- You can be self-insured within 12 years.
In this educational episode,
I'm going to address the question,
what is the end goal of buying term insurance
and investing the difference?
And hopefully this will help you understand
how to do that on steroids.
Get ready.
(bright upbeat music)
So I'm Doug Andrew.
I've been helping people optimize assets, minimize taxes,
and prepare for a comfortable retirement now
for nearly five decades.
And I got my insurance license clear back in 1974
and a series one securities license
which allowed me to sell any stock bond,
mutual fund, or anything.
And so I was a big proponent of buy term,
invest the difference from 1974 to 1980.
And I ended up being responsible
for over 3,000 clients in 13 western states.
And we were trying to do a good job investing
the difference to earn an average of 12%
in the market and mutual funds.
Now, DALBAR who studies investor behavior says,
if most people buy and hold in most 20-year periods,
you'll only average 9.14%
based on several 20-year periods in history.
And if you earn nine, you're only gonna net six
in a 33% tax bracket at the end of the day.
Because if you have $1 million saved and it's earning 9%,
you pull out 90 grand,
your only net 60,000 to buy gas and groceries
and prescriptions and golf green fees.
Well, in 1980, EF Hutton was the brainchild
behind the emergence of universal life.
And so I'm gonna explain the difference
between universal life and whole life,
because Hutton was basically thinking
why don't we sort of buy term and invest the difference
under a tax-free umbrella and put it on steroids?
And I could see it instantly.
So hopefully you'll understand as I go through this
because the end goal of buying term
and investing the difference
is to be able to get rid of the insurance.
It's term insurance.
It's gonna go through the roof in price
when you're in your 60, 65, 70 year old.
And you are gonna be paying big, big premiums.
And so the goal is that you buy term, invest the difference
so that when you have your cash accumulated,
you don't need the insurance anymore.
I think that's rather interesting
because the biggest purchasers of life insurance
are those people over the age of 65.
Did you know that?
And they're doing it for living benefits
not for the death benefits.
So let's go back and look at this.
I'm gonna simplify this.
When I first started in 1974,
all insurance companies had to use the 1958 mortality table.
That's how many deaths per 1,000 in America.
And then they adjusted in 1980, 2001, 2017.
This is called the Commissioners Standard
Ordinary Mortality Table, otherwise CSO.
So just to help you understand it,
I sort of like the old 1958 tables
because for 30 year olds,
there were 2.13 deaths per 1,000
40 year olds, 3.53;
when you were 65, it was 31.75 deaths per 1,000;
at age 80, it was 109 deaths per 1,000.
And so if you wanted to calculate the cost of insurance,
the pure cost,
then if you had 1,030 year olds
that wanted to put money in a hat
and they wanted to come up with $1,000 death benefit
for the 2.13 of them that were gonna die that year
to give to their, you know, beneficiaries,
everybody would have to contribute $2.13 to the hat.
They'd have to collect $2,130
so that they would have enough to pay $1,000 to 2.13 people.
Does that make sense?
And so it goes up.
And so term insurance,
it's not really a straight curve like this.
It's probably a more of a curve like that.
But let's keep this simple.
So when you're buying term and investing the difference,
you're paying less premium
but you're taking the difference
between what may be a whole life policy would cost,
which would be this.
And so your whole life policy
might be charging you $31 per 1,000.
But see, you're way over paying for the insurance,
the early years in whole life
so that you can keep paying the same premium
for your whole life.
You can underpay
when the insurance gets too expensive,
your policy premium doesn't go up.
It's guaranteed that pays that death benefit
for your whole life if you pay that minimum premium, okay?
Well, a lot of people, including myself,
I did all kinds of studies and I said,
"Well, if you could buy term
and if you invested the difference
and you dollar cost averaged, and if you earned 12%,
you would outperform the whole life, okay?"
Because I had to remember earning 12% before tax
is only like really netting 8%.
That's tax free in an insurance policy.
Well, that's what you could do.
But DALBAR says most people are only earning 9%
if they buy and hold.
If they retire and the market goes down,
they get impatient
and they sell when the market goes down
and they wait, wait, wait and buy high.
So the average retiree is only earning 3.5%
return in the market.
But see in 1980 and even before that with whole life,
people wanted to pay even more into it
and be done paying for their life insurance at age 65
'cause they had enough cash equity,
it's called cash value accumulated in it.
So that would be maybe paid up at 65.
They don't use that term anymore,
but you want it to be predominantly through
based on the average dividends or interest rates at age 65.
Then they said, "Well, let's pay premium for 20 years.
How about 10 years?"
Well, what EF Hutton said,
"Why don't we let people if they want, pay it in one year?"
In fact, when they first started,
people were throwing in $500,000
into universal life back in 1980.
And my clients were never happier
than when I got 'em out of the market.
But they could put in 500,000
and they were earning 11 and three quarters
to 15.5% from 1980 to 1991, 1992.
And so they were able to earn 11 and net 10.
That means they could put in 500 grand
and immediately start pulling out 50 grand a year tax free.
Well, because the banks and the brokerage firms
could not compete, they lobbied Congress.
And in 1988, they passed the Technical
and Miscellaneous Revenue Act.
Technical and Miscellaneous Revenue Act spells TAMRA, okay?
And so you had to spread it out over a five-year period.
So now it's sort of like a five pay whole life.
If you wanted to maximum fund that,
it's called a seven pay, okay?
And so you get the money in.
If I wanna put in $500,000,
I can put in 100 grand a year each year for five years,
but then I'm done.
I can't put any more into it.
But you are putting way more money in here.
And if you're a 60 year old, you put in $500,000.
Let me show you what happens.
Many times compare IUL to a bucket.
So if I'm 60 years old
and I want to reposition $500,000
to increase the liquidity safety rate of return,
use it for tax-free retirement income
but I don't need to start taking out income immediately.
I can design an IUL to accommodate $500,000.
Now once I know that,
that's called the guideline single premium.
And the calculation is for male aged 60
under TEFRA and DEFRA tax citations,
you want the least amount of insurance
you can get away with.
So for a 60 year old, that's about double that 1 million.
Yeah, I know you could buy way more insurance
than that for 500,000.
That's not the objective.
You want the least amount of insurance.
So this is $1 million death benefit,
but you put in $500,000.
And if your objective is to have the highest
net internal rate of return,
then this allows you to have this cash as it's put in there
and grows qualify as part of that death benefit,
which will mean the insurance
will get cheaper as you get older.
Have you got that?
Let me show you what I'm talking about.
You put in 100 grand the first year, 100 grand the second,
and by the way, this is the first day of the second year,
you can have 200,000 in there.
So in four years, in one day
I can have my 500 grand in there.
Now if I die in the fifth year,
then the insurance company is gonna pay out 1 million bucks.
Yeah, it's twice as much as I put in.
That's not why I did it was for death benefit.
But the insurance company's only charging me
for the differential, the net amount at risk.
If I have 500,000 of cash value
and the death benefits 1 million,
they're only on the hook for 500,000.
They're only gonna charge me for insurance.
I'm five years older,
even though the cost per 1,000 went up a little bit.
The amount of thousands I'm paying for is half
of what it was five years earlier.
Let's go seven and a half years.
Why seven and a half?
Because I have averaged since 1980, 9.62% rate of return
on my universal life and index universal life, both.
And so if you use 9.6 and divide that into the rule of 72,
your money will double every seven and a half years.
So we've had many, many people who have experienced this.
That half a million doubles to a million in the 12th year.
So in 12 years into the contract,
your cash value equals the death benefit.
So you now are self-insured.
People who buy term and invest the difference,
they don't hit that end goal of having enough cash
to get rid of the insurance
until 30, 35, 40 years down the road.
And in the meantime, inflation has eroded away most of that.
And so the end goal of buying term and investing,
the difference is to be able to get rid of the insurance.
And most of the time they can't do that
for 30, 35, 40 years.
I can do it in 12 years with universal life.
That's why I call it
by term invest the difference on steroids.
So I have $1 million in the 12th year in there.
Now I can start pulling out 100 grand a year tax free.
But if I wanna let it sit there and grow,
it'll double in another seven and a half years.
So by the 20th year, it's got 2 million in there.
Well, what if I die?
Does it only pay out 1 million?
No, TEFRA and DEFRA says
the insurance company will pay 5% more than your cash value.
That little amount, that 5% more.
So if I died when I had 2 million of cash in there,
the death benefit would be 2,100,000.
The insurance company is only charging me,
the actual cost of insurance.
It's term insurance.
Every whole life, universal life
all has a term insurance cost, a term component, okay?
But they're only charging me for the net amount at risk,
that 100,000.
The cost on that insurance in, you know, 20 years,
even though I'm 20 years older is minuscule
compared to the interest I'm earning on 2 million bucks.
Many times I have earned on my universal life,
10%, 15, 20, 20 5%, 61%.
I mean 25% on 2 million,
you make another half a million dollars.
The cost of the insurance would be a few 1,000 bucks.
Many times all of this interest that you're earning
dwarfs the actual cost of insurance.
You are self-insuring.
You are buying term, investing the difference
and hitting the end goal in as early as 12 years.
If it takes you till 15 years, that's okay, even 20 years.
But you don't have to wait until the 35th or 40th year
to finally have enough money
that you can get rid of your death benefit
and get rid of paying for insurance,
because it's taken care of really fast
when you maximum fund an IUL.
Does that make sense?
If this is intriguing you and you wanna learn more,
I wanna gift you a copy of my most recent bestselling book
called "The LASER Fund".
And it's actually two books in one.
300 pages total.
But this side is for the left brain learners
and it's about 200 pages, 14 chapters
with all the charts and graphs and explanations.
If you're more of a right brain learner,
you flip it over to this one.
About a 100 pages and 12 chapters
with 62 actual client stories.
If you wanna use both your right brain and left brain,
read both books.
But you can go to Amazon
and I think it retails there for 20 bucks,
you pay another 10 bucks for shipping and handling.
If you do that, thank you.
But you don't need to do that.
I'll gift you a copy free.
Simply go to laserfund.com or click on the link below.
You contribute a nominal amount
towards the shipping and handling.
I'll cover the rest of that cost
and I will pay for the book.
I'll fire out a hard copy to you via priority mail.
And in that site, when you're claiming your free copy,
if you'd like to listen and learn or watch and learn,
check out the audio and video formats.
We teach educational webinars on a regular basis.
There's no charge for those.
You can even schedule an appointment
with an IUL professional
that knows how to structure these correctly.
But this is why the goal of buying terms
and invest the difference is to eventually have enough money
that you no longer need the insurance.
You can accomplish that probably in 1/3 the time
with a property structured IUL.
(upbeat cheerful music)