- The insurance revolution.
In this episode, I'm going to address the question,
why is IUL income tax-free?
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I'm Doug Andrew, I've been a financial strategist
and retirement planning specialist now
for north of 48 years, nearly five decades.
What have I been doing for people?
Helping them optimize their financial assets,
minimize taxes,
and empower what I call their authentic wealth.
Usually, for long term goals like retirement,
people have come to me for at retirement planning,
which is something totally different
than for retirement planning.
And usually, I'm having to help them reposition their assets
into vehicles that will be tax-free during retirement
because most retirees are in danger of outliving their money
due to the negative impact of taxes
eroding away or taking away
at least a third of their income.
If they have a million dollar nest egg
and if it's earning seven and a half percent
and they don't wanna deplete their principal,
they pull out 75,000,
but they only net 50,000 to buy gas, groceries,
prescriptions, golf, green fees, or whatever
because they have to pay tax.
And maybe they can't get by on 50,000
because of the second danger, inflation.
Inflation at the recording of this episode,
last year was 15% was the actual rate of inflation,
which means the cost of living will double in 4.8 years.
So retirees in particular, this was like a hidden tax
because if you could get by on 50,000 today,
in less than five years at 15% inflation,
you're gonna need 100,000 to buy the same gallons of gas
and loaves of bread that 50,000 buys today.
And in less than 10 years, you're gonna need to have 200,000
to buy what 50,000 buys today.
So the second big danger is inflation,
the third is market volatility because usually,
when we have irresponsible government
spending in the printing of money,
that causes us to incur higher taxes and inflation
'cause they're printing money,
we also have market volatility.
So that's why my favorite vehicle
in the Internal Revenue Code, I call it the laser fund.
LASER is an acronym
that stands for liquid assets safely earning returns.
It's a max funded tax advantage insurance contract,
indexed universal life structured correctly.
And funded properly,
then it is qualified to be what I call a LASER fund, okay?
Now, LASER's an acronym
that stands for liquid asset safely earning returns.
So when people ask me, "Okay, Doug, I'm getting it,
but tell me why is IUL,
index universal life income tax-free?
I mean, as soon as the IRS finds out about this,
they're gonna close that loophole, right?"
And I sort of snicker and I go,
"Hmm, no, it's not a loophole."
The IRS knows all about it
and they're the ones who actually have dictated
the parameters on why it's tax-free
and how to keep it tax-free.
And so far, it's been a sacred tax-free cash cow
in the Internal Revenue Code now for over 108 years.
And I'll explain reasons why, okay?
And so this really was an insurance revolution
that was started not by an insurance company,
but by a brokerage firm, EF Hutton.
You may have watched other episodes on this channel
where I talk about the history
behind the emergence of universal life,
and then indexed universal life.
So I started in 1974,
and I went out and from 1974 to 1980,
I ended up being responsible for over 3,000 clients
in 13 Western states.
And I was a big proponent of buy term insurance
and invest the difference because I felt like,
well, you could put your money in the market
and maybe you could earn an average
of nine to 12% before tax,
which would outperform most whole life policies
that unfortunately, only usually performed
at maybe two and a half, three, three and a half percent.
Even if they credited you eight gross with dividends,
you might only net five or 6%
even by the time you were 90-years-old.
So I thought, "I cannot do that
even though those are tax advantaged."
Well, EF Hutton was really the brain child
behind the emergence of universal life.
It wasn't whole life, which is basically built on a chassis
design for death benefit, first and foremost.
You can use it for living benefits,
but to create predictable cash flow
or income during retirement,
you're hard pressed to see a whole life policy
actually perform to create predictable income.
Now, they said,
"Hey, let's see if we can take the least amount of insurance
on a policy that the IRS will let us get away with,
and let's put in the most premium or the most money
the IRS will allow as fast as the IRS allows,
and let's use life insurance for living benefits
because it will accumulate money tax-free."
So it wasn't whole life, it wasn't term,
and so they called it universal life
because it was universally applicable
where you could minimum fund it
for less premium than whole life for permanent insurance
because of those high interest rates back in the 1980s
where I got credited between 11 and 3/4
and 15 and a half percent.
Never less than 11% from 1980 to 1990.
And so I had clients putting in big lump sums of $500,000
and they were earning 11, netting 10,
pulling out 50,000 a year tax-free right off the bat.
So what was EF Hutton really thinking?
Well, this multi-trillion dollar insurance industry
is not only the backbone of America,
but the backbone of the world.
This is where governments go to for help
when they need help.
Some of these insurance companies manage as much money
as the IRS clicks an income tax in an entire year.
And so what do they do?
Well, money inside of a permanent life insurance policy,
now for over 108 years,
has been sort of a sacred tax-free cash cow
because under section 72e of the current code,
money inside of an insurance policy grows tax-free.
The interest, the dividends, and so forth.
And if you want to access money while you're alive,
you can do that if you do it the smart way
under section 7702.
And so this insurance revolution that EF Hutton said,
"Hey, nothing else does that."
And then when you ultimately die,
anything left in there when you die blossoms,
increases in value and transfers out tax-free
in a death proceed, life insurance.
That's under section 101a.
So Hutton said, "There's nothing else
in the Internal Revenue Code that does that."
Municipal bonds don't do that.
In other words, you can accumulate money tax-free,
you could access it tax-free.
When you die, it blossoms and transfers income tax-free.
So they said, "Well, let's use it for living benefits.
So let's take the least amount of insurance,"
and this is why people were putting in
a half a million bucks
and taking out a dinky amount of life insurance.
And the IRS said, "What are you doing?
And EF Hutton said, "We're not doing anything wrong."
They went to court, EF Hutton won.
They weren't doing anything wrong.
And you probably have watched other episodes
on this channel.
But if not, I'll just summarize here.
The IRS went to Congress and said,
"We have to change the definition of tax-free
under these three sections of the code.
If you violate the definition of tax-free insurance,
it's gonna be taxable
under the investment part of the code."
Investments are taxed sooner or later,
and they're usually subject to volatility.
So in 1982, in 1984
under the Tax Equity Fiscal Responsibility Act
and the Deficit Reduction Act,
we have these two acronyms called TEFRA and DEFRA
that basically dictate the minimum amount of life insurance
that has to be attached to the account so to speak
so that it stays under the definition of tax-free insurance.
But TEFRA and DEFRA gave parity
so that it doesn't matter if you're a 20-year-old,
if you're 60-years-old, or if you're 80-years-old.
The amount of insurance required goes down
as you get older and the more unhealthy you are,
the less insurance you get away with.
So that an 80-year-old can earn 11 and net 10,
a 60-year-old can, and a 20-year-old can.
Because the 80-year-old gets away with less insurance,
then the 60-year-old
and the 60-year-old gets away with less insurance
than the 20-year-old.
Everybody can earn, let's say 11 and net 10,
or earn eight and net seven,
or some years earn 25 and net 24
'cause the cost of insurance stays the same
no matter how old you are or how unhealthy.
And if you're totally uninsurable,
it's the owner of the insurance policy
that gets all the tax-free accumulation.
You can actually put the life insurance death benefit
on a surrogate, a spouse or your children, okay?
So TEFRA and DEFRA have to do with the amount of insurance
so that it stays tax-free.
TAMRA happened in 1988
under the Technical and Miscellaneous Revenue Act
that spells the acronym TAMRA.
And so this dictates,
"Hey, do you wanna access your money tax-free?"
And it was actually, came about because of the banks
and the brokerage firms in 1988 couldn't compete.
They saw this massive Exodus of money
leaving their institutions into these
'cause these were safer.
They paid higher interest, they were tax-free,
they blossomed when you died.
Their accounts didn't do that,
but they didn't wanna kill them
'cause this is where they put 30 to 40%
of their tier one assets for liquidity and safety.
And so they wanted to slow the flow.
So I've explained in episodes that, and in my various books,
I compare it to a metaphor using a bucket.
And so let's say a bucket
is an index universal life insurance policy
and you're a 60-year-old male.
Well, when you do what EF Hutton came up with
under TEFRA, DEFRA, and TAMRA,
a male age 60 who wants to put in 500,000
and have that 500,000,
let's say earn the best possible rate of return,
I've averaged about 9.62% in 20-year periods.
Let's round that down to 9.6.
That means 500,000 will double every seven and a half years.
What you're wanting is the least amount of insurance
'cause you could buy a ton of life insurance
for half a million bucks.
Well, you want the least amount.
At age 60, TEFRA and DEFRA says that's maybe twice that,
a million.
It also means that when I put in 500,000,
the amount of insurance the insurance company's
charging me for if I select the level death benefit option
is the difference between my money,
which now is part of the death benefit,
and the actual death benefit.
So when I have a half a million,
they're only at risk for the other half a million.
They're only gonna charge me for that extra,
that differential.
When this doubles in seven and a half years to a million,
now I'm self-insured.
Now, my money equals the death benefit.
When that million doubles to 2 million
in another seven and a half years,
the death benefit actually has to stay ahead
by five percentage points if I died
in the 15th year from this example.
It may leave behind 2,050,000,
but I'm only being charged for 50,000 of life insurance
because 2 million of it is my money.
Does that make sense?
So when you structure it correctly and fund it properly,
the insurance gets cheaper as you get older.
And so TAMRA says, if you want to access money,
if you threw in all half a million in one fell swoop
like we used to back in 1980, it will grow tax deferred.
If you die, it will blossom and transfer income tax-free,
but if you wanna turn on tax free income
you have to comply with TAMRA and you have to spread it out.
So if you're over age 50,
basically you have to fund it maybe about 20% a year.
It's an exact number based on your age,
but I'm just gonna simplify it here.
So the most you could put in would be a hundred thousand
the first year.
A hundred thousand the second, a hundred thousand the third,
and then the fourth and then the fifth year.
So after five years, you've complied with TAMRA,
And now when you access money,
as this doubles to a million, a million doubles to two,
2 million doubles to four, 4 million doubles to eight,
yeah, we have clients who now have $8 million
and it generates 600,000, 800,000 a year
of tax free income without depleting principal
because they complied with TAMRA when they funded it.
Okay.
So TAMRA is really good
if you wanna turn on tax-free income.
So that's the insurance revolution
and why it has become one of the most incredible instruments
that knocks the socks in my opinion off of IRAs and 401ks
and even Roth IRAs or 401ks.
I've never owned any of those,
I never will because Roths only have two benefits.
Your money grows tax-free in a Roth,
you fund it with after-tax dollars just like this.
Roths only came out in 1997.
Roths have too many strings attached.
You can access money tax-free,
but you can only put in a certain dollar amount
or a certain percent of your income.
I can structure one of these to 500,000,
300,000 a year, five years.
I don't have to put in 300,000, I can put in 30,000.
I can make up the other 270,000 at any time I want.
In a Roth,
you're limited to a certain percent of your income.
You cannot touch it for five years
until you're 59 and a half.
With a Roth, you can't use indexing.
With indexing, I can tell the insurance company
to take the interest on my money and fund an options budget
and they will do that and they will credit you
whatever the S&P or the Dow does,
and you can watch episodes on this channel about indexing.
And so when the market goes up, I can get credited 8%, 12%,
even 15 and 25 and 61%.
Many clients have actually achieved that.
But if we guess wrong and the market dives, crashes,
you do not lose one dime of your money
that you had at the beginning of the year.
You just relinquish the interest on your money that year
because money is not at risk in the market.
That's called indexing.
And this is where people generally will earn more like
nine to 10% by employing indexing
based on actual historical performance.
So this is why it's called the insurance revolution
and this is why we compare it to a five-story building.
If the IRS said,
"Hey, you know, you build a five-story building.
If you'll just rent out the first floor the first year,
the second floor of the next year and on to the fifth year,
and if you just take five years to fill it up,
the rental income forever after
will be tax-free."
Sounds silly, but I would do that.
That is a max funded insurance contract
in compliance with TAMRA.
So this is the beauty behind a max funded insurance contract
structured correctly and funded properly,
it qualifies to pass the LASER test;
liquidity, safety, rate of return, and tax benefits.
That's why it's called a LASER fund.
Does that make sense?
So this is the insurance revolution.
I credit EF Hutton.
They weren't an insurance company,
they were a brokerage firm,
but they knew it was far better to earn,
let's say 11 and net 10 than trying to earn 15 or 16%
at a tax deferred IRA or 401k in the market
to net 10 after tax.
So this is what I would like you to do.
Take advantage and learn about this.
This happens to be chapter seven
of this book called "The LASER Fund,"
and I want to gift you a free copy.
Here's how you can claim yours.
You don't have to shell out 20 bucks on Amazon.
This is actually two books in one.
This side is about 200 pages,
14 chapters with all the charts and graphs.
If you're more of a right brain learner,
you flip it over and read this one.
There's about a hundred pages, 12 chapters,
over 62 actual client stories.
But you go to laserfund.com and/or click on the link below
and in laserfund.com, you contribute a nominal amount
towards the shipping and handling.
I cover the rest of that cost.
I'll fire out a free copy to you,
but there's also options there to listen and learn,
watch and learn.
Also, check out some of the online educational webinars.
They're free.
And if you want, you can even talk to an IUL specialist
that will help you understand how this may apply
to your particular set of circumstances.
But this is about you and your brighter future.
I do not want you to outlive your money
due to the negative impact of taxes,
inflation, and market volatility.
Make yourself immune,
eliminate those dangers by employing a LASER fund.
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