Universal life can become cheaper as you get older. In this episode,
I'm going to hit the question doesn't IUL
get more expensive as you get older and it can lapse? Absolutely not if it's
structured correctly. You're going to learn how and why in
this episode.
I'm Doug Andrew and I've been doing this
for more than 46 years for clients. Helping them optimize their financial
assets, minimize taxes and empower their authentic wealth.
My favorite vehicle, dream solution for many goals such as
retirement, college funding, business working capital,
emergency funds, real estate management and on and on and
on is what I call The Laser Fund. A laser fund is a max funded indexed
universal life insurance policy. So, if you're asking this question, you
probably already know a little bit about IUL.
If you are not aware of the Tefra, Defra and Tamara tax citations,
I want you to search other videos to understand these.
But when you design an IUL policy correctly,
if you're doing it for living benefits, first and foremost, to be able to grow
the most cash value and then have the highest amount of net spendable
income, it will knock the socks off of other traditional investments
like IRAs and 401Ks especially invested in the market.
It will double or triple the cash flow that you would get out of the same money
put into a whole life insurance policy. because universal life was designed and
first thought of by EF Hutton to be for living benefits, for tax-free
accumulation and income not primarily for the death
benefit. When you understand that, this is how you
can make sure that if you earn an average like I have between 6 to 10
percent rates of return, that you're netting 5 to 9 percent
rates of return. Now, to be honest, with index universal life, there there are
years I've earned 17%, 25%, even 55% with a multiplier, a
performance factor. But the average has been around 11
netting 10 for a 25 year period using indexing.
I've been able to achieve that. But with just
normal universal life, my average returns have been around 8.2%.
But interest rates are relative. If you want to have the highest rate of return
net compared to the gross rate of return that if you only earn 7, you would
net 6; make sure it's structured correctly
so the insurance gets cheaper as you get older. Now, most people
when I say, "Hey, insurance get cheaper as you get older."
No, insurance always is more expensive when you get older.
Now, the cost of insurance per thousand of benefit goes up as you get older
because people more and more people die the
older they are. But the actual amount at risk in a
properly structured indexed universal life insurance policy
goes down, down, down to 120th what it was when you started when it's
structured correctly. So, let me explain how this works. So,
under Tefra and dDefra tax citations, Tefra is the tax equity fiscal
responsibility act of 1982. Defra is the deficit reduction act of
1984. If you've watched my educational videos,
hopefully you understand that what you're doing is you're structuring
your insurance policy to have the least amount of insurance
the irs will let you get away with under tefra and defer tax citations
and put in the most premium that the IRS allows as fast as they allow.
So, the example that I use to keep it simple is a 60 year old for example that
wants to put in $500,000. They used to be able to put in
500,000 in one fell swoop after 1988.
They had to spread it out over 5 years in order to
grandfather themselves to have tax-free income forever
after. And that's because the banks and credit unions lobbied congress to
to slow the flow. But they didn't want to kill these because this is where they
put 30 to 40 of their tier 1 assets for
liquidity and safety. And so, we have to comply with 3 tax
citations tefra, defra and tamra. When you structure your IUL properly,
then you take the least amount of death benefit. And then I
choose usually the level death benefit where
you can put in your cash contributions and they qualify as part of the original
required death benefit. So, if i was 60 years old and I wanted to
be grandfathered to put in 500,000, the fastest
I would want to do that would be in 5 years. 100 grand a year for five
years. The minimum death benefit under tefra
and defra for a 60 year old is 1,250,000 or thereabouts.
If i was 75 or 80, it would be less than that. If i was
22 year old female, it would be 5 or 6 million maybe.
But see, the actual cost of insurance is the same
if your goal is to earn (like I have) 11%
and net 10. You want to have only 1% of your interest rate out for
the cost of insurance. So, when you design it correctly in the
first place, you take the least amount of insurance
under tefra and defra to put in the amount of money you want to be
grandfathered to put in there. And then you put it in as fast as the tamra law
allows. As you do that in that example, if i'm putting in 100 grand a year,
after 5 years, I put in 500,000.
The original death benefit was 1,250,00.
Well, once I have 500,000 in there of my money,
the death benefit is 1,250,000 but I said, "You know what? I want my 500,000 to
qualify as part of the 1,250,000. So, the net
amount is the difference the 750,000 is all the insurance companies at
risk to cough up if you happen to die. Because 500,000 of the 1,250,000 is
now your own money. Why would you do that? You could opt
to have the death benefit always be on top of your cash.
But now you're going to pay for 1,250,000 of life insurance the
rest of your life. That's whole life. Okay? I don't want that. I want the cash
to qualify as part of the death benefit so what they're charging me less and
less as the risk goes down. If a half a
million of cash value doubles in 7 ½ years
like it has in mind. Or if you only earn 7.2%, it would
double in 10 years. Now, you're half a million goes to a
million. The original death benefit was a 1,250,000. Now, there's only 250,000
that the insurance company is at risk to pay out
if you happen to die. They only charge you for that net amount of risk,
okay? Well, the million doubles to 2 million. And another 7 ½ or
10 years. Well, wait a minute. You have 2 million of cash, the original death
benefit was 1,250,000. Tefra and defra says well now the death
benefit grows with your cash. And it must stay 5 percentage points
ahead. What does that mean? It means that when I
have 2 million, the death benefit is 2.1 million. The insurance company is
only charging me for 100,000. But the interest on my 2 million dollars is
way more than paying for the cost of insurance the 100,000 even
though I'm older. And so, that's why the older I get
the cheaper the insurance becomes. When I tell people I''ve been averaging 11
netting 10, or if i earn 9, I net 8 or
whatever it is, that is based on the average. But the
older I am, if I've had a policy for 30 years, if
I earned 11 i might net 10.9 because the cost of insurance is way
more than compensated with the interest on my cash value.
And so the net cost is very, very small. And this is what allows me
to take income on a million dollar nest egg
of maybe a 100,000 a year without depleting principal.
Because the cost of insurance is so low, it becomes cheaper as I get
older. Hopefully you're getting this. But one last
point. Sometimes whole life insurance proponents say,
"Well, with whole life, you get guarantees. It will never
lapse." Well that comes with some very rigid requirements. You have to put in a
set amount of premium payments for the first several years or
else it will lapse you do not have those guarantees anymore.
If you want guarantees, if you think that the economy is going to be horrible for
the next 30 or 40 years, you can get those same guarantees in a
universal life policy. You're going to pay for them like you do
in a whole life policy. But with universal life, you can actually
pay a little premium for a no lapse guarantee.
You may give up a little bit of your cash flow or rate of return. But it means
this: You can suffer the policy to lapse which
is what a lot of whole life people say, "Oh,
the universal life will crash and burn." Well, first of all, they don't understand
how the insurance gets cheaper as you get
older. But you can actually purchase a rider that says, "Your policy
will never lapse if you live to be 120 if you will
simply take out only this much income a year." That's called a no-lapse
guarantee. So, anything that maybe a whole life
insurance agent may say, "Well, whole life does this." I would argue,
"Well, yeah. But you're paying for that. You're only going to earn maybe
6% and you're going to net 3." The best whole life I've ever seen
if you earned 8, you would only net 6. I would rather earn 9 a net 8
or earn 11 a net 10. You do that with universal life. And
if i'm worried that, "Well, what if this lapses? What if
what if the cost of insurance somehow goes through the roof?" I'm going,
"No, no, no. It has to be within the contract."
I can purchase the same guarantees on a menu that whole life offers with
universal life. I don't do that because frankly, I base
it on some of the worst periods since the great depression. And i know that's
very highly unlikely that there won't be enough cash in there
to keep me insured if i live to be 120. So, you have the same choices. But don't
overpay for the guarantees and trade it off
for a million dollars of cash value only giving you 40,000 a year of income out
of a whole life policy (let's say) compared to
80,000 or more that you could get out of a
universal life policy that has the same amount of cash in it. Does that make
sense? If you would like to learn more about
how this works, I would recommend that you read and study my most recent
book The LASER Fund. I'll gift you this book for free. It's 300 pages
of charts graphs explanations. 62 actual client stories. I'll pay for the book.
You can claim your free copy by going to laserfund.com.
L-A-S-E-R, fund, ".com". You contribute $5.95 toward the shipping and handling
and I'll send out a book to you. And there's options there to listen and
learn and watch and learn also.