Diversify the smart way. In this episode, we're going to address
the question "What are indexing options
in IUL and can you change those options as you go?" So, get ready.
You're going to be blown away with the flexibility behind an indexed universal
life insurance policy.
So, I'm Doug Andrew. And I've been doing THIS for more than 45 years.
What's THIS? Helping people optimize their assets,
minimize taxes and not outlive their retirement.
In other words, redefining their retirement years
by not following the herd. By keeping their money in traditional IRAs and
401Ks, taking the required minimum distribution
thinking they're saving tax. And so, there's a lot of strategies that
subscribers to this channel learn by getting answers to questions that
frankly a lot of the financial services industry professionals
don't even know the answers. And so, in this particular episode, I'm going to
talk about indexing options. And don't be surprised
if you've not heard about this because there are many financial advisors that
immediately think i'm talking about indexed mutual funds. No.
I'm talking about indexing as a strategy. Let me briefly
explain my favorite vehicle is a max funded IUL,
index universal life insurance contract. And so,
in that, since 1980, that's where I have put my serious cash. And I've earned
average rates of returns of 8.2% up until 1997. What happened in 1997?
That's when indexing came out. And when i saw that, it was a no-brainer. And my
average return went from 8.2% up to over 10 percent. Now, how does
indexing work? You're having your money linked to the
market. Not in the market. See, I don't want my
money at risk in the market. So, let's say I have a
million bucks. It doesn't matter if you have
10,000, a half a million, a million, 10 million. Okay? We have clients that have
tens of millions of dollars in their max funded IUL. So, they use it for
working capital for business, for retirement income and so forth. And we
know that one client in particular has 8
million dollars in his IUL and it generates 800,000 a year
of tax-free income at a net of 10% payout without
depleting principle. So, how does that work? If I have a
million dollars of cash value inside my IUL right now,
and I want to just hunker down and play it safe because i think we're
headed for a recession or something, I can just settle for the insurance
company's general account portfolio rate. So, in the 1980s to 1990s,
that was usually 11 and three quarters to 15%.
Now, the last 20-25 years, we've been at an interest rate low.
So, many insurance companies on AAA and AA bonds and mortgages on shopping
malls and skyscrapers have only been earning like 5 or 6
percent. So, if their general account portfolio is let's say
6 like it was from 2000 to 2010. It was a little bit
north of 6. They need one of those percentage
points for their profits but that means i would net 5%.
So, on my million, I can choose to just hunker down and
accept the 5%. 5% on a million is $50,000.
I can take it out, it's tax-free. If I take it out if i leave it there it
compounds tax-free. If you don't know why, be sure and
click on other episodes to learn why. Now, if i feel bullish about america
and in a year like an election year where many times politicians, it doesn't
matter republican or democrat, they will make
the economy look vibrant dynamic and growing to get
reelected. So, during election years, I usually
link my returns to an index or indices of my choice. And that way,
I do not put my million at risk. My million must stay
safe in the insurance company earning 5%.
What i'm doing is i'm giving up the for sure 5%.
I'm telling the insurance company, "Don't you dare risk my million. That must stay
safe, I want that no matter what happens in the economy or the market." But you can
take the 50,000. The 5% interest you're earning on my money.
I'm willing to give up the f5% interest and let you
use that. However you want. So, you'll have the wherewithal to pay me whatever
the growth on these indices is. Now, the most common indices are
the S&P 500, the Dow Jones. Maybe the Russell 2000. It could be
the euro stock index. Or in japan is that the Hang Seng or the
the Bud B, The Barclays U.S dynamic balance index.
So, many times, I will diversify the smart way.
So, for example, in 2010 back to 2000, that 10-year period. Worst
10-year period since the great depression.
I could have taken that million and had 20%.
200,000 linked to the Dow. I could have had 200,000 linked to the S&P. 200,000 of the
Russell 2000. 200,000 to the Bud B. I could have had
the remaining 200,000 just sitting there earning 5%.
Now, during that time period, just doing that
walking away, I would have earned 7.23%. But every year, I can change
the indices that i am linked to. So, when people say, "Well,
which one do you use?" Well, sometimes, I might have more of it in the S&P,
sometimes in the Bud B. And by diversifying,
then i have that type of rate of return or some years.
I have earned 16% with one. 12 percent on another.
If I have some of my money just in the general account portfolio, that's 5.
But people by diversifying by linking to different
indices, they have averaged in excess of 10%,
many years even 11-16 percent like 2017, many of our clients earn 16 as high as
25%. So, let me talk about the linking period
next. So, there are linking periods. The most
common is the one year point to point. So, for
example ,in 2011, what was it? An election year. President
Obama was running for his second term. And I knew my chances were better
than not that the economy would be growing during that time period.
But i wanted to protect myself in case something out of his control
like a terrorist attack would cause a dip or a crash in the market.
So, I used indexing. So, I linked. Now, by doing that, I chose November 15th as the
linking date that year to November 15th of the next year 2012.
Right after the elections, okay? And sure enough, I
locked in gains of 16 that year. Even though the market went up
a little bit higher than that, I was capped at 16. Why? Because
the insurance company doesn't have my whole
million to put in the market. They only have
the interest on my million to buy upside options. So, if the market
did crash, the options expire worthless but I didn't lose my million,
okay? The options just expired. And so, at least, I didn't
lose if the market went down. But if it went up, the insurance company had the
wherewithal with 50,000 of options to
pay me 3 times that. 15, 16 percent. They're big boys and girls, they know
what they're doing. People say "How can they afford to do that?"
No. They can afford because they're buying upside options. Because they do
not have to keep the 50 000 on hand in case the market goes down.
You've relinquished that interest but not your principal.
Does that make sense? So, the linking dates can be year point to point.
You can also have 12 linking dates. That's called dollar cost averaging.
We have people that put in 100,000. And
they that 100,000 is linked a twelfth of it is linked
January to January the next year. At 12th of it is February to February. March to
March, April to April. That's called dollar cost averaging.
So, that you're not worried about just a one year point to point
like i did in 2011 because i knew it was the election cycle.
And so, you can do dollar cost averaging. You can do one year point-to-point
2 year. Another popular one that many people
choose is a 5-year you're uh linking on a date. And 5
years later whatever the market is at because it's usually up, you will get
that entire gain with no cap. Or there may be a cap
of a of 100 or 200 percent. But people have made a
tremendous average rate of return with a 5-year
linking especially after a crash. You link right at the bottom of a crash.
And 5 years later, sure enough, you're going to probably make a
killing. So, those are linking dates. Linking
methods are next. So, let me explain why there's caps
and the different linking methods that you can use to enhance and diversify
with your money. So, linking methods also allow you to diversify. For example,
one of the simplest ways is to simply say, "Okay,
I want you to link to let's say the S&P 500. And they will measure one year point
to point. And during that period, if the
market goes up, they will pay you whatever the S&P
does. If the S&P goes up 10%. They'll pay you 10%.
If it goes up 15%, they'll pay you 15.
If the cap is that or higher. But if the caps only at 12, the most they will
pay you is 12% if that's the cap.
But see, if the market goes down, you don't lose. You don't earn anything. But
see in that case zero, earning zero is hero. Because you
didn't lose. See in 2008, a lot of our clients were
actually cheering when everybody else in america that had their money in the
market, they were panicking. And our clients were
going, 'Go, go." Because they weren't losing. Most
Americans lost 40%. A million went down to 600,000. Our
clients still had their million. The next year, the very first 90 days,
they locked in gains of 16 after not losing a penny.
And most people took 4 years to make back what they lost.
And so, sometimes zero is your hero. Many times people don't like
zero. And so, there's trade-offs. You can say, "Well, I want 2%." An insurance
company may say, "Well, we'll pay you 2%." On a million bucks,
That's 20,000 which is double what banks. maybe we're paying at the time.
And so, they'll pay you 2%. But the cap comes down from maybe 15 down to 13 percent.
Or from 13 down to 11. If you have a little bit higher floor,
then the ceiling comes down. And those have averaged between 8 to 9
percent for the last 40 years based on actual stock market history.
Sometimes, you keep the floor down at zero but you have a lower cap
because the insurance company will say, "We'll pay you
140% of whatever the S&P does." What? How can they afford to do
that? Well, in this case, if the general account
portfolio rate is 5%, my million would then be earning
50,000. And I'm saying you can have the whole 50,000. You don't have to
guarantee me 2% or anything. You can have the full 50,000. But
I'm willing to accept a cap of only 13 instead of
15 because if the S&P only goes up 10 or 11,
you'll pay me 1.4 times. That you'll pay me 140%
of whatever the S&P does. That is used during the the markets that go up and
down like a yo-yo. The most common question i get asked is,
"So, Doug, which one do you use?" My answer:
All of them. See, I diversify the smart way. See I
don't define diversification is having my eggs in a basket
where some of these eggs are getting broken because the returns are pathetic
or it's not in a safe place. Why would i do that?
I want to diversify in superior investments that are tax-free. I
diversify by having indexed universal life insurance
policies with this company, this company, this company, this company.
Some on me, some of my wife, some of my kids. Some
with this index. Some with this one. Some with 5 of them. I diversify back
and forth. Some with this linking method. Some with a 5-year linking method. I
am so diversified. I'm more diversified than most financial advisors
ever diversify their clients money. But see,
what did I do by using these different linking methods?
From 2000 to 2015, not only did I accomplish this that many
of our clients did the same thing. A million in the year 2000 doubled
to 2 million by 2007 the end of 2007.. By the end of 2015, it doubled again
and it was 4 million. A million was worth 4 million.
And now that 4 million is generating 400,000 a year of tax-free
income for those people. Folks, most Americans didn't achieve anywhere
close to that because they had their money in
the market. So, if you want to create predictable rates of return,
have safety and have zero be your hero; use the indexing options that are
allowed and afforded with a properly structured
indexed universal life insurance policy. If this is intriguing you,
i would recommend you read my most recent book The Laser Fund.
I'll buy the book and gift it to you for free. Just go to laserfund.com. Pay $5.95
shipping and handling. And I want to fire out a copy of this
book so that you can learn more about how you can do exactly what I've
been explaining here.