- Money in a permanent life insurance policy can be tax-free
whether it pays out at death or at retirement.
In this educational video episode,
I'm going to answer a question
that was submitted to me, I'm Doug Andrew.
The question was,
is there a limit to how much of my life insurance
can be tax-free?
So I'm going to answer that question
based upon the death benefit,
and as far as also the living benefits while you are alive.
(upbeat bright music)
So, as mentioned, I'm Doug Andrew.
I've been a financial strategist
and retirement planning specialist now
for nearly five decades.
And if you've watched very many educational videos
on this "3 Dimensional Wealth" channel,
you will soon discover,
or you've already discovered
that one of my favorite financial vehicles
to accumulate money tax-free,
and then be able to access that money tax-free
while you're alive for retirement income,
or college funding for your kids,
or working capital for business,
or your real estate management,
emergency funds, whatever,
and also to be used for living benefits,
but when you die,
to be able to maximize what you leave behind
totally tax-free,
is a max-funded index universal life insurance contract
that's structured correctly and funded properly.
If it is, it qualifies to be deemed
what I call a LASER fund.
Now, LASER is an acronym that I've used for years
that stands for Liquid Assets Safely Earning Returns.
And at the end of this episode,
I want you to stay with me,
'cause I wanna gift you a copy
of my most recent 300-page best-selling book
called "The LASER Fund,"
so that you can gain more understanding
about how this works.
So here's how I answered this question
that was submitted to me.
He had been watching my YouTube channel
and he goes, "Whoa!."
And so the actual question that he posed was,
Hey, Doug, if I were to purchase
a $300,000 life insurance policy,
or a $3 million policy,
I don't care if it's 30 million life insurance policy,
his first question in this paragraph was,
is there a limit to how much of that is tax-free?
Now, he was talking about the death benefit,
so I answered that first.
Yeah, it doesn't matter if you have a life insurance policy,
whether it's 300,000, 3 million, 30 million
as the death benefit,
if the beneficiary, okay, that is named in the policy
at the time of underwriting, okay?
If that beneficiary is somebody
that would suffer an economic loss
by virtue of your death, okay?
Which you have to do to qualify
for the life insurance policy,
you have to prove that there's a reason
and justification for that amount of life insurance.
I'm gonna come back to that topic here in just a moment.
But it doesn't matter if you qualify for 3 million
or 30 million of life insurance
based upon your income or your net worth,
'cause you can't just take out $100 bazillion
of life insurance
if you don't make that much money to qualify,
or your net worth isn't equal to that.
But whatever you qualify for,
when you die, under Section 101A
of the Internal Revenue Code,
that is 100% tax-free.
Only if you did something stupid
like as a business owner,
if you tax deducted the premiums you paid into it,
then you are triggering tax on the death benefit,
which would be silly.
You don't want to deduct the premiums
that you put in
because then you sort of mess up the tax-free transfer.
I'd rather have 3 million or 30 million
transfer out tax-free upon death
than worrying about a tax deduction
on the premiums I paid into the policy,
if that makes sense, okay?
So it's all tax-free on the death benefit.
Now, I also explained that if you need to access money
while you're alive,
the Internal Revenue Code allows you
to access that money without triggering income tax
under Section 7702 of the Internal Revenue Code.
Now, generally speaking,
I will usually say there are three basic ways
to access money out of a life insurance policy
that has cash value in it or whatever.
But there's the sad way,
and that's by dying.
Now, I don't recommend that one,
but it's one heck of a return.
I mean, if you put in 10,000
and the death benefit's 3 million,
and you die the next day,
and I've actually had clients who who took out
millions of dollars of life insurance,
and they thought they were gonna live 20, 30, 40 years,
so did the insurance company,
and they were killed in an accident.
I had one that he was diagnosed
in the fourth stage of Hodgkin's disease cancer.
When we were filling out the app,
he was coughing and he said,
"I can't get over this cough."
Well, by the time the policy came back and was approved,
he actually was diagnosed with this,
but the insurance company approved him.
He lived 13 months,
but they paid out the full death benefit,
totally income tax-free.
But that's the sad way.
It's one heck of a return,
but I don't recommend it.
Now, the other two ways are the dumb way and the smart way.
Now, the dumb way is to simply withdraw your money
out of he insurance policy.
You can withdraw what you've paid into the policy
up to your basis,
the total of what you've paid in,
and there's no tax on that.
But if you keep withdrawing your cash value,
now you trigger tax after you've recovered your basis.
And that's better than most investments
that are taxed LIFO.
Because if you start to take money out,
the IRS taxes you until you dip into your principal,
any interest comes out first.
With life insurance, It's taxed FIFO, First-In-First-Out.
So if you put in $500,000,
and you started to pull out 50 grand a year,
the first 10 years, that's tax-free,
'cause you're recovering the 500,000 you put in there
that was already taxed.
Only on the gain after that would it be taxable.
That's dumb.
The IRS says, "No, you don't have to pay tax.
You switch the nomenclature
and you borrow out your money."
And people say,
"Borrow my own money, why would I do that?"
Because there's usually two options.
The insurance company will loan you
the equivalent of your interest on that.
So if you had $1 million in there,
and if it's earning, let's say 10%,
like I've netted,
I've usually earned 11 and netted 10 on mine average
for the last 25, 30 years.
And so if I have 1 million in there,
and I start pulling out 100 grand a year,
I can borrow from the insurance company
the equivalent of that 100 thousand of annual interest.
They'll loan me that,
but that allows the insurance company
to keep my million in their growing and compounding,
and they'll keep paying me 10%.
So 1 million at 10% will double to 2 million in 7.2 years.
And so my cash value keeps growing
equal to or greater than the loan that I've taken out.
Now, they have to charge you an interest rate.
Sometimes they charge you a nominal rate like 2%,
and they credit the collateral
that was linked to that at 2%.
But I usually use what it's called
a participating or index loan
where I borrow out money maybe at four or 5%.
And I keep earning nine, 10, 11%.
Some years I may not earn anything,
but other years I've earned 25% and 61%.
So that's called a spread loan.
And that's where the money keeps growing
at great rates of return,
and the actual interest they're charging you
so that it's tax-free.
See, loan proceeds are tax-free.
So that's why it's the smart way to access your money.
So when I answered the question
that was posed to me by this gentleman,
I said, "Yeah, you can access money one of three ways.
The sad way, the dumb way, I prefer the smart way.
And that's with zero cost or the index loans
where you're actually continuing
to earn interest compounding at higher rates of return
than the insurance company is loaning you
the equivalent of your interest.
And there's illustrations of that in the book
that I wanna gift you at the end of this episode.
So let's go back to what you have to do to qualify
because his last question had to do with,
Well, do you have to have a terminal illness,
a chronic illness,
to be able to access money out of life insurance policy
before you die?
Well, he had learned about some things
called accelerated death benefits
or death benefit riders.
And so there are some insurance companies that say,
hey, if you have a life insurance death benefit,
let's say of 1 million bucks,
and you are diagnosed with a terminal illness,
your LE, your life expectancy is in,
you know, six months, or a year, or whatever,
they will allow you to be able to access
some of that million dollar death benefit prematurely
before you die.
So there are riders
that allow you to access some of your death benefit
without having to die yet to get it,
and that's called an accelerated death benefit or a rider.
Yes, you can do that.
Most of the time, people who have come to me.
they have max-funded their indexed universal life policies,
meaning their cash values have grown
by the time they're older
to equal or exceed the original death benefit.
They put in 500,000 and that doubled to 1 million.
And the original death benefit required was only 1 million,
so now, they're self-insured.
Their cash equals the death benefit,
so the insurance company isn't charging them anymore
for life insurance.
But then that million doubles
in another seven and a half years,
if they're earning 9.6%
like I've averaged easily over the last,
ever since 1980, I've averaged 9.62.
So 9.6 divided into the rule of 72,
your money doubles every seven and a half years.
So a half million doubles to 1 million,
1 million doubles to 2 million.
And so if you died when you have 2 million in there,
they will pay out 2.1 million.
They only charge you for that remaining 100,000.
And so the cost of insurance goes down as you get older
when you do it that way,
but you have so much cash in there.
If you have $2 million in there,
you could access 1.8 million of that,
and the remaining 200,000
will keep the life insurance policy enforced
until probably the day you die.
Many companies will have riders on there
that will guarantee no lapse.
And so you can access sometimes 90, 94% of your cash value.
Most people, if they had $2 million,
they just take out, you know,
income of 10% pay out, 200,000 a year tax-free
if they live to be 120.
So you can access the cash value
without triggering tax,
or if there is not much cash value,
but you're paying the cost of the insurance,
you can actually take some of the death benefit early
if you have an accelerated death benefit rider.
But it's tax-free if you do it the smart way.
You have to qualify as I said at the beginning.
When you apply for a life insurance policy,
because it's an incredible instrument
whether you use it for living benefits or death benefits,
but you can't just take out a bazillion dollars
of life insurance.
When you're younger,
you can qualify for maybe 30 times your income.
If you make 100,000 a year,
you could qualify for 3 million of life insurance.
As you get older and the kids leave the nest,
your life expectancy is shorter.
And so maybe at age 60,
you can only qualify for eight to 12 times your income,
but maybe you have higher income.
Or you can qualify for a certain factor of your net worth,
at least one times your net worth.
So if you have a net worth of 5 million,
you can qualify for 5 million of life insurance, okay?
Now, these are called financial underwriting guidelines.
And as you do that,
there's all kinds of reasons or justification
for that amount of life insurance,
'cause you can use it for retirement planning,
for estate planning to pay estate tax
if it forces you into paying estate tax if you died.
It could be used for debt reduction
to liquidate debt, or to pay off a business, or whatever.
And so when you apply for life insurance,
you must prove that whoever you name as the beneficiary
will suffer economically,
even if it's your business,
your spouse, your children,
that they're going to suffer that much of an economic loss
if you die.
And if you can prove that,
you can change the beneficiary later on if you want
to a church, a charity, whoever you want.
But when you apply,
you have to follow underwriting guidelines
based upon your income, or your net worth,
and are you going to create an economic loss,
by virtue of your death,
for the named beneficiary?
If you can't prove that,
you will not be approved for a life insurance policy.
But once you get approved,
the death benefit will be tax-free
as long as you don't mess that up
by trying to tax deduct the premium payments, okay?
The cash value can be accessed tax-free
if you do it the smart way.
If you want to use the death benefit before you die,
you must have an accelerated death benefit rider.
So hopefully this was helpful.
I answered that question and he asked me to do a video,
so I've done the video.
If you wanna learn more,
I would recommend you claim a free copy of this book
called "The LASER Fund."
And this will show you a lot of these things
that I've been talking about.
This is a 300-page book,
which is two books in one.
This side is about 200 pages.
This is 14 chapters
with all the charts, and graphs, and explanations.
If you learn more by stories,
you flip it over to this one,
this is about 100 pages, 12 chapters
with 62 actual client stories.
If you wanna learn both left brain and right brain,
you can read both, okay?
And here's how you claim your free copy.
You simply go to laserfund.com
or click on the link below,
you contribute a nominal amount
towards the shipping and handling.
You must have some skin in the game.
I'll cover the rest of that shipping cost
and I'll pay for the book.
I'll send out a hard copy to you.
There's options there to listen and learn,
watch and learn,
you can also register for webinars.
You can even schedule an appointment
to talk to an IUL specialist if you want,
to see how these strategies may apply
in your particular set of circumstances.
But this is about you and your brighter future.
(upbeat bright music)