IUL is totally tax-free. In this episode, we are going to address the question,
"What's the difference between an indexed annuity and an indexed universal life
insurance policy?" You're going to be blown away.
So, my name is Doug Andrew.
I've helped people optimize their financial assets, minimize taxes and
empower their true wealth for more than 45 years. Helping people prepare for
retirement. I would off time show them different
savings vehicles and how they would rank based upon the key elements of a prudent
investment. Number one, liquidity. The ability to access your money when you
need it. May be with an electronic funds transfer or phone call. 2, would be
safety. Not only the safety of the institution but the safety of the
principle that when you set aside money, principle is protected. You don't want to
lose what you invested. And number 2, every year you make money, you want that
to become newly protected principal. You don't want to lose in future years the
money you made in past years. Does that make sense?
Number 3 would be predictable rates of return. They don't have to be
pie-in-the-sky rates of return. I have averaged 7 to 10 percent on my IUL
insurance policies for years. And there are critics out there that say, "Oh, I've
never seen one that does that." Well, then you haven't seen one structured
correctly. That is the worst reasoning I've ever heard. It's like you ever seen
your brain? Well, no. Well how do you know that exists? Come on. And then the last
feature would be tax advantages. Now, out of four different financial vehicles
that most people draw from for retirement, my favorite by far is the
tax-free bucket is what I call it. And among the tax-free buckets, you have
municipal bonds, you have Roths that are tax-free when you take out the money. But
what I call the Laser Fund which is a max funded IUL, indexed universal life
insurance policy, it knocks the socks off of Roths.
The laser fund has six benefits compared to Roths that have only 2 benefits.
Municipal bonds are usually low yielding. And some municipalities aren't as safe
as you may think they are. They've actually gone bankrupt many many times
throughout the country. And so, when we start looking at different financial
instruments, sometimes people are told to put money in an annuity. Now, an annuity
is simply a savings account with an insurance company. Why are they
recommended? Why do some state, government pensions guarantee income for life by
using an annuity? It's because of the safety of the multi trillion dollar
insurance industry in this country that is whether the Great Depression with
flying colors. We've also had many periods like 2008 where not one legal
reserve insurance company went under during those critical time periods when
some times banks were failing left and right or never opened their doors again.
So, I like the insurance company, the annuities or savings accounts. Life
insurance people think, "Well, that's just a death benefit. Why do i want the
expense of life insurance when I don't really care about the death benefit?" So,
they assume the annuity will perform better because it's cheaper. It doesn't
have the cost of insurance. Wrong. Let me tell you why. So, as I shoot straight with
you, an annuity is the same as account with an insurance company. I've never
owned an annuity. I don't think I will ever own an annuity. There are thousands
of them out there. And the vast majority I wouldn't touch with the 10-foot Pole.
If I were going to put money into an annuity, it would be for predictable
income so that if I ran out of money at age 85 in the annuity, the annuity would
keep paying me income and keep up with the cost of living increase if I live to
be 120. And there's only a handful of annuities that do that. And those
annuities have the average more like 9 10 and 11 percent. But the biggest reason
why I would not own an annuity is because it's only tax-deferred. If it's a
non-qualified annuity, one that's not an IRA or 401K, you're funding that annuity
with after-tax dollars. And it's accumulating tax deferred. But as soon as
you start taking income, now you're paying tax. And it's taxed LIFO. L-I-F-O.
Last in first out. I'll explain that. But if it's a qualified annuity, it's like an
IRA or 401K. And when you start taking the money out, you will pay tax on 100%
of it. Let's go back to the non-qualified deferred annuity. If I put in
$500,000 (let's say) into an annuity. And let's say I was earning
10%. And unfortunately most don't pay that. But let's say you were earning 10%.
10% of 500,000 would be 50 grand a year. If I start taking income out of that
annuity at 50,000 a year, that's taxable. Because the last money I'm earning is my
interest and that's the first money coming out. That's called LIFO tax
treatment. Unfortunately, most investments are taxed LIFO. There's only one vehicle
that I'm aware of in the Internal Revenue Code that is taxed FIFO. That
is life insurance. In other words, the first money in is the first money out.
Using that same example. If I put in $500,000 into a max-
funded IUL. And you can't do it all at once now if you want to have tax-free
income. But let's just simplify this. Once I get my 500,000 in there,
if I was earning 10%, 50 grand and I started taking that 50,000 out, the
first money in is the first money out. So, the 50,000 is part of my basis,
my original 500,000. I already paid tax on that. So, it's tax-free. I could
take 10 years of income of 50 grand a year and not pay any tax because I'm
recovering my basis first instead of last with the annuity. But see, insurance
contracts allow you to continue to take out money tax-free forever.
You want to know why? So, with indexed universal life insurance, what you're
allowed to do under Tefra, Defra and Tamra tax citations and subscribers to
this channel often have questions about those tax
citations and the sections of the Internal Revenue Code as it relates to
indexed universal life. And so you can search through my channel and get
answers to those questions. The point I'm making is right now is that you're
allowed to put in more money into the IUL and cut the cost or expenses down.
People say, "What? I thought you had to pay for the cost of the insurance and the
annuity doesn't do that?" Yeah, there's a handful of annuities that will increase
in value a little bit if you happen to die. But see most annuities don't blossom
with life insurance proceeds when you die. And so people assume that's a cost.
Well, when you're using indexing, most annuities have to keep the caps very low.
And so, usually they might cap it at maybe 8 or 9 percent, maybe. But
we're the same insurance company and there's some huge companies that offer
both indexed annuities and indexed universal life. You will notice that caps,
the most you can earn on the indexed annuity in a given year might be 7% or
8% or 9% whereas indexed universal life with the same company that caps our 11,
12, 16. How come? Because they are able to structure the life insurance in a more
optimal fashion than they can with an annuity which is simply a savings
account. And so, you're able to take the money, the cash value that is totally
tax-free in the insurance policy. Not just tax-deferred. And you're able to
accumulate that money so that when at the end of the day, if you've been
averaging 10%, 10% on a million dollars in an IUL would generate about
100,000 a year of tax-free cash flow. You will be very hard-pressed to
find an annuity that even comes close to that kind of predictable income. We have
run illustrations all day long for years showing the difference between indexed
annuities that are taxed LIFO and totally tax-free indexed universal life.
They're more flexible. The caps are higher. The costs are actually less even
though there's an insurance component because
the insurance component gets cheaper as you get older. If it's structured
correctly and subscribers through this channel find out the answer to that
question on some of other YouTubes. But when you understand this, you'll
realize, "Why would I ever owned an annuity when I can have the few benefits
of an annuity, indexing with higher caps and it's totally tax-free instead of tax
deferred? And at the end of the day if I die and there's a million the million,
blossoms to 2.5 million." See if I died right now, every million in my
IUL would blossom to about 2.5 million tax-free. People say,
"Well, that has a cost." Well it's not free. But I'm not paying for it. It's being
paid for with a minuscule portion of tax that you would pay on an annuity when
you took out your money. So, why don't you redirect some of that otherwise payable
tax and have a death benefit? It's not really costing me at the end of the day.
It is required. And that's what qualifies it to be totally tax free. So, the message
is in the key takeaways, what's the difference between an indexed annuity
and an indexed IUL? The best way is to have somebody who really understands
that 2. And take the same insurance company that offers both. And put in the
amount of money you want illustrated in an indexed annuity. And look at the
income stream and the indexed options that are available to you. Then look at
the index options and the caps that are afforded in the IUL with the same
insurance company and create the maximum income that you can till age 120. And you
will see you will have higher income. Now, if you want absolute guaranteed income,
even if you run out of money, maybe an indexed annuity and only a handful would
be recommended for that situation if you want guaranteed income. That's fine for
some people. But most people are like me. They want to have the highest payout
instead of having 70,000 a year, they want 90 or 100 thousand a year of
income. And they know based upon historic averages that that will last if they're
120. But if all heck broke loose, maybe an annuity would give you peace of mind for
a base. But the difference is the flexibility, the indexing options and
it's totally tax free. I mean the IUL. Whereas annuities are taxable and their
tax LIFO. If you want to understand the difference
and see a comparison, you will learn a lot from reading this book The Laser
Fund. I'll gift one of these to you for free. It's 300 pages. And it has also 62
actual clients stories because it's actually 2 books in 1. This is for
the left brain. You know, the charts graphs and explanations. This is for the
right brain. You read it this way. And in this, we talk about liquidity, safety,
rates of return and the tax advantages. You'll see that most annuities on a
scale of one to ten in these 4 scores. Four usually only around 18 to 22. And
IUL will score 34, 35 ,36. It totally dwarfs and indexed annuity.