In this episode, we are going to answer the question how can I access my IUL
cash values totally tax-free? This is episode 11 of 21 in a series titled
Secrets To A Tax-Free Retirement. This is a free course that is designed to
empower you to accumulate an extra million dollars or more that can
generate $100,000 a year of tax-free income for as long as you live. So, put
your seat belt on I'm going to blow you away.
I'm Doug Andrew and I've been a financial strategist and a retirement
planning specialist for more than 45 years. My favorite vehicle of for that
most retirees draw from during retirement is the tax-free bucket.
It's an indexed universal life insurance contract that is maximum-funded. I
affectionately call it the Laser Fund because it passes the liquidity, safety,
rate of return tests with flying colors and as tax-free as icing on the cake. Now,
I have explained in previous episodes the history behind indexed universal
life and just universal life in general. Why it's a sacred cow and why it's
tax-free under Section 72 E 7702 and 101 A of the Internal Revenue Code.
Now, 72 E if you remember allows you to accumulate your money tax-free. Section
101 A says that when you die, it blossoms increases in value and transfers income
tax-free. But we're talking about Section 7702 in this episode. This addresses how
you can access your money tax-free while you're alive. In actuality, there are
3 ways you can access money. The sad way, the dumb way and the smart way. I
think I know which one you would prefer. But before we go into the smart way, I
to explain the sad way and the dumb way so that you don't take those options
unless you absolutely have to. And then it's still far better than most other
investments. But I would recommend you do it the smart way. Now, from previous
episodes if you viewed them, the money inside of an insurance policy
accumulates tax-free. But if you ever happen to die sooner or later, the cash
value inside the insurance policy blossoms. It increases in value and
transfers income tax-free. For a 60-year old, the objective (again) if you're trying
to do it for living benefits, you want the least amount of insurance you can
get away with and put in the most money the IRS allows. So, for a person age 60, ,if
you wanted to put in $500,000, the minimum amount of
insurance under TEFRA and DEFRA tax citations would be a million two hundred
and fifty thousand dollars or there abouts. That means if I put in
500,000 and I died the next day in an accident, the insurance company is
obligated to pay a million two hundred and fifty thousand dollars tax-free to
my heirs, my beneficiaries. So, they actually were on the hook for
750,000 of risk and that's all they all they charge me for
it. Now, that is what I call the sad way, okay? You have to die. Now, the sad way, I
have actually had people who intended to accumulate the money and retire 30 or 40
years down the road but they got cancer. They got killed in an accident, my own
brother who we were accumulating money for his retirement was killed in an
automobile accident. And so, every bit of money in there blossomed and transferred
income tax-free. So, it's the sad way --you die but it's one heck of a return but I
would not recommend it, okay? But that's why you have the insurance there that if
something happens to you, if you die with what is called a premature or untimely
death, it's the sad way to access money but it blossoms and it's income tax free.
Now, what's the dumb way to access money? That would be
triggering unnecessary tax. The beauty of a max_funded insurance contract and the
whole idea behind EF Hutton coming up with the idea back in 1980 was for tax-free
access, for living benefits. And so, you would have to do something dumb to
pay tax on it. So, let me explain when it would be taxable by doing something dumb
or stupid. So, life insurance in the Internal Revenue Code is taxed FIFO. That
means first in first out. Compared to most investments or annuities. And
annuity is a savings account with an insurance company that's taxed LIFO. Let
me explain it this way: If I put $500,000 into an annuity and I wanted to start
income immediately... And let's say they're willing to give me a 10% payout.
Very few will do that but let's keep it simple. So, I put in 500,000
and I'm getting 50,000 a year. Now, if that's the payout or the interest, I
have to pay tax on the last money I'm earning, the interest. I have to pay it
first. That's LIFO, last in first out. And so, if I started taking 50,000 out
of the annuity and that was all interest, I have to pay tax every year on that.
It's only when I finally dip into the basis that I don't have to pay tax. If
it's an IRA or 401K, it's all taxable. That's called LIFO tax treatment. Life
insurance is taxed FIFO. First in, first out. So, in that same example, if I put in
$500,000 and I'm earning 10% which I've done for
25 years as an average, I could start pulling out $50,000 and I
can call it a withdrawal and I'm withdrawing my basis first. So, the first
money I put in --the 500,000 is the first money coming out. So, at
50,000 a year, the equivalent of my interest, it would take me 10 years
before I have recovered my basis. First money in, first money out. So the first
10 years that example it's tax-free. Now, here's
the problem. In the 11th year on, if I'm still earning 10% and I keep pulling out
$50,000 now, I've recovered my basis. I already paid tax on that. That's why it
was tax-free the first 10 years. Now, I have to start paying tax on the 50 grand
a year starting in the 11th year. Now, FIFO tax treatment is better than LIFO.
But you don't have to do that. The IRS says, "No, no. You don't have to pay
unnecessary tax." Change the nomenclature don't call it a withdrawal. Call it a loan.
What? Borrow your own money? Watch. So, under FIFO tax treatment, you can take
withdrawals out of your insurance policy up to your basis and then switch to
loans thereafter. But I don't. I start using loans day one. And in the next 2
episodes, I will explain why that is the smarter way to go. But if you borrow
money out of your insurance policy, people say, "What? You're borrowing your
own money? They're going to charge you interest." Now, listen close to how this
works. There's a lot of advisors that don't understand this. Let's say I had a
million dollars in my insurance policy. And I'm earning 10%. Now, I can withdraw
my money but that may be the dumb thing to do because I'm permanently lowering
the ability of my insurance to accommodate new money if I ever want to
reinvest down the road. But after I've recovered my basis, now I have to start
paying tax on the 100,000. I change the nomenclature to borrowing. I
want a loan. Now, if you had money, if you had a million bucks in a bank and you
wanted to go withdraw your money, they would stop paying you interest on that.
Or if the bank said, "You know what? We'll keep paying you interest. But you can
borrow the equivalent of your interest. And we'll charge you 5%" or
whatever. Well, a lot of times banks they're pretty pathetic. They may only
pay you 1%. So, why would you do that
when they're only paying you 1% and they're charging you 5%. With the
insurance company, it's the opposite. So, if I borrow my money out, if I'm earning
100,000 a year in interest on my million bucks, I just say, "Okay, leave
my million alone. Leave it there earning interest." And if it's earning 10%, a
million keeps growing. A million one hundred thousand, a million two hundred
thousand. Only is compounding. They loan you the equivalent of your interest.
So, my balance divides into a 2 on my statement. I have this phantom loan
balance here. I have 100,000 next year another 100. So, it's 2
hundred, 3 hundred, 4 hundred. Why do I call it phantom? Because the loan is
not doing payable during my lifetime. And it's washed away.
It's forgiven, it's washed out when I die with the death benefit because the loan
balance is increasing but my cash value is growing compounding. And it stays
ahead of this. This growing tax-free - this loan balance equals the same amount
that I would have had in there had I been withdrawing my money and paying
taxes. By doing this, I avoid paying tax because loan proceeds are not deemed
earned passive or portfolio income. Those are the only 3 types of income
Americans pay income tax on since 1986. And so, when you have loan proceeds, that
is not taxable income. It's that cut-and-dried. There's nowhere on a tax
return to put a loan proceed out of an insurance policy. It's tax-free. So, let me
summarize this. I borrow the equivalent of my annual interest. I borrow it and
this phantom loan balance grows but you have your cash values that grow this at
any given time minus this equals the same amount you would have had had you been
withdrawing money and not earning interest anymore. Now, the insurance
company to deem it a true loan is required
to charge you a nominal interest rate. And that is defined year by year. They
may charge you 2% on your loan balance but they will credit you a
interest on this side. It's usually what is called a zero wash loan. That is the
simplest option. They charge 2% but they credit you 2% on the
amount of this money that collateralized this loan. So, they're charging you 2,
their crediting you 2. What's the net cost? Zero. Oh, that's called a zero-wash
loan. Now folks, that will generate tax-free income. I've had people that
have been taking $100,000 a year or more in tax-free
income for 30 years. 30 years times a hundred thousand, they have a
3 million dollar loan balance over here. But their cash value has grown by
more than 3 million. This minus this equals the same amount had they been
pulling it out that dumb way and paying taxes all of those years on that income.
So, the key takeaways of this episode is there are three ways you can access
money out of an insurance policy. The sad way, dumb way and smart way. The sad ways
by dying. One heck of a return but I don't recommend that one. The dumb way
would be to trigger unnecessary tax after you've recovered your basis under
FIFO tax treatment. I prefer the smart way. The smart way, if you're very
conservative, you simply borrow the equivalent of your interest and you
leave your money there compounding tax-free that is collateralizing the
amount you're borrowing. And this stays ahead of this. When you die, this minus
this gives you the same death benefit that you would have had had you pull it
out the dumb way and been paying taxes all of those years unnecessarily. So, if
you want to learn more about this, I want you to watch this episode next because
I'm going to show you the absolute smartest way to access your money and
borrow it like they millionaires there's and billionaires do. But in the
meantime, if you want to study this book, The Taser Fund is my 11th book. 300 pages
of charts graphs explanations and 62 actual client stories. I would invite you
to claim your free copy of this book. Go to laserfund.com. I'll pay for the
book, you pay $5.95 shipping and handling. I'll fire out a copy for
you and you can study and read and learn. You can listen and learn. There's all
kinds of formats of this book available for you.