- Free life insurance?
No.
But I'm not paying for it.
Otherwise payable income tax
is paying for my life insurance.
So, I'll take as much as I can get.
In this educational episode,
I'm going to address the subject:
How Do Fees Actually Work in an IUL,
an indexed universal life insurance policy.
(upbeat music)
So I'm Doug Andrew
and I've been helping people optimize assets
and minimize taxes now for nearly five decades.
And if you've watched very many
of my educational episodes on this channel,
you probably understand
that one of my favorite financial vehicles
that allows me to accumulate money tax-free
and then be able to access that money income tax-free.
And at the end of the day, when I finally die,
anything left behind to my spouse, or my kids,
or a church, or a charity
actually blossoms, increases in value,
and transfers income tax-free.
What does that?
A maximum-funded indexed insurance contract
if it's structured correctly and funded properly.
If it is, it is deemed what I call a LASER Fund
LASER's an acronym
that stands for liquid assets safely earning returns.
So people then ask,
"Well, what are the fees inside of an IUL?"
Well, there are fees that are required
in order for it to be deemed tax-free insurance
under three sections of the Internal Revenue Code
Section 72e.
That allows money inside of an insurance policy
to grow tax-free,
the interest of dividends or whatever.
Section 7702, that allows you to access that money,
the smart way tax-free.
And then Section 101a that provides,
so that anything left behind when you die blossoms,
increases in value, and transfers income tax-free.
And so when you adhere to those three sections of the code,
you're staying tax-sheltered
under those three sections
by adhering to three tax citations that spell acronyms,
TEFRA, DEFRA, and TAMRA.
And so you have to have a commensurate amount
of insurance coming along for the ride,
so that you don't move over
to taxable investments in the code.
And under TEFRA and DEFRA,
you have to have a a certain amount of insurance
coming along for the ride.
But what you're doing
is you're taking the least amount of insurance.
The IRS will let you get away with
and put in the most money or the most premium the IRS allows
because your objective is the living benefits.
You want the fees to get smaller and smaller.
You want this to cost less as you get older.
Many people, including people like Dave Ramsey,
do not understand this.
They think that fees inside of an insurance policy
get more expensive as you get older.
No, asset managers charge you 1% on your balance
as it continues to grow.
And if you start out with a half a million,
and it doubles to 1 million, and then to 2 million,
then to 4 million, to 8 million,
the fees will be nearly $1 million at 1%
as your balance is growing.
They'll charge you that 1% in any given year
even if they didn't make you money.
See, with insurance, the only commissioner fee
is when you put in new money at the front end,
usually the first five years.
All the growth on your money
is done without any type of commissioner compensation.
It ends up being one of the cheapest
financial vehicles around when you understand it.
When you put in 500 grand,
your commission or the advisor
might be compensated as much as 20,000, but that's it.
They don't keep making money on your money
when it doubles, doubles, doubles, doubles to 8 million.
You're not gonna pay $1 million in fees
over a 30-year period.
You pay a one-time upfront fee, so to speak, of 20 grand.
And a lot of people do not understand that.
But then they say, "Well, besides that, there's other fees."
There's the actual cost of the insurance.
Well, okay.
So the fees in an insurance policy,
it might be the marketing fee for the agent who did it
and they don't work for nothing.
Then there are administrative fees or policy charges,
and those are usually laid out in the illustrations
because the insurance company
is in business to make a profit.
But if their general account portfolio rate
on the money that you're paying into the policy is 5%,
it's been as high as 15.5% of my career.
But if it's 5%,
they need about one of those percentage points
to cover their overhead and cost and make a profit.
And so the net might be 4%
is what they're crediting the policy,
and that's called the general account portfolio rate,
unless you choose to relinquish that 4% interest
and link it to an index so that it funds an options budget
with the insurance company
so they can afford to pay you eight or 12% or higher.
If the S&P goes up, they buy upside options.
But if the market crashes, those options expire worthless.
You don't lose your money,
let's say $1 million of cash value.
You just didn't make anything that year,
but you didn't lose the original principal you started with.
Does that make sense?
If you don't understand this,
you need to watch some other episodes.
So coming back to this,
the fees are the cost of the insurance
and also the policy fees or the different charges.
And those are always laid out
usually in two or three columns on an illustration.
But when you structure maximum-funded IUL,
you're doing it so those fees become cheaper
as you get older.
Now, I know a lot of people
have never seen an insurance policy
that gets cheaper as you get older.
Well, then, you haven't seen one done correctly.
So basically, if I have a client
that wants to put in 500,000 and they're 60 years old,
the minimum amount of insurance required
under TEFRA and DEFRA is about double that,
about 1 million.
You could buy way more life insurance
than 1 million for 500 grand.
But that that's not the objective.
You want your half a million
to grow at a really high rate of return
as quickly as possible.
So you use the level death benefit
so that when you get your 500,000
into $1 million life insurance policy,
at that point you have 500,000 in there.
Or not only your premiums but the interest on that.
The net amount of risk to the insurance company
is only now the difference
between the original million of death benefit
and the 500,000 of cash value
'cause that now equals part of the death benefit
under level death benefit option.
So if you die, they're only gonna pay out 1 million,
but they're only charging you
for the remaining amount of risk.
You are now self-insured
for half of that $million death benefit
that's gonna be tax-free.
Well, many of my clients have earned 9.6 or greater.
9.6 into the rule of 72
means your money will double every seven and a half years.
So after like four years in one day under TAMRA,
getting your 500,000 in there
so that when you withdraw money it's tax-free forever after.
Your 500,000 can double to 1 million in about seven,
seven and a half years.
So this would be 12 and a half years into that policy.
The 500,000 is now doubled to 1 million.
What was the original death benefit?
1 million.
There are no fees now technically
because your cash value has grown to equal
and exceed the original death benefit.
So there is no net amount at risk.
The insurance company is not charging you anything
for the net amount at risk except TEFRA and DEFRA says,
"If you want it to be tax-free when you die,
then the insurance company has to pay out 5% greater
than your cash value as now it grows."
So if you died when you had 1 million in there
and the death benefit would be 1,050,000.
But in that 12 years,
they're only charging you for 50,000 of insurance coverage,
the interest you're earning on 1 million bucks
is way greater
it dwarfs the cost of 100,000 of death benefit
because even though the cost per 1,000 goes up
as you get older,
the amount of thousands you're paying for now
is 1/10 of 1% of what it was 12 years earlier.
You can't believe how many insurance agents
do not understand this.
So what does this mean?
If the million doubles
in the next seven and a half years to 2 million,
if you die, they pay out 2.1 million.
They're only charging you for 100,000 of insurance,
but the cost of 100,000 of insurance is minuscule
compared to the interest you're earning on 2 million.
By the way, that minuscule portion
of money that they're charging you
is actually money that would otherwise go out the window
in unnecessary tax.
And so at the end of the day,
if I start an IUL policy and 30 years down the road,
if I look at my cash
that I've accumulated net after all costs, all fees,
and I retroactively calculated,
it's usually within 1% of the gross rate of return.
If I averaged 11, I net 10;
if I averaged nine, I net eight
if it's structured correctly.
That 1% would be otherwise payable tax.
If I put my money in an IRA of 401k,
I would've to be earning 15 or 16%
in the market in an IRA of 401K
to net 10% after taxes and fees.
That's money that would go out the window in taxes
if I followed the herd and put money in IRAs or 401ks
and paid asset management fees for the rest of my life.
Instead, I only have to earn 11 to net 10.
And that 1% is the cost of the insurance,
the fees that the IRS says has to be there,
but I'm not paying for those.
Uncle Sam is paying for them because I've repositioned it.
It's money that would otherwise go out the window
and not unnecessary tax.
If this is a making sense to you
and you need to study this a little bit more,
then I would recommend that you study this book.
This is my 11th book.
It's been flying off of our warehouse shelves.
It's called "The LASER Fund."
This is how to diversify
and create the foundation for a tax-free retirement.
And so what is a LASER Fund?
It is a property-structured
max-funded indexed universal life.
And I would say unfortunately,
99% of insurance agents that sell IUL
do not know how to do that,
and so it cannot perform the way that I just described.
And so unfortunately, their IUL policies,
they do not perform at 11% 'cause they don't rebalance,
they don't diversify in different indexing strategies.
And so they may only earn eight or nine,
but if you earn nine, you're only gonna net six or seven
because they don't know how to do it right.
That's why I started a coalition or a network that I train.
I've trained over 5,000 agents,
and this is called IUL Insiders.
And so if it's done correctly,
then you can earn 11 net 10, like I'm talking about.
You'll have a gross higher rate
and you will net within 1% of the gross rate of return
retroactive back to day one.
But the longer it goes,
if I earned 11% this year
on my policies that are 30 and 40 years old,
I would net 10.95 'cause in this given year,
the cost of insurance is minuscule.
But retroactive back to day one, it's about 1%.
So I let Uncle Sam pay for my insurance,
I don't object to insurance benefits.
We object to paying for it,
so I let Uncle Sam pay for mine.
Does that make sense?
So if you wanna learn,
I would suggest you study this book.
Now, you can go to Amazon.
It's 20 bucks plus shipping and handling.
If you do that, thank you,
but I'll gift you a copy free.
You simply go to laserfund.com, L-A-S-E-RFund.com,
click on the link below.
You contribute a nominal amount
towards the shipping and handling,
and I'll cover the rest of that cost.
I'll pay for the book.
I'll fire out a hard copy via priority mail.
While you're in there claiming your free copy,
if you like to listen and learn or watch and learn,
check out the audio and video options.
You can even register for a free educational webinar.
We do them on a regular basis.
You can even schedule an appointment
with an IUL specialist that I have trained
that I oversee that knows how to structure these correctly,
and they'll be able to do that for you
at no cost, no obligation.
So this is not about me,
this is about you and your brighter future.
And hopefully, this episode has helped you understand
how to have the fees inside of an IUL be minuscule
and actually be covered by otherwise payable tax.
(upbeat music)