This is how money works.
In this episode, I'm going to address IUL variable or indexed loans.
How do they work?
Get ready.
You're going to be blown away with the examples I am going to show you.
So, I'm Doug Andrew and I've helped many, many thousands of people optimize their financial
assets by using max-funded indexed universal life insurance.
In fact, from 1980 until 1997, I used just regular universal life because indexed universal
life didn't get introduced until 1997.
Once that came out...
Because interest rates were coming down, I've been able to tweak my rate of return by usually
at least 2 and a half percentage points by using indexed universal life where my money
is not invested at risk in the market.
My returns are linked to an indexed.
It's not an indexed mutual fund.
It's not variable life, okay?
But this episode is about how to access money the smart way.
Now, I have another YouTube basically talk about why would you want to borrow money.
I'll simply summarize here before going to an actual example of variable or indexed loans
in this episode.
So, people always say, "Well, why would you want to borrow your own money if the money
in the insurance policy, the cash value is yours?
Why would you borrow your own money?"
Well, it's because years ago, the IRS said, "Listen, when you access money out of a life
insurance policy, there's 3 different ways."
And I summarize them as the sad way, the dumb way, and the smart way.
The sad way is by dying.
Now, I wouldn't recommend that one.
But that's one heck of a return.
I mean if you put in $500,000 dollars and you die the next day, and at least behind
5 million, that's one heck of a return tax-free.
In actuality, there are clients of mine that have died prematurely in accidents and so
forth.
And the family was so grateful for that tax-free incredible rate of return.
But that's for death benefit.
Most people come to me wanting to get the best internal rate of return for living benefits.
That's why EF Hutton designed universal life was for living benefits.
See, whole life insurance was originally designed primarily for death benefit.
So, if you're trying to take the least amount of insurance the IRS will let you get away
with and put in the most money, the most premium that the IRS allows to turn into this tax-free
cash cow for tax-free income, you take the least amount of insurance but when you begin
to access money, you don't want to do it the dumb way.
Now, life insurance is one of the very few financial instruments in the internal revenue
code that allows you to recover your basis first.
See most investments are taxed LIFO --Last In, First-Out.
If you put $500,000 into an annuity just to keep this simple and if it was earning 10%,
you started pulling out that 10%, that 50,000 a year, you'd have to pay tax on it from day
one.
Because the last money you're earning the interest is the first money coming out.
Life insurance is taxed FIFO.
The first money you put in, if you put in 500,000 over 5 years or whatever, if you put
in 500,000 and you start pulling out 50,000 a year.
Or if 500,000 doubles to a million and you start pulling out $100,000.
Until you have gotten back the 500 grand that you put in, it's tax-free because the first
money in is the first money out.
But then if you kept withdrawing your money, that would be dumb because now you're triggering
unnecessary tax.
You pull out 100,000 and you're paying tax of maybe 30,000.
You're only netting 70,000.
The IRS says, "You don't have to do that".
You could do it the smart way.
You borrow the equivalent of your interest and let your money keep growing with interest.
And so, a lot of times when people see this, they don't realize there's actually 2 options.
You can use a fixed or what we call zero cost or very low-cost wash loan.
Or you can use a variable or indexed loan.
But let me share with you the 3 types of income that are subject to income tax in America.
You ready?
Ever since 1986 reform, that's when President Reagan was serving his second term.
There's only 3 types of income Americans pay income tax on.
Earned income which would be salaries and wages.
Passive income which would be rental income or lease income.
And portfolio income which is where most people get income off of their IRAs and 401(k)s in
the market.
That's the interest and dividends.
Now, it's pretty cut and dry.
If you have income that is not classified or fall under one of those 3 umbrellas, there's
nowhere on a tax return to put in.
It's not a loophole.
The IRS knows you're receiving the money but if it's not one of those 3 types, it's tax-free.
It's that simple.
When you borrow money, you do not have to pay tax.
That's not income.
You're borrowing.
When you borrow for your house, you borrow for your car, you don't have to pay tax on
money you borrow.
So, you're borrowing money out of your insurance policy instead of withdrawing it.
Why is that smart?
Here's why.
So, in another YouTube episode, I talk about fixed or zero cost loans.
Let me simplify that first of all so that you understand.
Because you actually have the choice anytime you want when you're accessing money out of
your life insurance policy to call it a fixed loan or a variable or indexed loans.
So, let me show you the difference.
If you choose the fixed loan, most insurance companies will charge you a nominal interest
rate that's required by statute by the government.
Okay?
In the internal revenue code.
And so, that could be 2%, 2 and a quarter, 3%.
So, a lot of the companies are right around 2, two and a quarter.
We'll use that.
So, let's say you borrowed 100,000.
So, you have a million dollars of cash value in your policy finally at your retirement.
And you want to start taking out $100,000 a year tax-free.
So, even if you recovered your basis, you want to do the smart way.
You borrow 100,000 because you're going to leave the money in there instead of withdrawing
100, you're going to leave it there to grow.
So, your million is going to keep growing by 10%, okay?
So, it's going to be worth 1,100,000 at the end of the year because you didn't withdraw
it.
But it's being collateralized by that 1.1M. And so, that $100,000 that collateralized
the loan of 100, the insurance company contractually is going to charge you 2 and a quarter percent.
If they don't you charge at least a nominal interest rate, it's not a true loan under
the definition of the code.
Therefore it won't be tax-free.
Well, they're charing it 2 and a quarter over here on this 100,000.
But over here on the 100,000 that was sort of earmark to collateralize it, they're crediting
you the same rate --2 and a quarter.
So, it's 2,250 here, 2,250 here.
They charge you 2,250, they credit you 2,250.
It's called the zero net cost loan.
Now, sometimes in the first 5 years or whatever, if you're borrowing that quick, they might
charge you 2 and a quarter and only credit you 2.
So, it's a net cost of quarter or a percent of something like that.
The spread is very small.
They will cap these.
The most they can charge might be higher.
But usually, in a fixed loan, these are pretty much stated, okay?
So, what does that mean?
You borrow 100,000 thousand a year for 10 years.
You have this million-dollar loan but it's just a phantom loan.
It's not doing a payable during your lifetime.
It's washed away because this million grew to 2 million in that 10-year period.
And 2 million of cash minus a million-dollar amount equals the same million you would have
had you pulled it out the dumb and paid over 300,000 in tax during that 10-year period.
You can save 300,000 of tax by doing it the smart way.
That's called a zero wash loan.
That's really conservative.
Are you ready for the variable or indexed?
Here we go.
Under a variable or indexed loan, you're borrowing let's say the same hundred thousand.
And the insurance company will usually charge you a higher rate like 4 and a half or 5 percent.
*GAPS* "Why would you ever chose this one instead of that one?"
Here's why.
So, they'll charge you 5%.
So, 5% on 100,000 will be 5,000.
But what do you get to earn?
They're not going to credit you just 5.
They'll credit you whatever the index is earning.
Now, the cash value, your entire million dollars in this example of cash value is earning the
index rate.
Yeah, there might be a year here or there where you earn nothing because zero is your
hero.
If the market crashes, you don't lose a dime of your principal.
But the average return (remember) has been 8.2, 9.6, 10.07.
Many years, our clients have earned as much as 25% and even 61%.
So, you can earn 10.
I've had many clients who have borrowed money at 5 and earn 10.
How much more is 10% than 5%?
Don't say 5.
It's double.
Okay?
It's 2 times more.
I've had clients earn 16, like in 2017.
I have a client, he's a business owner.
He's very savvy.
He buys real estate apartment complexes.
And he fixed them up and flips them.
He doesn't like to be the landlord.
And he called me up and he said, "Doug, I need a million dollars out of my life insurance
policy."
He uses the life insurance policy as a working capital account because it's just as convenient
as some drive-up window with a bank and he is earning way more interest.
He says, "Email me one of those forms."
It's a one-page form.
He puts his name, his policy number.
And it says, "would you like to withdraw a million?"
If that's how much he has in there.
"Or would you like to borrow a million?"
Guess which box he checks?
Borrow.
Why?
Because he borrowed a million in 2017 at 5%.
They put on his statement a charge of $50,000.
He doesn't have to write out a check and pay that off because it's covered by what?
That year, he earned 25%.
He earned 250 grand on the million that he didn't withdraw.
He used it as collateral.
So, he made 250,000 in 2017 on his money while he was using that money technically by borrowing
against it.
And they charge him 50,000.
And they credited him 250,000.
That's a net of $200,000 tax-free, 20% rate of return tax-free on his million while he
was using his million to make a ton of money in real estate.
Are you getting it?
That's the power behind variable loans.
Now, the only difference between variable and indexed loans.
Variable means that they can change this interest rate.
They rarely do very much.
But they usually will cap it at 7 or 8 percent as the highest they would charge you.
But there is usually no cap over here unless you chose an indexed with a cap of 11 or 12
or 16 or 25.
Many of my clients choose no cap and this is where they've earn as much as 61%.
So, that's what I do.
But you can always flip back to this one and then flip back to this one.
If the economy is growing, use this method.
If the economy is crashing, go back to this method.
So, it's a zero net cost of nothing.
Doesn't cost you anything.
But it's tax-free.
An index loan means that usually the rate is fixed at 5.
You're earning whatever the index is.
In actuality, variable can be better because sometimes interest rates go down, down, down.
At the recording of this video, interest rates are clear down around 3% to borrow for a house.
So, sometimes a variable loan can be at 3 or 4 percent.
And so, sometimes a variable (even though that sounds scary) can help you in a low-interest
environment where as an index loan might fix it at 5.
But you could've been charged only 3.
But the power is you're earning on your entire cash value whatever the index crediting rate
is for that year.
And this is where people have made 5 times more.
250,000 at a cost of 50.
Would you hire an employee for 50 grand that made you an extra 250 grand?
Would you buy a widget machine for 50 thousand and made you an extra 250,000?
This is how money works.
You want to learn more?
So, if this has piqued your interest and you would like to learn more before doing this,
think of somebody who would benefit from watching this episode.
Share, click like, comment, subscribe.
I post an in-depth answer to a financial question like this almost on a daily basis.
This is not about me.
This is about you and your brighter future.
And to show my deep sincerity in this, I want to gift you a copy of this 300-page book.
My most recent.
It's my 11th book.
It's called The LASER Fund.
You go to (L-A-S-E-R) laserfund.com.
Click below on the link.
And you don't have to pay $20 for the book.
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And in this book, there's 200 pages of all kinds of charts and graphs and explanations
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If you want to learn how it works in real life with stories, you flip the book over.
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