What three ways can you access money income-tax-free out of an IUL policy?
why do savvy investors borrow money out of an IUL? By the end of this episode, you will understand
that you can access money tax-free from an IUL policy. The sad way, the dumb way, and the smart
way and I would recommend the smart way and this is by far the absolute best way to access money.
So, I'm Doug Andrew I've been a financial strategist and a retirement planning
specialist now for north of 48 years and so during that time period one of my main objectives
is helping people and I've helped thousands of people optimize their assets
and minimize taxes. So they can enjoy retirement without worrying about the negative impact of
taxes, inflation, and market volatility. So, I make them immune from those three dangers because
taxes, inflation, and market volatility, is what causes most retirees to outlive their money.
So, my favorite vehicle to eliminate those dangers or make you immune from those is a max funded indexed
universal life. Because it's tax free so it doesn't matter what taxes go to, it doesn't affect you.
You also learn that you link your returns to the things that inflate. So, even though I don't
like inflation any more than you do. It doesn't hurt me, it helps me. Because I link my returns
to the things that inflate. I've always been blessed to be able to earn a rate of return
greater than the inflation rate of the time. If you understand this you will outpace inflation and
the third reason market volatility because that's going to continue to happen. You want to make sure
that when the market goes down you do not lose. But when the market goes up you benefit without
your money at risk or invested in the market you're simply linked to it. So, in this episode,
I'm going to go into how you access money. Because if you've watched other educational episodes
many times people go okay I'm beginning to get it and when you meet with a professional advisor.
If you understand the basics of sections 72(e), 7702, and 101(a). How to accumulate access and transfer
your money tax-free and how to adhere to tax citations TEFRA, DEFRA and TAMRA.
Many times people go, "Well, now review with me again. How can I access money out of this?".
Because a lot of times people think it's just growing there. No, remember the laser fund is what
I call a property structured maximum funded index universal life policy and laser means
liquid assets safely earning returns. So, you want liquidity. You want to be able to access your money
anytime. Now, a lot of times people do not touch it until they retire. But my heavens the
reason why I use IUL and why many people do as an emergency fund or working capital for business
is so that they can put money in there and they can use it like their own bank and they can access
money to be able to use in their business or to acquire real estate or what have you
and when they finally retire every million dollars can generate you know about a ten percent payout a
hundred thousand a year tax-free without depleting principle. Now, I'm going to show you three ways
that you can access money. The first way is the sad way. The sad way is one heck of a return
but I don't recommend that one, it's by dying. If I set up an IUL policy and I'm 60 years old
and I structure it to accommodate let's say $500,000
and it doesn't matter if I put in 500,000 or if I only put in the first 100,000
or the first 10,000. If I put in the first $10,000 and I happen to
die in an accident the insurance company's going to pay out 1,250,000. I could have gotten
way more life insurance than that. But even if I take the least amount of insurance the IRS will
let me get away with because I'm designing it to be used for living benefits. it's still going to
blossom to 1,250,000 if I die the day after I take it out and frankly, I've had many clients who
were in pretty good health but they died within a year or two and it blossomed and
left behind millions of dollars to their family and even my own brother included. I never dreamed
he would be killed in an accident and he was able to through his IUL policy to be able to empower
his widow and his four children to live in dignity. Because even though he was sucking away money into
his IUL policy for retirement he got killed in a one car rollover an accident and that blossomed to
a death benefit tax-free within three weeks. That allowed his wife my sweet sister-in-law
and their four children to be able to have still the dreams they wanted to achieve had my brother
been able to stay around. So, yes, it's the sad way but it is one heck of a return and many many times
when I go out hunting or fishing or whatever and my sweet wife goes, "Doug, be safe. I don't want a
grizzly bear to eat you", I go, "Thank you honey but if I do get eaten by a grizzly bear do me a favor."
She says, "What's that?", and I go, "Well, try to look down and look sad at my funeral because you're
going to be loaded with a bunch of money in about three weeks", she doesn't like me to say that.
You see, it's a tremendous rate of return tax free if I die but I don't recommend that one.
So, most people want to use it for living benefits and they do, they live long time.
So, I told you the other two ways are the dumb way and the smart way. So, why do we call it the
dumb way? If you watch some of my other episodes, life insurance especially max funded insurance
is one of the very few financial instruments in the internal revenue code that allows you to
accumulate your money tax-free but you can sort of mess it up by having it just be tax-deferred
if you do the dumb thing. Let me simplify this. Let's say you put $500,000 into an IUL policy
and let's say that you wanted to start taking out tax-free income. Clear back in 1980 people
could do that. They didn't have to spread it out over five years under the TAMRA tax citation.
So, back in 1980 clear up until 1988 I had many many clients put in 500,000.
They were earning 11 or higher but earning let's say 11 a netting 10. 10% net on 500,000 is 50 grand.
They could pull that out tax-free. Now, let's say they just withdrew the 50,000
even though that's the interest they're earning. If you withdraw your money I think that's dumb.
People say, really? Well, the internal revenue code says you can withdraw up to your basis without
paying tax because it's tax FIFO. The first money you put in is the first money coming
out that's called FIFO tax treatment. whereas most investments like annuities are taxed LIFO. If you
put 500,000 into an annuity and if you started pulling out 50 grand a year that would be 100%
taxable because the last money you're earning your interest is the first money coming out
if the annuity was paying 10%. Insurance it would take 10 years in that example
before you got back to 500,000 that you put in the first money you put in 500 is the first money
coming out, that's tax-free. But in this example in the 11th year now I would have to start paying tax
on 50,000 every year. I may only net you know if I lived in California I pulled out 50 I may
only net 30,000 in a 40% tax bracket. That's dumb, you don't have to do that. In fact, the IRS says
you don't have to do it that way. So, that brings us to the smart way. The dumb way is triggering
unnecessary tax and it's all nomenclature. It's semantics. You called it a withdrawal. Most savvy
investors borrow the equivalent of their interest or they just borrow money out of their policy.
People go, "What? Why would you borrow your own money?", stay with me here. Okay, let's say you had
a million dollars in a bank and you go to the bank and say, "Hey, can I withdraw my money. Am I 100,000 a
year", now, very few banks I'm sure pay 10 interest may be clear back in 1980 they did but not today.
But let's say they did. So, if you're earning 10 percent yeah you can withdraw your money but
you may say, "Well, why don't you just keep my money there in a CD and loan me the equivalent of the
interest I'm earning on the CD", well you could do that but the problem with banks is that they're
only paying you right now one percent and if you borrowed uh from the bank they'd probably
charge you five percent, that's dumb. But with an insurance company, it's the opposite. With an
insurance company, let's say you have a million dollars and you're earning 10% which many of
our clients can do this and so you borrow the equivalent of your interest. On a million you're
earning a hundred grand. You borrow a hundred thousand which is the equivalent of your interest.
Okay, why would you do that? Because loan proceeds are not deemed earned passive or portfolio income.
Those are the only three types of income Americans pay income tax on ever since the 1986 tax reform.
So, when you borrow for a house or a car you don't have to report that as taxable income it's
tax-free. Now, in order for it to be tax-free the IRS says, "Borrow the equivalent of your interest.
Leave your money in the insurance company earning 10 percent". So, envision this. You had
a million at the beginning of the year it earned 10 percent now you have a million 100 thousand.
You borrowed out the equivalent of that 100,000 of interest. So, now you have a
$100,000 loan. This loan is not doing payable during your lifetime it's like a
phantom loan. It's washed away when you die. This 100,000 loan is collateralized
by this 100,000 of interest, you just earned on your million. Your million one hundred
thousand minus the 100,000 dollar loan is the same million left that you would have had
had you pulled it out the dumb way and maybe paid tax. By having it be a loan proceed it's tax-free.
Well, what's the catch? The IRS says the insurance company in order to make sure
it's tax-free has to charge you an interest rate. The minimum statutory interest rate
it might be 2%. So, the insurance company on their ledger is charging you two percent
on the hundred thousand dollar loan. But guess what? They're crediting you the same
two percent on the 100,000 of interest you just earned that collateralized that loan.
Now, the original million is still earning you know ten percent but this is called a
zero washer zero cost loan. So, you go through the years and you keep borrowing 100,000
a year and it keeps accruing interest at 2% but it keeps compounding at 2%.
It's a zero-wash loan. It doesn't cost you anything to call it a loan but it's tax-free.
At the end of the day, 20 years down the road you have a two million dollar loan balance. You've
been pulling out 100 grand a year for 20 years. You don't have to write out a check for that it's
washed away because this has grown to 3 million, 3 million minus 2 million equals the same million
that you would have had had you pulled it out the dumb way but that's tax-free. So far so good? Let me
blow you away with this next concept. I started out this episode talking about what savvy investors do.
Savvy investors will borrow but they won't use the zero washer zero cost loan
What will they do? They use an index loan especially when the economy is doing well.
What's that? They'll tell the insurance company, "You know what? I want you to loan me the equivalent of
my interest", let's say a hundred thousand a year in this example, "But you can charge me a higher rate
four percent. You can charge me four percent", because the insurance company will charge a
little bit higher rate but they'll guarantee that. Why would you let them charge you four percent
when you can get away with 2%? Because on the money you're earning over here on all of
that as it compounds they're crediting you on the entire amount, not just the original million.
As the million is growing with the indexed rate they will credit the entire balance at 9%, 12%, 25%.
Hello? We had a client in 2017 that borrowed a million dollars out of his IUL policy.
They charged him five percent for that index loan in 2017 but he earned 25% on his million.
So, he had 1,250,000 minus the 50,000 of interest he netted 20% or 200 grand on his million
while he was using it in real estate to make money even though he borrowed it from the company.
Because he was making 25% and only paying 5% to borrow instead of withdraw. If he had withdrawn
it he would have missed out on $200,000 that's why savvy people do this.
They borrow it because it's a phantom loan it's not doing payable during your lifetime. It's
washed away with the death benefit. But you can do a zero-cost loan. Whatever they charge you
they credit you, it doesn't cost you anything to call it a loan and it's tax-free and the IRS says
do it that way. But if you want, they can charge you a little bit higher rate and they'll credit you
whatever the index rate is. That's called arbitrage or spread and this is what allows so many people
that if they have a million dollar nest egg and if it was only earning eight percent by borrowing
it out they usually get at least two percent or higher on the average. So, they can actually
pull out 100,000 dollars a year even if they're only earning eight percent and not
deplete principle because they're earning money by using the borrowing or the smart way to access
money. So, if this is blowing you away you need to meet with an IUL advisor to see how this really
works and they can create illustrations to show what this means with your money in your particular
set of circumstances. Before meeting with an IUL specialist make sure that you watch several of
these episodes, post a comment, share with others that you think would benefit from learning this.
But make sure this is your textbook. If you have not claimed your free copy of this book do so now
by going to laserfund.com laserfund.com or click on the link below and you contribute
a nominal amount towards the shipping and handling and I cover the rest of that cost
and I pay for the book. It retails for 20 bucks I will gift it to you free. There's options
there if you would rather listen and learn and watch and learn. But there's a choice in there
if you want to set an appointment with an IUL specialist to see how these concepts apply in
your particular set of circumstances. But do me a favor, if you set an appointment make sure you
meet with that advisor having understood some of the basics at this level instead of down here.
By studying this and watching as many of these videos as you can before that appointment. Then
you will have the highest and best use of your time and the advisor's time and instead of
trying to understand the basics you'll see how these concepts apply with your numbers right off the bat.