Welcome back. In this episode we are going to address the question, "What types
of life insurance policies are the best?" We're going to go through different
types, term, permanent, whole life, universal life. And I'm going to show you
how you can more or less buy term and invest the difference on steroids. Which
is my favorite way to go. But I want you to understand the power behind
accumulating your money tax-free, accessing it tax-free and then when you
ultimately pass away it blossoms and transfers tax-free. How to use life
insurance for living benefits more than just for the death benefit.
My name is Doug Andrew. And I started in the financial services industry clear
back in 1974. And I was a big buy term and invest the difference proponent. From
1974 to 1980 I helped thousands of people in fact over 3,000 people in 13
western states learn how to set aside money in a term insurance policy and
automatically invest the difference. Because the biggest problem with buy
term and invest the difference is getting people to invest the difference
in a safe environment that passes liquidity safety and rate of return test.
A lot of people don't even invest the difference. So, why did you do all of that?
Well, as I would go out and show people the math behind it.
I could outperform at that time traditional whole life insurance because
there was only a term or whole life insurance clear back in the 1970s. It was
in 1980 when EF Hutton changed all of that. And they basically said, "Why don't
we buy term and invest the difference under a tax-free umbrella." Now, some
people still don't understand how this works. But they realized that life
insurance policies were sort of a sacred cow in the Internal Revenue Code,
allowing that any money that you put into the insurance policy that
accumulated cash value would grow with interest or dividends tax-free. Because
why would they penalize somebody trying to protect their family, be responsible
that if I happen to die and leave my wife with our 6 children. Why would
they want to make it harder to create financial independence? if I happen to
die. So, I'm insuring myself to make sure that if there was an economic loss
incurred by me passing away sooner than later. What we call an untimely death.
That my wife would have the wherewithal to continue to educate my children, have
music lessons, try out for football things like that. Well, that's why they
allowed money inside a insurance policy to grow tax-free. Well, also there
is a way that you can access that money tax-free. And that's under Section 7702
of the Internal Revenue Code. And when you ultimately do die, it blossoms in
value, okay. The premiums you paid usually increase and you leave behind a 100
thousand, a half a million, a million, 10 million whatever insurance you purchased.
And that's totally tax-free because they want to take pressure off of the
government not to have to use welfare programs to take care of widows and
orphans and so forth. And that's why it's a sacred cow. It's been that way for over
a 100 years under Section 101a of the Internal Revenue Code. So, you have
term insurance and that is where you're just paying the pure cost of your chance
of dying in any given year. And that's based upon mortality costs. For example
when I first started, there were 4 30 year olds in the country, 2.13
deaths per thousand. Well, for every thousand of life insurance, the cost
would be 2 dollar and 13 cents. So, if you have a thousand 30 year
olds, we all put 2 dollars and 13 cents into a hat. And when 2.1, 3 of
us died at age 30 that year, there is a thousand dollar death benefit 2.3...
One 3 widows, okay. That's the pure term insurance. Now, it's a
little bit more complicated than that. But sometimes people didn't want to have
to pay higher rates. Because term insurance goes up every year. Because
more people died at age 31, 32 and when you get up to age
60, 65. By age 65 1/3 of American males have already
passed away. So, the cost of insurance goes up. Well, that's where they came out
with permanent insurance, where instead of paying the pure cost... There is a term
component in permanent insurance but instead of paying the pure cost your way
way over paying the actual cost of insurance in the younger years. But later
there's a crossover point and then you are under paying in the later years,
because you've build up equity or what is called cash value in the permanent
life insurance policy. The problem was, up until 1980 that cash value is only being
credited with maybe 2 and a half, 3 and a half percent.
Some companies touted dividends in the 6, 7 and 8 percent range.
Now, a dividend was tax-free because it's really just a refund of overcharged
according to the IRS. If the insurance company is charging you this and your
chance of dying was only that. That overcharge building up that cushion for
when you're older and you don't want to pay higher premiums. That was growing
tax-free and so if you had a dividend or the insurance company was operating more
profitably by not just insuring anybody on the street. They required physical
exams and so forth. That profit would be refunded back or you could use it to buy
paid up insurance or whatever and that was tax-free. But it was really just a
refund of overcharged. And so that was a refund, that was tax-free. Well, that's all
there was. In 1980 EF Hutton came out with the idea, "Hmmm, why don't we use life
insurance for the tax-free accumulation of money, more for living benefits
instead of death benefits?" People want to use this to accumulate their money
tax-free. Be able to access income tax free. And then when they ultimately die
yeah, it'll blossom in value and transfer tax-free. But you know what? Instead of
trying to get this much insurance for the least premium. Let's flip it. Let's
try to get the least amount of insurance the IRS will let us get away with and
put in the most money and it turns into a cash cow. And this is where I have
earned average rates of return after the cost of insurance of 7, 8, 9,
10 percent average. Some years I've earned 25 and netted 24
So, the cost of the insurance is what the IRS requires for it to be
classified as tax-free insurance in the Internal Revenue Code. If you violate
those sections of the code, it's no longer tax free. It becomes a taxable investment.
So, when EF Hutton came out with this they called it universal life because
you could use it for universal applications. If you wanted to use it for
a cheap way to buy permanent insurance and the economy's doing well, you could do it. But
on the other end of the spectrum if you wanted a maximum funded or living
tax-free income benefits. You could take the least amount of insurance and put in
the most premium and it turns into a cash cow.
That knocks the socks off of putting money in a tax-deferred IRA or 401k in
the market. So, there's 3 types of universal life. I like universal life
because it's more flexible. I can put in money and then I can skip several years
and cost not a dime. You can't do that with whole life.
But in any given period especially at the end of the day. I've usually been
able to earn at least 2 percent higher rates of return in universal life than
whole life. Because I'm able to structure it under IRS guidelines to perform
better with an internal rate of return. In other words, some of the best whole
life insurance policies out there if they weren't going to credit you
as much as 8%, you're only netting 6%. And it
takes you until you're age 90 to realize an internal rate of return within
2% of the growth rate of return. I can earn 9 and net 8. I can net
8 which is what most whole life policies at best gross. So, I would rather
have the universal life. But I can put in money, stop, coast, make up for the lost
time or do whatever I want. We don't have that kind of flexibility in whole life.
Because whole life was primarily designed for the death benefit. Universal
life was originally designed for living benefits. So, look at the 3 types I'm
going to explain right now. Back in 1980 when EF Hutton came out with this idea.
It was called Maximum Funded Tax Advantaged Life Insurance Contracts. And
whole life, they tried to respond and they became more competitive. And instead
of earning rates of return of 3 and a half or 4 percent. They became more
competitive with their products but still the flexibility isn't there. And I
can usually earn a rate of return of 2 or 3 percent higher with the same
amount of money in a universal life. And I can fund it in 4 years in one day.
Most whole life takes at least 7 years or 7 pay to do that. Because
there were tax citations passed in 1982, 1984 and 1988. They spelled the acronyms
TEFRA, DEFRA and TAMRA. And they allow a universal life policy because of the
greater flexibility to be funded quicker and allow you to get a
internal rate of return. So, I'm partial to universal life because of those
reasons and there's three types of universal life. When EF Hutton first came
out with this idea, it was fixed. And that's where the insurance company is
just paying you interest based upon their fixed general account portfolio of
triple-a and double-a bonds. Maybe a few mortgages on shopping malls and
skyscrapers. Maybe 15% of the money that an insurance company manages which is in
the billions, might be on that. If they were to put money into stocks they'd
have to use very, very secure stocks. Most insurance companies only put about 5% of
their general account portfolio in that. And so, generally speaking the fixed
gives you whatever they're earning. And then indexed is my favorite. But in the
1990s variable came out. Now, I prefer the indexed one but that didn't come around
till 1997. Here's why I prefer it. Fixed and they'll guarantee you like maybe
3%, so that's the lowest you will earn. But see? I have usually on mine
earned no less than 4 even though the guarantee is 3. But things could get
bad enough, that's it. But since the year 2000 I've only averaged about 6.3%.
If I just say just pay me what interest you're earning minus about
1% for your cost and so forth. But you see the highest I earned was back
in 1980 to 1990 was about 13 and 3 quarters percent on this one. And
this is with a large company. But see, over 25 years I've probably averaged
about seven point five two. So, that's okay, tax-free.
Well, variable came out of the 90s said, "Hey! Why don't we get money out in
the market. And let's assign the money in our insurance policy to the market out
there and with mutual funds. Well, you just took away the guarantee." And so
there are periods where people have lost 50% of the value in their
insurance. And so they had to hurry and pay more money in their. Since the year
2000 sometimes this has been as low as one point eight one percent, pretty pathetic.
there have been times that people have earned as high as 35. But the average is about
nine point one four. That's not bad now, you're not netting nine point one four on a variable. Because
they're management intensive. See? Maybe only knitting 7. The reason why
I like indexing is because 0 is the floor. I will not lose during a year that
the market goes down. During the downturns, during crashes I don't lose. Zero
is the hero so to speak. When the market goes up I participate and I've earned as
high as thirty-nine point two-two percent. Since 2000 I've averaged eight point four seven
percent and that's not with the second strategy I teach rebalancing. But look at
this, the 25 year average has been ten point oh seven. You notice
that's about 2 and a half percent higher than fixed. And so, I know that in
any 10 year period, my chances of earning 2 and a half percent higher tax-free
rate of return than fixed is very, very likely based upon 25 years of history. So,
this is my favorite. Some years if I feel like we're headed for a major recession
or a terrorist attack happens. I can just switch back on indexed policies and just
settle for the general account portfolio rate until the market turns around. And
then I can switch back, that's called rebalancing. And this is where people can
tweak their rate of return even higher than 10%. Or use multipliers or
performance factors. And that's explained in another episode where I invited my
son Aaron to explain this. So, those are the three types of universal life. I
prefer indexed but it must be structured correctly and funded properly in order
for it to knock the socks off of the same amount of money being deposited
into a tax-deferred IRA or 401k. And people say, "How can that be? There's fees
with this." No, the insurance cost is a minuscule portion that's being paid for
with what most people will pay out in income tax
sooner or later on other types of investments. I hoped that helped to
understand the difference between term and permanent insurance, whole life
insurance, the variable, the index and the fixed. You can tell my favorite is an
index to universal life. But it's critical that it's structured properly
and funded correctly. That's what motivated us to write our 11th book. I
call my Max Bennett insurance contract "The LASER Fund" because it passes the
liquidity safety and rate of return tests with flying colors when it's
structured right. So, in this book we talk about how to tell if 1 that an advisor
is proposing to you is structured correctly. And you'll tell real quick if
they understand and get it. In fact, people who read this book know more than
probably 99% of insurance agents or financial planners out there. I would
love you to have a free copy you can go to laserfund.com
and you'll have a chance. I'll send it to you absolutely free. It's 300 pages of
information and you just pay a nominal shipping and handling fee. And you'll
also have some options if you want the audio version or the digital or some
mini classes. But the first thing I want is for you to have a copy of this. If
this resonated with you and you want to dive deeper and understand, "Golly, how
does this work and what are the historical rates of return?" Even and
different than what I've shown you here. This is about you and your future, not
about me. I've already done all this. It's from me learning the hard way that I
want you to avoid the mistakes I made. And you'll be way ahead of where I am
and I'm not in too bad a shape because of these strategies. I want you to be in
better shape.