Get grandfathered in. In this episode we are going to address the question "Can
the government change the tax laws as it relates to max-funded IUL, indexed
universal life. So, get ready. You're going to understand some very powerful things
about the Constitution of the United States.
So, my name is Doug Andrew and
I've been a financial strategist and retirement planning specialist for more
than 45 years. And I've been asked this question many, many times when I
explained how max-funded indexed universal life known as IUL is sort of
like a sacred cow in the Internal Revenue Code. Even before 1997, when
indexing came out, it was just universal life which was the brainchild of EF
Hutton clear back in 1980. And so, people would ask me, "Well, golly. Doug, this is
pretty incredible. But can the government change the tax laws as it relates to
these?" And my answer is, "Well, yeah." The government can try to do anything they
want. But let me share with you why I feel very safe that they will probably
leave these alone because they have looked at these many many times. But also
because of the grandfathering clause that is afforded in the Constitution. I
think it comes under and the ex post facto provision of the Constitution of
the United States where basically the government is not supposed to pass new
laws that adversely affect something that you established under previous laws.
Now, I can't guarantee that they won't touch the tax-free nature of indexed
universal life or whole life insurance. But they've tried or considered it
several times. And I'm going to share with you the last in-depth report that
they put out. And I'm talking about the general Accountability Office,
the house ways Senate and Finance Committee's. When they look at, "Hey, we're
hard up for tax revenue." So, the tax revenue errs often look at where the
cash cows are. Where is the money that has been accumulated. Now, we know that
they look at IRAs and 401Ks as sort of a savings bond. It's the best savings bond
the government ever came up with for themselves because they have a permanent
tax lien on your tax deferred IRAs or 401K. So, naturally, a person would go,
"You mean, if I put money into a max-funded IUL, it will accumulate
tax-free. I can take it out tax-free?" Yep, that's under Section 72(E) and
7702 of the Internal Revenue Code. It's been that way for over a
century. Well, I know when you die, it's always been tax-free when it transfers
in a death benefit. Yep. Well, could Congress pass a law to change that? Yes.
But let me tell you what normally happens. Back in 1990 for
example, the government was hard up for money. And so, they did an extensive study.
I remember reading the summary a white paper. It was about this thick. It was
published. And they basically came up with 3 conclusions, okay? First of all,
when they studied the economics of it, it would be a short term windfall. Of all of
a sudden they taxed you on the inside build-up of cash inside your insurance
policy. And heaven forbid, if they taxed death benefits that if you left behind a
million dollars of life insurance, your family would only get 600,000 or 700,000
of that. They realized they would be shooting themselves in the foot. In other
words, when they did the analysis, any tax revenue they may get in the short run by
taxing these, they would pay way more in the long run in additional social
security or welfare benefits or helping people who ran out of money in
retirement or people who left behind a widow orphans that they would be relying
and going to the government for help sooner because they had taxed
these insurance policies. So, when they actually did an analysis, they realized
that it would cost them money. It would be shooting themselves in the foot if
they tax them. So, they said, "Leave it alone." Wait till you hear the next 2
reasons why they said leave it alone. So, in this report, it became quite
obvious that the insurance industry, a multi trillion dollar industry, the
backbone of America where governments go to for help, okay? That they're one of the
strongest lobbies in the United States. So, first of all, it would be very
difficult to all of a sudden pass a law that would adversely affect people who
are trying to be self-reliant. To set aside money for their future and not
outlive their money. Or if they happen to die or get disabled that they would not
be a drain on society by relying on the government to take care of them. And so,
the lobby is so strong they go, "You know what? This is an uphill battle to do this."
But to be honest with you, there's a lot of politicians that own max-funded
indexed universal life insurance. Or even whole life insurance. And they don't want
to hurt themselves. It may be self-serving. But they use
these. So, why would they pass a law that adversely affects where they have their
money, okay? And so, they said "Leave it alone." But here's the third reason: They
said if we ever did consider passing new laws, we would grandfather everybody who
had established insurance policies prior to this law. And that's called
grandfathering because you don't have to comply with a new law. And there has
already been a strong precedent set for this. So, I'm going to give you example of
this with the ones that I've owned myself when new laws were passed. I
didn't have to comply with the new laws. So, for example, when universal life was
for introduced in 1980, brainchild of EF
Hutton... And they weren't an insurance company, they were basically proponents
of saving money. and they realized a lot of people did not like the volatility of
the stock market. And they didn't like being taxed sooner or later if it was a
tax-deferred account like an IRA or 401K. And they said, "Hello! Some of the
strongest institutions in America and the world are the legal reserve
insurance industry." And if you put money in them and back in 1980, the general
account portfolio interest rates that these companies were earning on their
portfolios of triple-A and double-A bonds and mortgages on shopping malls
and skyscrapers and so forth. They invest very little in stocks but they're very
conservative. But see their average return was between 10 to 15 percent. In fact,
from 1980 to 1990, I never earned less than 11 and 3/4 percent by having my
money in the insurance contract. And so, interest rates were high. But the
insurance industry could pay you that kind of a return totally tax-free because it
was insurance. And the EF Hutton said, "Golly, we would have to be earning for
our clients 15% or 16% in a tax-deferred IRA or 401K account in the market to net
the same 10% after paying tax and fees. So, they go why don't we just bypass the
volatility? Why don't we bypass the middleman and
have people put money directly into the insurance companies where the banks and
the credit unions invest some of their tier 1 assets for liquidity and safety?
And let them earn 10, 11 percent?" So, I earned 11 and 3/4. Let's just round it down to 11.
So, from 1980 to 1990 if I earned 11, I netted 10. Only one percentage point of
my earnings went out to the cost of the insurance. And that is what made it
tax-free. Because it paid for the insurance that the IRS said had to be
there or it wouldn't qualify to be tax free insurance under 3 sections of
the code 77(E), 7702 and 101(A). And so because of that, money
inside the insurance contract would accumulate tax-free at great rates of
return. Later on, when interest rates came down, then indexing came out. And you can
then assign the interest you're earning, the 5% or 7% or
whatever the insurance company is earning, you can take that interest and
allow them to buy up side options. So, when the market goes up, they can pay you
10 or 15 percent. But if the market goes down, those options expire worthless.
You didn't make anything but you didn't lose the principle you started out with.
And you will average usually about 2, 2.5 percent higher rates of
return. And this is where I have averaged over 10% on my max funded IULs
during that time period. The point is this: I took out my first ones clear
back in 1980. Now, in 1982, the TEFRA Act was passed. That's a tax citation. Tax
Equity Fiscal Responsibility Act. Then in 84, the IRS didn't know what they were
doing really and so they had to clarify it 2 years later. That's the Deficit
Reduction Act. That's DEFRA. Under TEFRA and DEFRA, it dictated the minimum
amount of insurance you had to have in order for it to fall under the
definition of tax-free insurance and not move over to another portion of the code
which is a taxable investment. I had insurance contracts before TEFRA and
DEFRA. I didn't have to comply with TEFRA and DEFRA on those. Only on new ones
thereafter. In 1988, the TAMRA law was passed. That's the technical and
miscellaneous Revenue Act of 1988 that said you cannot fund it any faster than
5 years. If I wanted to put in a half a million bucks, 500,000
like many of my clients did, they could only put in 100,000 a year
for 5 years thereafter in order to have tax-free income the rest of their
life. It took 5 years to grandfather themselves. Prior to Tamra, you could put
in the whole half a million in one fell swoop.
So, people who did that, they were grandfathered if they had their contract
before Tamra. The point is it behooves you to get grandfather. Because if
Congress ever gets greedy and wants to mess around, you want to be grandfathered
because you have an existing contract. But even if you've been minimum
funding, now you can make up for all that time you put going to put in this much
money and they only put in this much. But you're grandfathered. Because you
established it prior to any tax law changes. Can I guarantee grandfathering?
No. But the precedent has been set and we have a huge lobby and I think that this
will stay a sacred cow for the rest of my lifetime and hopefully yours too. So,
if you want to understand the answers to not only that question and more depth.
But many of my subscribers to this channel get similar answers to similar
questions. And you can also get answers by reading the book The Laser Fund. It's
my 11th book. It's actually 300 pages, 2 books in one. 200 pages contain
charts, graphs and explanations. 100 pages contain 62 actual client stories.
I'll tell you what. I'll buy this book. The books on me. I want to gift it to you.
Go to laserfund.com and you pay $5.95 shipping and handling and
I'll send the book out to you absolutely free so that you can become empowered
and get answers to some of these critical questions that will make a
difference for your brighter future.