable portion of the code, investments that are
also subject to market volatility and taxes sooner or
later. You want to stay grandfathered and
protected under the tax-free portion. So, you must have a commensurate amount
of insurance coming along for the ride. That was dictated under the tax equity
fiscal responsibility act of 1982 and the deficit reduction act of 1984.
But the concept really started with self-insurance.
So, in a previous episode, I talked about how if you wanted to set aside let's say
a half a million bucks, back in 1980, people could put a half a
million into an insurance policy and the death
benefit was basically a half million. Well people say,
"Well, who pays a half a million dollars for a half million of life insurance?"
If you're using it for tax-free living benefits so that that half a million
generates at 10%, 50 grand a year of tax free income
instantly which many people experienced. That is when you want to have the least
amount of insurance. And that's when the IRS said,
"What are you doing? I think you're overstepping your bounds." And
and they went to court and they went back. And
that's when TEFRA and DEFRA was passed. That's when they said you have to have a
commensurate amount of insurance. There's got to be
some risk. And if you put a half a million
into an insurance policy that has a death benefit of a half a million, there
is no risk. The insurance company is not at risk. So,
how do they make their money? By investing your money. So, when they
invest your money they make money investing the
money. But if they don't have any risk, then
golly! They can invest your money. And the cost
they charge you for the amount at risk goes down as you get older. And that's
why I explained in previous episodes the
cost of the insurance can get cheaper as you get older.
So, how does this all play into: "Well, okay how much am I charged
for the amount at risk?" So, this may be a bit of a review
if you've watched previous episodes. But let's say for a 60-year old
after Tefra and Defra tax citations were passed,
the minimum amount of insurance at risk to the insurance company that was
required if you wanted to put in a half a million
dollars was about a million two hundred and fifty thousand dollars.
But hello? If the insurance required to qualify for tax-free accumulation and
tax-free access was a $1,250,000 for that 60-year
old. For a younger person, it was more
insurance. For an older person less insurance because the
cost of the insurance is the same no matter how young or how old or how
unhealthy you are because the amount of insurance can be
squeezed down. It's called squeezing down the death benefit
so that if your objective is internal rate of return within one percent of the
gross rate of return, if you're going to uh average 11 and net
10 like I have, you want only one percent coming
out to pay for the cost of the insurance that the IRS says has to be there
or it won't be tax-free. Whether you're 80, whether you're 60, whether
you're 20, okay? And so, uh at
age 60, it would be a 1,250,000 for an insurance contract where you put
in a half a million dollars in what is called the guideline single premium. You
don't have to put that in all at once. But back then you could. So, if you put in
a half a million bucks and you die, you could actually opt
to have the cash value added on top. Well, that's if you want to maximize what
you leave behind. If you want to maximize your internal rate of return
so that if you earn 11 in that 10, instead of earning 11 and only netting
7 or 8, you want to have your cash inside the
insurance policy that you put there and the interest you earned on
it qualify as part of the death benefit.
If I put in 500,000 and the death benefit was a million
fifty as required under Tefra and Defra. The only amount at
risk is the remaining 750,000.
Now, my half a million growing at 10%
is going to be worth how much in 7.2 years? Rule of 72,
if it's earning 10%. A half a million is going to grow to a million.
Now, I have a million of the million 250 is my
own money. I'm self-insuring. It's my money.
The insurance company is only at risk now for 250,000.
So, even though i'm 7 years older,
the cost of the insurance has gone down because i'm only paying for one-third
the amount of insurance i was paying for 7 years earlier.
I was paying for 750,000 at risk. Now, I'm only paying for 250,000.
If you do the math, a million in another
7.2 years at 10% will double to
2 million. "Well, wait a minute I have 2 million dollars of
cash inside my insurance policy and the death benefit was 1,250,000?
No problem. Tefra and Defra says now your death benefit will
grow with your cash. It cannot be the same until you're age 95 or 100
depending upon the contract. It has to stay 5 percentage points
ahead. So, if I have two million of cash value,
the insurance is 2,100,000.
5% higher. But the insurance company is only
charging you for the hundred thousand dollars they're at risk
for. Because you self-insured the other 2 million. Now, even though
you might be another 7.2 years older, you are only paying for
100,000 of insurance now. And you have 2 million dollars earning
all this tax-free interest. So, you're earning this much
interest and the cost of the insurance is only this now because the amount of
insurance you're paying for has gone down dramatically since you
opened the account or started the insurance
policy. So, what does that mean at the end of the
day? So, many times i will state an average
cost of the insurance over the first 10 or 20 or 30 years
of about 1% In the earlier years,
it could approach 2%. But the longer you go,
the cheaper the insurance becomes. So, if during the first 20 or 30 years of an
insurance policy you were to average a gross
return of 11, you would be netting probably at
least 10. If you earned in any given year
8, you'd net 7. If you earned 16, you'd net 15.
Some years you earned 25 unit 24. So, one of those percentage points pays for
the cost of the insurance and all of the fees that are associated with the
contract. That's the average. But the older you get,
the more money you're making on your money as it compounds and grows.
Therefore, the amount of insurance that you're paying for
is less. Right now at my age, the insurance that i'm paying for is
120th what it was when i was 30 years younger.
So, if i'm only paying for 120th the amount of insurance even though i'm
older, I have so much cash earning
interest that just a minuscule portion of that interest is paying for
the cost of the insurance. And so, if i earned 11% on some of my
oldest universal life insurance policies, (this
year if i earned 11) I would probably net 10.9. The insurance
is costing me one tenth of 1% this year. But
average over the life of it, it's usually within
1% of the gross rate of return. You wouldn't believe how many financial
advisors and insurance agents do not understand that. Sometimes they go, "I've
never seen one that has done that!" Well, then
you haven't seen one that has been structured correctly
because unfortunately, the vast majority that i look at are not structured
correctly and funded properly. So, I implore you to continue to watch
the other episodes in this series Secrets To a Tax-Free Retirement because
it's critical that you structure it correctly and you
can take advantage of self-insuring your future. And have the
cost or the risk go down, down, down as you get older. So,
if this episode is intriguing you and you'd like to learn more,
be sure and watch this next episode. But if you like to read and learn and watch
and learn and listen and learn, I would invite you to claim your free
copy of my most recent bestselling book, The Laser Fund. It contains over 300
pages of charts, graphs, explanations in-depth detail. And when
you flip the book over, you can read 62 actual client stories
and examples. So, to claim your free copy, I'll pay for the book. You
go to laserfund.com. Pay $5.95 shipping and handling and i'll
fire out a copy for you to study and learn.
And then you can become empowered to have a brighter future.