- How accessing money from an IUL actually works?
In this educational episode,
I'm going to explain that there's a sad way, a dumb way,
and a smart way to access money out of an IUL policy.
Of course, my favorite is the smart way,
and there's two different ways to do it the smart way.
So get ready, you're gonna be blown away
with what I'm going to share with you.
(upbeat music)
So I'm Doug Andrew.
I've been a financial strategist
and retirement planning specialist now
for nearly five decades,
helping thousands of people optimize assets, minimize taxes,
and prepare for a comfortable retirement,
so they will not outlive their money.
Well, one of my favorite financial vehicles
that eliminates the dangers of taxes, inflation,
and market volatility,
those three dangers, by the way,
are what caused most retirees to outlive their money.
My favorite vehicle that eliminates those dangers
is a max-funded IUL policy.
And so it allows you to accumulate money tax free,
and you're able to participate when the market goes up
and not lose money when the market goes down
by using this strategy called indexing.
And if you don't understand how that works,
be sure and search other educational episodes
on this very channel.
But in this episode,
I want to talk about how do you access money?
Because, usually, people that I would help
would accumulate money tax free,
but then they wanted to use IUL for living benefits,
not just a death benefit.
In fact, that was the whole idea behind universal life
when EF Hutton came up with the idea in 1980.
They wanted to use the tax-free accumulation
and tax-free access for living benefits
as a superior alternative to IRAs and 401ks,
or investing in the market
where it's volatile and so forth,
by using insurance for living benefits.
So in a nutshell,
if you don't understand what I'm talking about,
you're taking the least amount of insurance
that the IRS will let you get away with
and you're putting in the most premium or the most money
that the IRS allows as fast as they allow.
And so if you wanted to reposition, let's say $500,000,
which I've had many clients do even clear back in 1980,
you could have bought a ton
of life insurance coverage for 500,000.
That's not the objective.
You wanted the least amount of insurance.
And so it was usually about double that.
For 500,000, you were required to have a million
or 1,250,000 if you were 60 year old, let's say.
The younger you were, you had to have more insurance.
But see, the objective was to earn a rate of return
like many of my clients did from 1980 to 1990.
They got credited between 11 and three quarters
to as high as 15.5%.
Let's just round down to 11.
They wanted to earn 11% gross and net over 10.
Yeah, our clients did.
They were able to earn 11 and net 10
because the cost of insurance
only sort of depleted or drained out one percentage point
out of the 11% they were earning.
And so they were netting cash on cash 10%.
And so if they put in a half a million bucks,
they were netting 10%.
That's 50 grand a year.
And many of them started to take out 50,000 a year
of tax-free income.
Yeah, it knocks the socks off of other alternatives.
You would have to be earning 15%
in a tax-deferred IRA or 401k in the market
to net 10% in a 33% bracket after paying tax.
You only had to earn 11 to net 10 in an IUL.
And so there was a massive exodus of money
that left the banks and the brokerage firms
and what have you into these 'cause these were safer.
They paid higher interest,
and they were not subject to the market downturns.
Your money was out of the market,
and you were able to earn 11 and net 10,
instead of having to earn 15 to net 10
having your money in the market in a tax-deferred account
because money inside of an insurance contract,
it's tax free under Section 72e
and 7702 of the Internal Revenue Code.
72e, you accumulate your money tax free,
7702 tells you how you can access your money tax free.
Now, one additional section of the code, 101A,
says at the end of the day,
anything left in the account, the policy,
blossoms and transfers income-tax free.
But the main objective for most of my clients
has been the living benefits.
So you can access money by dying.
That's the sad way.
If I put in, you know, $500,000
or even just a hundred thousand and I die
in an unfortunate accident
and I have a million dollar death benefit,
that's one heck of a return.
I put in a hundred grand and I die
and my kids, my spouse gets a million tax free.
That's one heck of a return.
But I don't recommend that one, but it protects me.
There's the dumb way.
Now, let me just simply say this.
If I had, let's say 500,000,
let's go back to that $500,000 example back in 1980.
If it's earning 11 and netting 10, that's 50,000.
Now if I withdrew 50,000 a year,
it's tax free for the first 10 years in that example
because life insurance is one of the very few investments
taxed FIFO instead of LIFO.
If you don't understand FIFO versus LIFO,
LIFO means last in, first out.
Annuities are taxed LIFO.
If you put 500,000 into an annuity
and you start pulling out 50,000 a year,
you have to pay tax on that
because the last money you're earning,
your interest is the first money coming out.
It's taxed LIFO.
Life insurance is taxed FIFO.
And so the first money you put in, that 500,000,
if you're pulling out 10% a year,
it would take 10 years before you recovered your basis,
or that 500,000.
That's tax free 'cause it's already been taxed.
But that's dumb,
because starting in the 11th year in this example,
you would be paying tax on that 50,000
from that point forward.
You don't have to do that.
The IRS actually says, "Well, that's stupid."
You could do it the smart way.
What is the smart way?
You simply say,
"I want to borrow the equivalent of my interest."
So sometimes critics go, "What, borrow?
Borrow your own money? Why would you do that?"
Here's why.
Because loan proceeds are not deemed earned passive
or portfolio income.
They're totally tax free.
You don't have to pay tax when you borrow money
to buy a car or house.
You don't have to pay tax on that. That's not income.
So why would you do this?
Well, because if I have 500,000 in there
and I'm earning 10%,
the insurance company will loan me
the equivalent of the interest they're earning.
So if it's earning 50,000, they'll say,
"Well, we'll loan you 50,000
because the interest you're earning on your 500 is 50.
So the interest this year of 50,000 is collateral
for the 50,000 of interest we'll loan you."
And so yeah, it doesn't cost you anything
because the insurance company will maybe charge you
because it has to be deemed a true loan to be tax free.
They might charge you 2% on that $50,000 loan,
but they're crediting you the same 2%
on the 50,000 of interest
that you left there to collateralize the loan.
Now the other 500,000 is still earning 10,
but see that's called a zero-wash loan.
The loan balance sits there and maybe accrue at 2%.
But the cash value that's collateralizing that,
the interest is also compounding at 2%.
It doesn't cost you anything.
So that's called a zero-wash loan.
But the smartest way is an indexed loan.
And so an indexed loan is where,
and sometimes they're called participating loans,
and that's where the insurance company
usually charges you a little bit higher interest,
maybe as much as 5%.
So this is where in a year
that you feel bullish about America
and you're accessing money,
you can borrow and they'll charge you 5%,
and then they will credit you
on all of your cash value plus the interest you're earning.
They'll credit you the indexed rate.
So on this example, if you had 500,000,
and let's say it's earning 10%, that's 50.
Now you're earning the indexing rate on the entire 550,000.
And then as that continues to compound,
you keep earning the full interest rate
on the compounding amount.
Well, why would you do that?
Because, historically,
if you just did that and never changed,
you would likely earn 2% higher than the cost of five.
You'd probably earn at least seven versus five.
And this extra 2%, it's called a two-point spread.
We'll actually have you coming out ahead
to where on a million dollar nest egg,
you could pull out 10% a year without depleting principal,
even if your insurance contract was only earning 8%.
You're earning eight but you're pulling out 10%,
and not depleting it
'cause you're earning an extra 2% spread.
You can do that and it's a no-brainer.
But because we teach a lot of IUL agents how to rebalance
and how to diversify,
this is where most of our clients
are able to earn 11 and net 10.
So if you borrow it five and earn 10,
how much more is 10 than five?
Don't say five, it's a hundred percent more.
So I'll give you an example.
In 2017, I had a savvy business owner
who keeps his working capital
in Indexed Universal Life Insurance policies.
He needed a million dollars to tie up a piece of property,
an apartment complex, for an earnest money.
He just said, "Doug, you know, email me that one-page form,"
and he puts his name and his policy number on there,
and it simply says, "Do you want to withdraw
or borrow a million dollars out of your IUL policy?"
And he goes, "I wanna borrow."
"Well, do you want to use a zero-wash
or zero-cost loan or do you want to use indexed?"
And he felt like, "Oh, 2017 looks pretty good,"
and he chose the indexed.
That year, he got charged 5% on that million dollar loan.
That's 50 grand.
He doesn't have to write out a check for that.
It's automatically deducted from what he earned
on that million that stayed in the policy as collateral.
Guess what he got credited that year?
25%. 250 grand.
So he earned 250,000 on the full million, okay?
And subtract the 50,000,
he netted 20% or 200,000 of tax-free growth
on his million while he was technically using it
in his business to make 3 million
to buy, fix up, and flip an apartment complex.
If this is like blowing you away, it ought to
'cause this is the smart way to access money.
So that's how it actually works.
If this is intriguing you and you wanna learn more,
you ought to study examples of the smart way to access money
by reading my book, "The LASER Fund."
Now this has been flying off of our warehouse shelves.
We send out hundreds of these every single week.
It retails for 20 bucks on Amazon.
You don't have to pay that, unless you would like to,
because I'll gift you a copy free.
To claim your free copy,
you simply go to LASERFund, L-A-S-E-RFund.com,
or click on the link below.
You contribute a nominal amount
towards the shipping and handling,
I cover the rest of that cost.
I'll pay for the book.
I'll fire out a hard copy to you.
There's also options in there
if you would like to listen and learn
and watch and learn too.
Check out the educational webinars
we teach on a regular basis.
You can even schedule an appointment
with an IUL specialist that I oversee and mentor
to see how one should be designed correctly for you.
But enjoy this. This is actually two books in one.
This side is for left-brain learners
with all the charts and graphs.
This side is for the right-brain learner.
It has 62 actual client stories.
So you can learn left brain, right brain,
or you can use your whole brain, okay?
But this is about you, your brighter future.
You're gonna miss out if you do not educate yourself.
And you'll quickly learn how to access money the smart way
and become what I call your own banker.
(upbeat music)