Maximum fund under IRS guidelines. In this episode, we are going to address the
question "How can universal life insurance be used for living benefits?"
This is episode two of a series of 21 titled Secrets To A Tax-Free Retirement.
If you immerse yourself in this education, you're going to be blown away. I'm
going to show you how you can accumulate an extra million bucks that will
generate $100,000 a year of tax-free retirement income into
perpetuity.
So, my name is Doug Andrew and I've been doing this for more than 45 years. Doing
what? Helping people optimize their financial
assets. Minimize taxes and empower their authentic wealth. But I've been deemed
primarily a retirement planning specialist. My favorite vehicle I call
the Laser Fund which is a max funded tax advantaged indexed universal life
insurance policy. I own several. My kids all owned several. We've had
thousands of people use this incredible tool to provide tax-free income for the
retirement that knocks the socks off of IRAs and 401Ks. So, how did it all come
about so that it was designed to be used for living benefits? EF Hutton who is not
an insurance company. They were a brokerage firm in America like Merrill
Lynch and so forth. And clear back in 1980, they were trying to help their
clients with stocks and bonds and mutual funds. I mean, I started in the financial
services industry back in 1974. And I had a series one securities license that
allowed me to sell stocks bonds mutual funds at everything. They don't even
offer that series one license today. You have to have a series 6, series 7,
series 63, 24. All these different ones that equaled what
that one was. And so, from 1974 until 1980 I ended up
being responsible for over 3,000 clients in 13 western states. And I was trying to
do my best to help them put their money into the market in different diversified
mutual funds. I was a huge proponent of buy term insurance and invest the
difference. Because if you invested the difference, even though you would have to
pay tax on what you earned in the mutual fund, sooner or later, even if it was an
IRA I could show people how that would outperform a whole life insurance policy
that only a that time was crediting 3, 3.5,
4 percent interest. So, EF Hutton said, "Hmm, why don't we buy term
and invest the difference for our clients under a tax-free umbrella in
sections of the Internal Revenue Code that have been around for decades?" The
3 sections were 72(E), 7702, and 101A which I'll address in another episode.
But let me share with you the idea that EF Hutton had to use life
insurance for living tax-free accumulation and tax-free income. Not
just for the tax-free transfer when you die. So, EF Hutton realized "Golly, if we
had our clients money in the market a subject to volatility..." It was like
playing red light green light when I was a kid. Sometimes you may take 20 steps
forward you might make 20% in a really good banner year. But then you had to
take 10 steps back when that when the market corrected or there was a little
recession so you go up and back up and back. Because I've often described the
stock market is like a person with a yo-yo.
Hopefully walking up some stairs. So, EF Hutton said, "You know what? We are trying
so hard that between up and down up and down averaging 12%." I mean that was our
goal, if we could average 12%. And they realized, "Well, even if we could do that,
and yet most people were not. Because most people buy and sell at the wrong
times." They they get worried when the market drops down 20 or 30 percent and they
sell. And then they wait till the market comes clear back up here and then they
buy. And so, most investors in the market do not average 9 or 12% that they could
if they just bought and held. The actual return is about 3.5%
according to Dalbar. Isn't that pretty pathetic? But EF Hutton said, "Even if we
could time the market and achieve 12%..." So, instead of taking 12 steps forward, okay?
On the average, they realized, "We'll, wait a minute. Whether money has to
be taxed as they earn it or whether it's tax-deferred and at the end of the day
you have to pay tax when you retire and take it out like an IRA or 401k,
you're not netting 12." You're taking 12 steps forward, okay? But you're
having to take 4 steps back in taxes. Because most Americans end up with about
a third of their money going out the window in taxes in retirement. So, 12
steps forward, 4 steps back in taxes. You're only netting 8. Another step back for
fees. Because most asset managers charge about one percent and fees. So, if you
made 12% you're only netting 7. In other words, if you had a
million dollar nest egg and you're earning 12%, that's
120,000. That's not all your money. It's the only 80,000 of it is your money
and then you have to pay another 1% in fees. That's another 10 grand. You only
netting 70,000 out of the 120,000 --12%
rate of return to buy gas and groceries, prescriptions and golf green
fees. And so EF Hutton basically said, "Hmm, instead of having to take 12 steps
forward and 4, 5 steps back, why don't we just take 11 steps forward
and 1 step back?" What were they talking about? Back in 1980, interest rates were
high. Now, interest rates are relative. And when interest rates are high for earning,
their high for borrowing. I mean mortgages on homes we're at 18 to
21 percent. CDs that banks were paying 10%.
Can you believe that? But back then, most insurance companies general account
portfolios which I explained in another episode, they were earning between 11
and three quarters to 15.5 percent on triple-A and double-A bonds
and mortgages on shopping malls and skyscrapers and so forth. And so, I never
earned less than 11 and 3/4 percent from 1980 to 1990 on my universal life
insurance policies. So, let's say we're earning 11. I'll just come down to 11.
They were saying, "let's take 11 steps forward and only 1 step back." What's
that step? It's not taxed. See, insurance is tax-free. That 1% is the
cost of the insurance that the IRS says has to be there. This must be defined as
an insurance policy in order for it to be tax-free. If it's not, then it is under
another section of the Internal Revenue Code and that's a taxable investment
subject to volatility. EF Hutton said, "Hey, let's take away the volatility and let's
earn an average of 11 netting 10%. That 1%, when you think about it is money that
would otherwise go out the window in unnecessary taxes if you had an IRA or
401K or a regular mutual fund. You'd have to be earning 15% pay tax of 1/3 to net
10. I only have to earn 11 to net 10 in the universal life. And that is a safer
bet. So, that was the brainchild of EF Hutton. In order to make it perform to
where only one of those percentage points was the cost of the insurance,
Hutton said, "Hey, under Section 101A of the Internal Revenue Code, we can simply
put in a large lump sum of money and we are self ensuring. It's tax-free. So, if
you put in 100,000 or 500,000 or a million, the
objective is to take the least amount of insurance the IRS requires and put in
the most premium the IRS allows as fast as they allow. And it turns into a
tax-free cash cow. This is how you can earn 11 and net 10. So, what does that mean?
Back in 1980, when I saw this, I thought, "Whoa!" This is by term and invest the
difference on steroids. In other words, I had people put in $500,000.
They're earning 11 and netting 10. What's a net of 10%
cash on cash on a half a million bucks? 50 grand a year, 10%. They put
in 500,000 and we're pulling out 50,000 a year of
tax-free income for years. There still doing it. Now, isn't that incredible?
But what happened is the IRS came in and said, "What are you doing,
Hutton?" And they took him to court and they passed some tax laws that I'll
explain here in a couple of episodes. But the beauty behind this was to use
Universal Life primarily for living benefits. Can you still use it for death
benefit and pay lower premiums than most whole life insurance policies? Absolutely.
Whole life insurance was forced to be more competitive. Whole life is okay for
death benefit. But whole life insurance doesn't hold a candle to universal life
when it comes to creating predictable income streams that are tax-free. I can
earn 11 and net 10 which I have done for the last 25 years. Whole life insurance
if it credited you 8 you'd be lucky to net 5.9 by the time
you're 95 years old. And so, that's why I like universal life because
EF Hutton designed it for living benefits. The death benefit also comes
along for the ride. So, back then in 1980, the objective... I called it the backdoor
approach. Instead of people coming to me wanting to buy as much insurance as they
felt like they wanted or needed for the least premium, people came to me and they
were telling me how much money they wanted to set aside for their future for
their retirement to have tax-free growth and tax-free income. So, this was the
brainchild again where EF Hutton said, "Wow,
money inside of an insurance contract accumulates tax-free. You can access the
money tax-free for living retirement income benefits and it's totally
tax-free. And when you ultimately die it blossoms it increases in value and
transfers income tax free." Nothing else does that in the Internal Revenue Code.
Municipal bonds don't do that. A Roth IRA doesn't blossom when you die. So, this
became the most incredible tool and I've been using it for thousands of people
since 1980. What you have to do is comply with the IRS guidelines that all
explain in the next episode so that you can accumulate access and transfer your
money tax-free. But you determine what is called the
guideline single premium. You don't have to pay a single premium. But you want to
reposition assets from other places that are non performing or they're there in a
volatile situation in the market. And you want to have more liquidity, safety and
predictable rates of return. You may end up wanting to reposition 200,000
out of this property that you sold. And 200,000 out of
IRAs of 401Ks. 100,000 out of CDs or money markets only earning 1%.
That's a total of 500,000. That's the amount, that's the
guideline single premium and then the IRS dictates what's the minimum amount
of insurance that must be attached so that your half-million will grow like
crazy income tax-free. If this is resonating with you, I would encourage
you to watch the rest of the episodes in this 21-video series, Secrets to
A Tax-Free Retirement. The next one is what I recommend. But if you want to cut
to the chase and read a book that we have written. And this is my eleventh
book. It's called The Laser Fund. And it has over 300 pages containing charts,
graphs, explanations. You flip the book over and you have 62 actual clients
stories. I'll tell you what. I'll buy the book. It's free to you. You just go to
laserfund.com and you pay a nominal $5.95 shipping and handling. I'll fire the book
out to you. You'll have options to get the audio version, the digital version.
However you like to learn. Also we have an 18-hour master class. But I encourage
you to watch this episode next so that you can connect the dots.