Seeking high returns means more risk.
In this episode, we are going to address the question: "What's the difference between fixed
and variable universal life?"
This is episode 6 of series of 21 titled Secrets To a Tax-Free Retirement.
If you invest 4 hours in viewing all of these episodes, you will be empowered to accumulate
at least an extra million bucks in my opinion that will generate $100,000 a year of tax-free
income for as long as you live.
So, I'm Doug Andrew.
I've been a financial strategist, retirement planning specialist for more than 45 years.
And my favorite vehicle for people preparing for retirement bar none is a max-funded, indexed
universal life insurance contract.
But before we talk about that in the next episode, I want to make sure you understand
the difference between fixed and variable universal life which came out before indexed
universal life did in 1997.
So, let me explain how an insurance policy works inside of an insurance company.
People like to use these for liquidity, ability to access their money when they need it.
For safety because the safety of the institution because the multi-trillion dollars insurance
industry is rated some of the safest places to put money.
This is where banks and credit unions put 30 to 40 percent of their tear 1 assets for
liquidity and safety.
It's also where a lot of pensions are invested.
When you look at history during the great depression, some real estate dropped 80% in
value.
Banks closed their doors.
40% never opened doors again.
Guess how many legal reserve insurance companies went under in the great depression?
ZERO.
They came through with flying colors paying 2.5, 3, 3.5 percent interest.
How about 2008?
There were 400 banks that went under in 2008.
900 more on the watch list.
Guess how many insurance companies went under in 2008?
ZERO.
Now folks, it's because the legal reserved insurance industry cross insures each other.
Instead of FDIC, federal deposit insurance corporation that charges a premium to banks.
But if a lot of banks failed, the government has to come in a bail them out.
When you have the legal reserve insurance industry, if an insurance company became insolvent
for some reason, there has never been a legitimate claim ever not paid or honored by the insurance
industry.
Especially if they have the legal reserves required on hand which is what most insurance
companies do.
Those reserved requirements are far more stringent than what banks and credit unions have to
have on hand.
And this is why in 2008, the federal government ask the 5 major banks to disclose where they
have their tear 1 assets for liquidity and safety.
Guess where they have 30 to 40 percent?
In BOLI, bank owned life insurance contracts.
The major corporations have it in COLI, corporate owned life insurance contracts.
Because they know where they can borrow our money and pay us 1% interest at the bank.
And the can put that money and increase the safety by 5 or 6 notches higher safety ratings
and also have 5 times the rate of return.
They can earn 5 percent when they're only paying us one percent.
On a million bucks, they pay 10,000 in interest, they earn 50,000 by putting it into an insurance
company.
So, these are very highly rated as far as safety is concerned.
I sort of put my money into last place that I think would go if things got really, really
bad.
In other words, I would have a lot of warning.
Banks and credit unions would be failing.
And I could go access my money because of the liquidity out of an insurance company.
But let me ask you this: If things were really that bad and you got your money, where would
you put it?
The american dollar would be worthless.
You better be able to grow carrots in your backyard.
A gold and silver isn't going to cut it.
You can't eat gold and silver at the end of the day.
So when people say, "Well, what if the insurance industry goes belly up?
If that happens, the american dollar is worthless.
And so, I like to put my serious cash in the last place that would go with things got that
bad.
Now, I want to share with you what the insurance company does with their money which is your
money because when you put your money into a bank, credit union or an insurance company,
it's a lended position.
Are they just a benevolent institution paying you interest?
No.
They're taking your money and earning more interest.
So, where do they put that money?
So, a legal reserve insurance company will have their assets, that money that they have
on deposit in what is called their general account portfolio.
Now, most insurance companies will diversify that into very conservative investments that
are liquid and safe.
They may put a large portion in triple A and double A bonds.
They may have 15 or 20 percent of their general account portfolio invested in mortgages.
In shopping malls, sky scrappers.
But they only loan about 40/50/60 percent value.
They don't loan 80 or 90 percent loan to value like the mortgage companies and the banks
do.
If they have to foreclose on a sky scrapper, which I've seen some insurance companies do,
they come out smelling like rose.
They make money.
And so, if they buy stocks, it's usually very conservative stocks in a very low percent.
So, this is called the general account portfolio.
Many insurance companies manage billions of dollars.
Some trillion of dollars.
One insurance company where I have some of my money manages 3 trillion dollars.
That's as much as the IRS collect an income taxes in an entire year in America.
One insurance company, okay/ So, these are huge.
So, the general account portfolio during high-interest time like back in 1980 to 1990, interest were
high.
Mortgages were high.
CDs at banks were paying 10%.
So, I was able to earn on my universal life insurance policies the fixed universal life
insurance returns of 11 and three quarters to 15.5 percent.
Then after the turn of the century, interest rates came down.
And we've been in an all-time low interest environment now where banks have only been
paying 1%, sometimes less.
And so, the insurance company's general account portfolio is usually yielding around 5 or
6 percent with mortgages and everything like that.
So, when interest rates are high for borrowing, they're high for earning.
When they're low for borrowing, they're low for earning.
That's called the general account portfolio yield.
So, if I have a fixed universal life insurance policy, that means I am just settling for
the general account portfolio rate.
For the last decade or so, it's been between 4 and 6 percent depending upon the company
where I have my money.
Let's just say 5.
That means the insurance company will pay me 5%.
In actuality, they're usually earning more like 6% but they need one of those percentage
points for them.
They're in business to make a profit and pay their overhead.
And the net would be 5 percent.
So, if I had a million dollars of cash value accumulated inside of my universal life insurance
policy and it's a fixed contract, and this year, the general portfolio rate is 5%, I
would be credited with $50,000 of interest on my million.
5%.
If it's 4 percent, it would be 40,000.
That's a fixed universal life.
And that can fluctuate very, very slowly through the years based upon the general account portfolio
yield of all their assets.
And those are published every year by every insurance company.
So, how does a variable universal life work?
So, variable universal life came out in the 1990's primarily is when it became popular.
And this is where people want to participate in the market.
Now, I've never owned a variable universal life or a variable insurance policy, I never
will.
Because it's too risky in my opinion.
This is where you keep just enough on hand in the insurance policy to pay for the mortality
cost, the cost of the insurance.
And you're telling the insurance company to take all the excess in the cash value and
put it out into the market.
This is why you need a securities license as a license producer if you're going to sell
this to somebody because now you're selling a security.
Your money is out in the volatile market in a portfolio of mutual funds or whatever you
choose.
Now, the advantages when the market goes up, you could be credited with 10%, 15, 20 or
25 percent.
But what's the trade-off?
When the market crashes like in 2008, 40%.
If you had a million dollars in your variable universal life insurance policy, that million
might go down to $600,000.
There are some policies where insurance companies have had to call to insured, the owner and
say, "You need to pay some premiums.
Hurry, pay some premiums because you lost all your cash value or a big chunk of it."
And now there's not enough to cover the mortality cost when people were not maximum funding.
So, variable universal life is where your money then assigned out to the market and
it's subject to the market volatility where you can lose.
And you can make.
But I don't like my money at risk in variable universal life.
This is why I choose indexed universal life which I'll talk about in the next episode.
So, when you structure a maximum-funded insurance contract, I would recommend you wanted it
to pass what I call the Laser test.
Liquidity, safety, predictable rates of return and tax free.
When you have fixed universal life, you do not get the rate of return that you could
get if you were able to participate when the market is doing well.
But you don't want to lose when the market goes down.
Otherwise your rate of return and the safety goes down.
So, that's why I wrote the book called the Laser Fund because I want to have liquidity,
safety, predictable rates of return.
And I want it to be tax-free.
These are the 4 pillars.
I want to send a copy of this out to you absolutely free.
I'll buy the book.
You just pay $5.95 shipping and handling.
Go to LaserFund.com and pay $5.95 shipping and handling.
And I'll send you out a free copy of this 300-paged book.
You can study it.
And I implore you to watch this episode next so that you can empower yourself to accumulate
an extra million dollars more that can generate $100,000 a year of tax-free income for the
rest of your life.