If an IUL is structured correctly and funded properly, there is little
downside. In this episode, I'm going to address the
question head on, "What is the downside
of an IUL? What can go wrong?"
I'm Doug Andrew and I've been designing universal life policy since 1980 when
they were first introduced by EF Hutton who was not an
insurance company, by the way. So, in this episode get ready i'm going
to show you the downside and what can go wrong. In
fact, in my most recent book The LASER Fund, I have
12 chapters where i talk about many ways that it is structured correctly. But I
always include one story where it was not designed
correctly and what went wrong and how you can avoid
it. I've often said the saddest thing to me is when somebody
comes, they took out a universal life policy
maybe 7 or 10 years before and they say, "Doug,
mine doesn't seem to be performing very well. You talk about your money doubling
every 7 to 10 years. And mine has hardly grown. What's up with
this? What am I doing wrong?" And I look at it. And sometimes they use
one of the companies I use, I use about 6 different companies. I
diversify. And maybe they even use the same product.
But it wasn't designed correctly. I look at it and in less than 30 seconds, I go,
"Who set this up?" And they go, "Well, I learned about
them. But you know what? My nephew said he had a license and he would do it.
And so, I just thought he did it correctly." And I go, "Oh,
he had no clue what he was doing. You have way more insurance here than
you needed. You may have been earning maybe 10% or 11%.
But you're only netting 2 or 3 because the cost of insurance is way
higher than it needed to be. Well, can we go
back retroactive and give me money? No. That was an expensive relationship with
that nephew. Sometimes people say, "Well, my
brother-in-law said he could do it." Don't make that mistake. So, let me give
you the the 5 or 6 reasons why and a
universal life or an index universal life may not perform as
you expected it to. And that's why it's so
critical that you go to a professional who knows what they're doing, a
specialist that does this all the time. Not somebody that sells all kinds of
insurance because they'll say, "Oh, yeah. I'd love that case." Because they earn a
commission off of that. If they design it wrong, it may be
a big commission for them and you didn't need to go through that
expense if you had it designed correctly with somebody who knows what they're
doing. And so, I would say the biggest reasons why universal life
does not perform as well as maybe people hear me talk
about is because it's not structured correctly. What do I mean by that?
You must take the least amount of insurance
that the irs will let you get away with based upon
your age, your gender and your health. And you can squeeze down the death
benefit. The older you are, the less insurance is required. If
you're unhealthy but you can still sort of fog a mirror,
you can take it out or you can use a surrogate.
But you're taking the least amount of insurance. And the older you are, you can
squeeze, squeeze, squeeze it down. Because the tax citations Tefra and
Defra gave parity, equality. It doesn't matter if
you're 22-year-old, athletic-marathon-running female.
Or a 68-year-old geezer like me. Or a 75-year-old friend of our family. He
was actually 78 when he came to us and then he took out his other policy when
he was 83. He had 3 blocked arteries, adult
onset diabetes, a prostate cancer episode, 6 sisters predecessor and 3
brothers. And we were able to give him the same 11
netting 10 percent rate of return that i was earning on mine. And that the 20
year old female was earning on hers because the
amount of insurance could be squeezed down because of his
health issues but he was still insurable. Many advisors,
many insurance agents do not understand what I just said.
And so, if it's not structured correctly based upon
age, gender and your health to have the least amount of insurance, then you fund
it properly by getting in the most money that the
IRS allows as fast as they allow. That normally is 5 years under the
Tamra tax citation. So, sometimes people take 20
years they and they hardly fill it up 30% of the way.
Well, it's not going to perform very well when it's designed to hold 500,000
and you've only put in 70,000 or 150,000. It's not going to perform very well. You
have to fund it properly, correctly based upon the time
frame you designed --5 years,10 years, 20 years. You design it
to be able to perform the best based upon the years of funding. And you put in
the most you possibly can. Otherwise, you need to adjust the death benefit down
if you're not going to use the room down the road.
That's one of the biggest reasons --it's not structured correctly,
it's not funded properly. What are some of the other reasons?
So, the third reason and fourth reason has to do
with the same concept. You must structure it correctly
under the IRS guidelines. Now, a life insurance contract is the only
vehicle in the internal revenue code that allows you to accumulate your money
tax free. So, you have to comply with section 72(E)
of the internal revenue code. It has to be deemed life insurance.
If you violate that definition under tefra and defra,
you move from tax free over to taxable investments.
So, 7702 of the internal revenue code allows you to be able to access your
money without paying tax. It's income tax free when you access money or turn on
income anytime you want. And so, you have to comply with
that by not funding it too quickly under
tamra. So, section 101(A) has been around also
for over a century. And that means that when you ultimately die,
the amount of cash in there blossoms, it increases and transfers income tax free
into a death benefit. But when people come to me and they want to put in let's
say 500,000, they could get a ton of life
insurance for that. They could get millions of dollars of life insurance.
But that's not the objective. If it's a 60 year old, I know the minimum
amount of insurance is going to be around a 1,250,000.
And they put in 500,000, the minimum death benefit is a 1,250,000.
500,000 already qualifies as part of the 1,250,000.
So, the insurance companies only charging for the difference
at risk, the 750(Thousand). When that half a million
doubles to a million, let's say in 7 ½,
10 years in the policy which might have done for for decades,
now the insurance company is only at risk for the the remaining 250,000.
The death benefit under tefra and defra was 1,250,000. Now, I have a million
of cash which is my own money. They only charge me for the remaining
250(thousand). When that million doubles to 2 million,
now, I have more cash than the death benefit.
Tefra and Defra tax citations say that the death benefit has to stay ahead of
it by 5 percentage points. Now, the insurance has gotten cheaper as
i get older. 30 years down the road, it's costing one twentieth what it did when I
started it. That's why at my age with my universal
life policies that I've had for 30 years, if i earned 11 this year, I would net
10.9. But during the average ownership of the policy, If i earn 11,
I've probably averaged 10. If I earn 8, I net 7. If i earn 7, I net
6. And in order to make it perform within
1 percent of the gross rate of return, you have to
comply with tefra and defra, take the least amount of insurance the
IRS will let you get away with. You put in the money as fast as they
allow. And now, it does not violate the definition of
tax-free life insurance under sections 72(E) and 7702 and 101(A) of the internal
revenue code that allows you to self-insure. That's
the tax-free umbrella. If you don't comply with those
3 sections of the code in tefra, deferra and tamra, it cannot
be tax free especially when you access it.
So, the other big reason is most people don't
fund it in compliance with tamra over a 5-year period to where then they are
grandfathered to access the money tax free.
Let me give you the final 3 reasons why
it does not perform sometimes or what can go wrong
so you can avoid it. So, the next couple of reasons may seem
obvious to you but they're pretty common. People use the wrong company.
There are over 200 companies out there offering universal life.
Maybe way more than that now. But I would not
touch 190 of them. The company does not meet my minimum requirements
for their ratings. And even though there's never
been a legal reserve life insurance company ever not honor
their claims or anything like that. It's one of the safest places you can put
money. I'm very very picky. I want companies
that are not stingy. I don't want a company that says they'll
do this and then a few years later, they change it
and they leave their old policyholders out
in the cold, so to speak. I like companies that will incorporate
new features and benefits with even the old policy holders.
I like companies that have a track record of giving
you the benefits instead of keeping it in their coffers. "Oh,
we're big and strong." It's because they keep the money they should have been
giving you. And so, there's only a handful. Maybe
10, 12 companies that I would consider putting my serious cash into.
So, that leaves a ton of other companies. 95%
or more that I would never consider to put my money into. So, people choose the
wrong company. Well, many times they choose the wrong
product. You can go to an insurance company
and be shown a product for whatever reason
by an advisor who doesn't know what they're doing.
And you use the wrong product. Maybe you use the product that was designed
for something totally different as a financial goal
than for retirement and the highest spendable income down the road.
So, I found a lot of people may have the right company but they use the wrong
product. What about the people who use one of the right companies and one of
the right products and it still doesn't work? How
does that happen? Here's why. I'm coming full circle
because it happens because the advisor was not
proficient. They didn't know what they were doing.
Again, can't believe how many people said, "Hey,
I use the company that you use, Doug. I use the product that you use. What's up?"
And I can tell in less than 30 seconds, "Who
designed this thing?" They structured it wrong. They were not
proficient. And that's why now clear back in 2007 and 2008,
I had over 3,000 financial advisors insurance agents, CPAs, tax attorneys, come
through a 3-day training and pay over six
grand to learn. But they oft times would go out and they
would not help their clients. And I would say, "What's up?"
They would go, "Well, Doug. We don't have time to educate people like you do."
And if you don't use it, you lose it. So, what happened is I designed a
proficiency exam. 100-question proficiency exam uh with
multiple choice and true and false. And then another 30 questions essay.
Do you know that out of the 3,000 advisors who took that exam,
only about 200 could pass the exam? That's pretty pathetic because the
others were not using it. And if you don't use it you lose it. They forget.
And those advisors are not proficient anymore.
Because you forget. If you're not doing it every day.
Out of those 200, there was only maybe 10 percent, 20 that I
really trusted were doing it so much on a regular basis that I would point my
clients to those advisors. And I still do that
to this day. It's critical. You have somebody
who knows the latest and greatest ways to structure and the features that are
available and how to apply them to help you have the best net internal
rate of return. And so, I'm actually designing another
proficiency exam to see who really understands how to do these
correctly. But let me warn you. Most advisors
that you probably hear or watch on TV at the Dave Ramsey's, Susie Orman's, Rick
Edelman's, David Box; they wouldn't even score
20 or 30 on this exam because they wouldn't understand
70 to 80 percent of the questions. They're not taught this stuff.
Again, this exam is not for any advisor. It's for those specialists. In my most
recent book, there's actually 14 questions that you can go through. And if
you ask those questions of an advisor and they "hmm", "ha?" or they go, "I
don't know for sure. I'll check it out." That is a warning sign.
And you can tell if an advisor understands how to do this. So, let me
show you how to get your free copy of my most recent best-selling book for
free. If you have not claimed your free copy,
go to laserfund.com. l-a-s-e-r, fund, ".com".
You contribute $5.95 toward the shipping and handling
and I will buy the book. I'll fire it out to you free.
It's 300 pages of charts graphs explanations and 62 actual client
stories. You can learn how to be able to tell if
an advisor knows what they're doing. And you'll read those 14 questions that
you ought to ask of your advisor if you're considering
taking out a max funded IUL.