What is indexing? How does it work? By the end of this video, you will understand
how to participate with the upside potential of the market
without your money at risk in the market. Get ready, this is going to blow you away.
So, I'm Doug Andrew I've been a financial strategist and retirement planning specialist
now for north of 48 years, helping people optimize their assets minimize taxes and empower what I
call their authentic wealth. If you've read any of my books or watched other educational episodes
my favorite financial vehicle or instrument that allows you to accumulate your money tax-free and
then be able to turn on tax-free income or just access money tax-free for any reason and then at
the end of the day when you ultimately pass away. Anything left in the account blossoms increases
in value and transfers income tax-free is a max-funded indexed universal life insurance
contract and so in this episode, I'm going to explain what indexing means. Because when
these were first introduced clear back in 1980 by EF Hutton who is not an insurance company.
If you've watched any of those episodes Hutton basically said, what are we thinking? Let's put
money into the multi-trillion dollar insurance companies because that's the backbone of America
the insurance industry and increase the liquidity the safety and the rate of return.
Because they're tax-free and those come under three sections of the code 72(e), 7702, and 101(a),
that I explained in other episodes. But I compare this metaphorically to a bucket. Indexed universal
life was introduced in 1997 when interest rates started to come down so that people could have the
choice to earn a higher rate of return than just the what is called the general account portfolio
rate which I'm going to explain here in just a moment. Again, you're designing an IUL policy like
a bucket a repository. You want to structure it to accommodate the amount of money that you
want to put in there, okay, so that you can access it tax-free and so you want all of the interest in
the growth to be tax-free and you want to be able to access the money tax-free down the road. And
so we have to have a minimum amount of insurance because the objective is for living benefits. So, if
I'm a male age 60 and I wanted to put in 500,000. You don't have to put that in all at once of course.
In fact, you can't, if you want to turn on tax-free income the most you could fund that would be
about 20% a year if you're a 60-year-old. So, 100,000 a year for five years
and now you're grandfathered to access money tax-free. This 500,000 can grow
to a million, and two million, and four million, eight million, which many clients have seen that
kind of growth at an average return of 9.6%. But what you're trying to do is get the least amount
of insurance. You could buy way more insurance than 1,250,000 for 500,000. That's not the objective.
You want the least amount and you will learn in other episodes how this as it grows
actually means the net amount between this and the death benefit gets smaller as you get older.
The insurance can actually get cheaper as you get older if it's structured correctly. But let's talk
about indexing here. Now, you can leave your money in that bucket and if you feel you know bearish
about America that you think the economy is going to go down or we're going to have a recession.
You can just sit back and settle for what is called the general account portfolio rate.
So, the insurance company they accumulate your premiums in your account with of course thousands
of other people and so that is your cash value in your contract and so they have that money and
they manage billions and even trillions. One of the institutions that has over three and a half
trillion dollars. That's as much money as the IRS collects in taxes in an entire year and
this is one insurance company. So, what do they do with these billions and trillions of dollars?
They are extremely conservative. This is why banks and credit unions take 30 to 40 percent
of their tier-one assets for liquidity and safety and put it into these insurance companies. Because
many times these insurance companies are rated double a and triple a and a lot of these banks
are only rated triple b. So, banks are taking the money you deposit in them and they only
pay you one percent and they're turning around and putting some of that back into insurance companies
increasing the safety by five or six notches higher and they're earning maybe four or five
percent and they're only paying you one. So, they're earning four to five times what they're paying you
and it's tax-free. But the one percent interest they pay you you have to pay taxes on, hello?
This is where a lot of savvy investors put their money. Now, if you had your money in the insurance company
back in 1980 interest rates were high. I mean, mortgages on homes were at 18%. CDs at banks were
paying over 10 and so my universal life policies I never earned less than 11 three-quarters
as high as 15 and a half percent from 1980 to 1990. But in the 90s interest rate started coming
down and so in 1997 indexing came out. Now, there's a lot of financial advisors that think I'm talking
about index mutual funds. No, an index mutual fund means your money is in an index like the S&P 500
actually in the market and if you would have had a million dollars in an indexed mutual fund the
S&P index in the year 2000. You would have seen that million go down to 600,000 twice during
that decade. No, that's an index fund. Your money is at risk in the market, it's just simply diversified
in the S&P 500 or the Dow Jones. Indexing is not that, this is a strategy, not a commodity, okay.
So, let me explain this as simply as I possibly can. I'm going to take a snapshot in time and
let's say that you started talking away 500 bucks a month 30 years ago in an IUL policy and now
you have a million in there which many clients have easily been able to accumulate a million
just talking away 500 a month or you could start out with a lump sum of
250,000 and put in 2,000 a month and in 10 years you'd have a million or if you put in 500,000
and you only earned 7.2% you would have a million at the end of 10 years. So, whatever it is,
for you to understand this I'm going to take a snapshot in time. Let's say that at this point
in time you have a million dollars that you've accumulated in your IUL policy. Whether you've
been doing this for years or just five years ago, okay. So, you have a million of cash value. So, every
single year you have some choices you can make. You don't have to. You can just let it go and it'll
perform quite well. It's very management unintensive. But if you meet with an advisor
who understands what they're doing at least once a year you can rebalance. So, let's say that the
insurance company on this money your million and of course millions of other people's money.
Let's say that these billions and trillions of dollars they have it in triple a double a bonds.
They have it in mortgages on shopping malls and skyscrapers. But they only loan maybe 50
60 loan to value they don't loan 80 percent loan to value like mortgage companies do. So, they're
very very safe and conservative. If they have to foreclose on a skyscraper or a shopping mall
they come out smelling like a rose because they have a huge cushion if they have to do that and
so that's why the multi-trillion dollar insurance industry has whether the great depression and even
the mortgage meltdown of 2008. They came through with flying colors. So, let's say that the insurance
company is earning four percent because we are in a low-interest environment here the last decade or
two. So, four percent on a million is 40,000. You can just say, "Well, just give me your
fixed-rate", now, they're in business to make a profit so they may take one of those four percent
for them and so you're earning maybe three percent if you choose that which is three times what a
bank may pay you okay and it's tax-free. So it's three times better than a bank and it's tax-free
or if you feel bullish about America and you feel like you know what? I think I can earn more than
four because I think the economy is going to go up. But I don't want to risk in case I'm wrong.
That's the beauty of indexed universal life. What do they do? You simply say, "I want to link to an
index. I want to link some or let's say all of the money", you don't have to do this with all your money
and you can diversify. I'm just going to keep this simple. You could take 200,000 of that and link it
to the S&P 500 another 200,000 of the Dow Jones and then the Russell 2000 and then the Barclays
U.S dynamic balance index. You could leave the last 200,000 and they're earning 4% if you want.
You can diversify however you want. But let's just keep it simple and say you've got a million
and you want to link to the S&P, okay. I've done this many times just to one index. What are you
doing? You're relinquishing that four percent. Your million dollars has to stay safe in the insurance
company earning four. You're not authorizing the insurance company to take your million and put it
out in the stock market in the S&P 500. Well, then how can they afford to pay you what the S&P does.
You're relinquishing the four percent interest that year. You're saying, "You know what, you can
take the interest on my million. You do not have to credit that to me this year but don't lose
my principle", what do they do with that forty thousand? They fund an options budget. They do
this daily okay and so they buy upside options in the S&P in this example. Now, it's quite simple
they're the number one purchaser of options in the world, they do this hourly. What does
that mean? At the end of the year if the S&P went up eight percent the 40,000 of options
gave them the wherewithal to pay you 80,000 on your million. They can afford to
do this, okay. Because the options gave them the wherewithal. Maybe it went up to 12% and so
they may pay you 120,000 because 40,000 of options the way that they purchase them allows them to
have 120,000 at the end of the year if the market went up. Now, they may only pay you up to a cap
maybe of 12% or some years caps have been 16-25%. But why do they do that? Because they will cap you
because of the price of options. but what's the other benefit? That if the market were to lose 20,
30, 40, the options expire worthless but your money is still safe. Your million you didn't
lose one dime of your principal and it's like Will Rogers once said, "People get more concerned about
the return of their money instead of return on their money". Now, this is already arousing
some curiosity and you can think of somebody you ought to share this video with be sure and do so
and post a comment so that we can you know respond and that we can help you understand
it even better. Now, stay with me here. Sometimes you can choose indexing options with no caps
like many of our clients did in March of 2020 to March of 2021. Then they subtract maybe
five percent off the top a year later. Many clients did that and from March of 2020 to
March of 2021 the market went up 66.33 percent minus five percentage points they netted 61.33%.
Pretty phenomenal, right? But you do not lose any of your principal if the market goes down.
The interest that funded the options the options just expired worthless because the
market went down instead of up but you don't lose your principal. Now, you take any period
like the great recession. We start out in November of 1999 down here and if we go over here to the
same month in the year 2012, okay. This is where people who have their money in the S&P. If you had
let's say a million dollars in here you saw it go up and then 9 11 happen and from 2001 to 2003
for 3 years a million went down to about maybe 600,000 dollars. Some lost 35%
Some lost 50%, let's just say 40. It took 4 years when you had your money
in the market to make back what you lost. Because a 40% loss has to be followed by a
67% gain. 600,000 down here has to grow by 67% 400,000
thousand to get back what you lost. People felt like they had lost their future. They had to put
off retirement seven years and then what happened in 2008? As Warren Buffett put it he
said when the tide went out in 2008 it revealed who was swimming naked, people weren't protected.
They saw that million-dollar nested go down to 600,000 again for the second time and it took
four years to come back and finally have a million forty-six thousand eight hundred dollars. A measly
4.68% increase which was gobbled up with the inflation rate at the time.
That's money in the market. That's an indexed fund. Iindexing see when you have your money in the
market you have to wait and make back the losses a 40% loss has to be followed by a 67 percent gain.
But with your money in the market if you do the math this would only have been about one-third of
one percent interest compounded annually with your money in the S&P. No, what our clients achieved was
this. By using indexing they may not have made very much during these down years but they didn't lose
and then when the market went up they went up and maybe to a cap. But in that same time
period many of our clients had 130% instead of a four percent increase. What does this equate to?
Let's go back to the year after I started in 1974 and in 1975 if you had 500,000 in the market in
the S&P, it would have looked like this in the red. Oh yeah, the 90s were great but at the end
of that time period, you would have ended up with. 5.6 million. Now, with indexing, you would have
maybe not had as much some years but at the end of the day you would have had 8 million
tax-free instead of 5.6, let's summarize this. If you had your money in the market a lot
of heartburn, a lot of down years, and you might have ended up with 5.6 million you may say well
that's pretty good. Well, maybe inflation gobbled up a lot of that but that's not the net. You have
to pay about 1.8 okay million in tax you're only netting 3.8. Over here in the index universal life
you would have had 8 million tax-free. Which would you rather have hamburger or hamburger b? So, that's
the beauty behind this and so I would recommend that you really check out how indexed universal
life can be the dream solution for your goals, for retirement, maybe college funding for your kids
and grandkid's, business working capital, and make sure you study this book The Laser Fund. It's 300
pages of charts graphs and explanations. If you have not claimed your free copy be sure and do
so by going to laserfund.com or click on the link below. You contribute a nominal amount towards the
shipping and handling I cover the rest of that and I'll fire out a copy to you. But you can read this.
You can listen and learn. You can watch and learn. But this is about you and your brighter future.