Immediate tax-free growth on money put into this. In this episode,
I'm going to address the question which type of life insurance policy generates
immediate cash value.
So, my name is Doug Andrew. I've been a financial strategist, retirement
planning specialist for more than 46 years.
And I've helped thousands of people select the right
type of life insurance based upon their objectives.
Now, most people came to me as a financial
planner. They really didn't want or need more life insurance when they usually
came in. They wanted a place to put their money
and I would say, "What are your priorities?" And I would
list them. Because sometimes people don't know the
vernacular, the terminology, the lingo. And so, I would list, "What's most
important to you?" And by and large if they understood
money. Liquidity was number one. Now, a lot of people don't
think about this but liquidity means the ability
to access your money when you need it with an electronic funds transfer, phone
call without triggering a bunch of tax or penalties from the institution or the
IRS or whatever. The second thing that people wanted was safety.
People don't like to lose money. And so they wanted safety. Not only of
the institution. But whenever they set aside money,
they didn't want to lose principle. A lot of them didn't understand that
every year you make money ,you can actually lock in that gain
until I taught them about this. The third thing down the list was rate of return.
Now, a lot of them put that number 1. That's not the most important. It's third
down the list. What rate of return am I going to get? And the fourth factor
is is it taxed as earned or is it tax deferred or is it
totally tax free? There's a huge difference between those
three types of tax scenarios. And so, I began to point them
to vehicles that passed the liquidity
safety rate of return and tax advantage test with flying colors.
And most investments that people think about don't even come
close. When it comes to insurance when people said, "I want to
retire with this much income..." I go, "Well, you're going to be
shocked. The best way to accomplish that is in a max funded indexed UL.
Universal life insurance contract." They go, "What? I don't need any more insurance."
I said, "Well, what does that have to do with it?"
Let me show you the differences here and when they would see
that an IRA, 401K or a mutual fund earning 12% because of taxes on
the back end whatever. If they would all run out of money at age
76, age 78, age 81 in a max funded IUL based on actual
historical performance would go on until age 120.
And I would cover up what it was. And I'd say, "So, which one do you want?" They go,
"Duh? This one." And then I'd uncover it and they go,
"Wait a minute. That's an insurance policy?"
They go, "Well, I don't need insurance." What does that have to do with that? Look
at what it does. Quit getting hung up on what it
is. If you don't need any more insurance, make me the beneficiary but enjoy all
the tax-free income. They go, "Oh, no. No, yeah. We'll take it if we
don't have to pay for it." Well, nothing is free. But it was being
paid for with otherwise payable income tax they would pay on other investments.
So, when people ask the question, "Which type of life insurance
creates the immediate cash value ?"iI's not so much the type
but it is actually how you're funding it. So,
let me explain. So, listen again. It's not so much the type of life
insurance but how you structure it and how you
fund it. So, let me explain this. Many times
I ask people, "What is the objective here?" And they said, "Well,
maybe it's for death benefit." But if you're asking the question
which type of life insurance generates immediate cash
value, that is permanent insurance. It's either whole life or it's universal life.
And there are several different types of whole life and universal life.
There's fix, there's variable, there's participating
interest, sensitive whole life and so forth. With universal life, there's
generally fixed, variable and index. Now, I prefer
index universal life which actually started out in 1997.
Prior to that, I owned regular universal life because it started in 1980.
Now, in a nutshell, whole life was generally created
for death benefit. It can be used for retirement but the income generated
out of a whole life policy is not near as good or predictable
and usually not near as high of a payout as the same amount of
money that you would put into a universal life. Because universal life
was originally designed to be for living benefits, to use the
money tax-free. And so, the unique
feature of permanent life insurance, whole life or universal life
is that it allows money inside the insurance policy to accumulate
tax-free. That's under section 72E of the internal revenue code.
And then if you need to access it while you're still alive,
there is a smart way to do it and you can do that under section 7702
of the internal revenue code which allows you to access money tax free.
And then when you ultimately do die, whatever's in there blossoms in value
and transfers income tax-free. But see, usually with whole life
insurance, people are trying to get the amount of
insurance death benefit they want and they usually say, "What's the least
premium I can pay to make sure i'm covered for my whole
life?" It's a different dynamic in how you structure it.
When EF Hutton came out with universal life they said, "Wait a minute,
let's use it for a living benefit. Let's take the least amount of insurance
that the IRS will let us get away with. And put in the most money the IRS allows
as fast as they allow." And these things turns into
a tax-free cash cow. And it allows you on every million dollars in my lifetime,
with my clients, every million dollars could generate a
60 to 100 thousand a year of tax free income into
perpetuity. Whether it was fixed or if it was indexed.
If you have indexed universal life, generally speaking you could probably
plan on more of an 8 to 10 payout that a
million dollars would generate 80 000 a year of tax free
income. Most whole life if you tried to do that, a million dollars of cash
value inside a whole life insurance policy may only generate 30 or 40 thousand a
year of income. Would you like to have 40,000 or
would you rather have 80,000? That is accomplished with universal
life. Universal life generally you earn a
higher rates of return. And consistently, it's
more flexible, you can put in more money you can put it in faster
because it was designed primarily for living benefits, to accumulate
cash value. Now, what a lot of insurance agents actually don't realize is with
universal life, you could put in a hundred thousand a
year for five years and people say, "Whoa, why are you doing that?" Because you want
that half a million to double to a million in 7 to 10
years. And let's say you retire then and you want that million to generate 80
to 100 thousand a year of tax free cash flow into perpetuity if you live to be 120.
That's what universal life can do. The question was what type of life
insurance accumulates immediate cash value? Well, if you are
putting in the most the IRS allows, let's say a hundred thousand is the most
under the way you've structured yours. There's nothing magic about a
100,000. But you can learn in other episodes on this
channel about what these parameters are. These
are tax citations --Tefra, Defra and Tamra. So search that.
When you maximum funded, if you put in a hundred thousand dollars
you have 70,000 in most situations of immediate access to
cash value. You actually have
100,000 of accumulation value. Maybe if you
cancel the policy, you would only get 70,000. But you're
earning interest on the 100,000. There's
costs of insurance that are required there so that it qualifies to be
tax-free. So, maybe the very first year, there's
95,000 and so forth. But if people want 100%
access to 100% of what they paid, then you can get a rider. And the rider waives the
surrender charge but there's always a trade-off. So,
if we had a business owner come and they
wanted 100 access, in other words, if they put in
100,000 in premiums, they have at the end of the year
100,000 of cash value that's surrenderable. In other
words, if they cancel they could get it. They just simply add a rider which is a
waiver of that fee. But there's a trade-off. If they keep
that going forever, they're going to suffer down the road with rate of return
by maybe a half a point. Maybe you don't think that's significant.
But it will end up costing them maybe 5 or 10 percent of what they could
have had in tax free income down the road.
If they could have taken out 100,000 a year on a million
dollar account, maybe they can only take out 95,000 a
year the rest of their life. So, there's always a trade-off. If you
cannot accept that, hey, if I put in money, if i put in 100,000
year for 5 years and if you needed the whole 500,000 at
that point, oh yeah, you can get it. There's a smart way to
get it. You can learn about the sad smart and dumb way to access
money in other episodes on this channel. But see,
you can put in a half a million over 5 years and you can go grab your half
a million. So, the type of life insurance isn't so
much what's critical. It's how you fund it. Are you maximum funding it? Are
you paying the the least amount of premium just for the
death benefit? Those take a long time to accumulate
cash value. When we maximum fund an indexed UL, it
has tremendous liquidity. And the cash surrender value begins to
accumulate instantly. And you can even have 100%
access to 100% of your premium (if you're a business owner )on
the front end. But be willing to give up a little bit
of the rate of return on the back end. So, if you're watching this and going,
"Whoa, wait a minute. I've never heard of this before."
You're not alone. And so, this has motivated me to write 11 books
thus far. And my goal is to write a book every year the rest of my life.
I want you to learn. So, if this has intrigued you,
my 11th book, my most recent bestseller is called The Laser
Fund. Now, laser is an acronym that stands for liquid asset safely earning
returns. This book teaches how to diversify and create the foundation for
a tax free retirement. This is actually 2 books in
1. This one is 200 pages, 14 chapters
with all kinds of charts and graphs and explanations. But if you like to learn by
stories, you flip it over and read this 100 pages,
12 chapters with 62 actual client stories.
If you want to use your whole brain, the right brain of the left brain, I would
recommend you read both books. But don't pay 20 retail for this.
I want to gift you one free. To claim your free copy of the book, simply go to
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laserfund.com and you will learn more about what I've
been talking about.