- Why has there been debates in Congress
about the tax-free inside build-up of cash value
in life insurance policies?
By the end of this video episode,
you will understand that when Congress
gets hard up for money, for tax revenue,
they often look at changing tax treatment of life insurance.
I'll explain why and how next.
(upbeat music)
So I'm Doug Andrew.
I've been around the block now for more than 48 years.
I'm approaching 70 years old.
I started in 1974 as a financial strategist
and retirement planning specialist.
And during that nearly five-decade career so far,
I've been very blessed to have authored 12 books so far,
and I have taught over 90,000 hours of education
in front of audiences,
many of them professionals like CPAs and tax attorneys.
And so ofttimes, I will be asked the question,
"So why does Congress allow the money
inside of a max-funded insurance contract..."
And my favorite is indexed universal life,
and you'll see on different episodes on this channel why,
because of the average returns
I've been able to achieve throughout the years.
But they'll say, "So why does Congress
allow this to accumulate tax-free
and be able to borrow money income tax-free?
As soon as they learn about this,
they'll close this loophole."
Well, it's not a loophole, number one.
Number two, the IRS is very well aware of it,
and they're the ones that sort of set the parameters
or the rules in the Internal Revenue Code,
that if you abide by those,
the money inside of an insurance contract
will grow tax-free.
That's under section 72e of the Internal Revenue Code,
which I explain on several other episodes here,
and it's been that way for over 108 years
in one form or another.
And if you want to access money while you're alive
and not trigger a tax, you have to do it the right way,
and that is outlined under section 7702
of the Internal Revenue Code,
'cause this was the brainchild of EF Hutton
when they introduced universal life.
And then later on, that was in 1980, by the way,
and then later on, 17 years later,
when interest rates started coming down,
indexed universal life came out
because that allowed people to continue
to earn more like 8, 9, 10% rates of return or higher
when the market was going up
but not lose when the market was down
by not having your money at risk in the market
but linking your returns
to an index or indices of your choice.
If you don't understand what I just said,
be sure and check out educational videos about indexing
on this very 3 Dimensional Wealth channel,
and be sure and subscribe
because I post a new video almost on a daily basis.
But stay with me to the end
'cause I wanna gift you a copy of my most recent 300-page,
best-selling book called "The Laser Fund."
So your money accumulates tax-free,
you can access it tax-free under sections 72e, 7702.
And when you ultimately die,
because none of us are getting out of here alive,
I don't mean out of this video section.
I mean out of this life, right? Okay.
We're all gonna die someday.
The unique thing about a max funded insurance contract
is whatever is left in the account when you die
usually increases, maybe a little bit,
maybe a whole bunch, by double or triple,
and transfers income tax-free.
For example, I'm gonna be 70 here in a couple of months.
If I died right now, every million that I might have
in a portfolio of laser funds
would blossom to more than double that
and transfer tax-free if I died, okay?
And so people say, "Well, how much does that cost?"
Well, nothing's free, but it doesn't cost me anything.
It's being paid for with a minuscule portion of interest
that would otherwise go out the window in unnecessary tax
if I followed the herd and put my money in IRAs and 401ks.
So I'll take as much insurance as I can get
if it's not costing me anything.
See, we don't object to insurance benefits.
We object to paying for them.
If I were your employer and I came and said,
"Hey, we've had a great year.
We have some additional benefits
for everybody here at the company this year.
We have free life insurance, how much would you like?" No.
The most common answer I get is, "As much as I can get."
See, we don't object to insurance benefits.
We object to what? Paying for them.
And you can actually have the insurance
being paid for indirectly
with money that most Americans shell out
in unnecessary income tax.
And you can learn why and how on this very channel.
But let's get back to the subject
of why does Congress sometimes mess around
and consider taxing these things?
Now, see, why have they been tax-free for decades
and now over a century?
It's because when people put money
into these insurance policies,
they are trying to be responsible and accountable.
They're trying to take ownership
so that if they live a long time,
they will not outlive their money
and have to rely on the government, welfare or whatever,
to be able to survive.
They don't wanna outlive their money.
If they happen to die sooner than later,
they don't want their beneficiaries,
their heirs, widows, and orphans
to be reliant or dependent on the government for welfare,
and so they're trying to be responsible
and accountable, okay?
And so that's why these have been tax-free,
because people are trying to take ownership,
but why do you wanna penalize somebody
who's taking ownership to be responsible and accountable?
If they live a long time or die sooner than later,
they wanna make sure they're not a drain on society.
Does that make sense?
Now, that should be a no-brainer,
but whenever you have legislators
and congressional people
that are eager to spend, spend, spend,
they usually have to come up with ideas
when they present their spending bills
on how they're gonna fund it.
And there have been times
where these congressional committees do studies.
Well, golly,
look at this multi-trillion-dollar nest egg over here.
Now, see, they ofttimes look at IRAs and 401ks
and they realize, golly, there's $25 trillion
in yet-to-be-taxed IRAs or 401ks
and they sometimes get impatient.
They don't wanna wait around
for those people to retire and get the tax revenue.
There's a lot of motives behind why they try to do something
to trigger tax revenue.
That's why, frankly, they passed Roths in 1997.
I'm not saying it wasn't a step in the right direction
for you, but they didn't do it for you.
They did it for them because if people realized,
hey, it's better to pay the tax
and roll money over to a Roth, it triggers tax.
They were hard up for tax revenue
and it was a huge windfall.
But see, they did it for them 'cause they wanted money
to be able to fund their spending bill.
Does that make sense?
Well, this is what happens ofttimes
when greedy Congress people
start to consider,
should we tax money inside of life insurance?
It's multi-trillion-dollar little plum over here
that we could pluck.
And so the last time they did that that really worried me
was back in 1990, and they've done it since,
but in 1990, they actually got really serious.
And for months, they had the General Accountability Office,
the Senate Finance Committee,
the House Ways and Means Committee,
and they all went through and studied this report,
and it's very extensive.
And I was nervous,
a lot of people in our industry were very nervous.
Are they gonna be stupid enough
to tax the inside build-up inside of life insurance?
Now, they weren't talking
about taxing life insurance proceeds, thank goodness,
but what about the cash value?
Well, let's tax that money
that's growing inside of the insurance policy.
Well, that's sort of ruins why people set aside money
for living benefits for tax-free income.
And a lot of them said,
"Well, we oughta tax it like an IRA or 401k
or tax it as earned."
Which is stupid, but they were considering it.
And then they would say, "You know what?
Even if we let it grow tax-deferred,
when people access money while they're alive in those loans,
we wanna tax those loans."
But what's that gonna do?
Now they've gotta deal with,
wait a minute, if we tax loans,
then when you go to borrow money on a house or for a car,
you gotta pay tax on the money you borrow to buy a house?
It creates a whole can of worms,
and now they have to separate loans from life insurance
must be different as loans for cars and houses.
And fortunately, they got voted down
and they said, "Leave these alone, okay?"
And so this is why they realize
it would actually hurt them more than help them.
It might give them a windfall on the short run,
but in the long run, it would actually cost them more
than it would make them in the short run.
Many times, Congress doesn't think that far in the future,
as you know, but thank goodness some do.
So that's why it's sort of been a sacred tax-free cash cow,
but I can't guarantee that in the future.
Having said that, there's two other reasons
why they have left these tax-free.
This one may not surprise you.
A lot of congressional people own these policies.
They would be shooting themselves in the foot
and they don't wanna do that.
Number two, if they did tax them,
they said we would grandfather everybody
who already owned insurance under that premise.
This is protected
in what is called the ex post facto provision
of the Constitution,
where Congress is not supposed to pass new tax law,
for example, that adversely affects somebody
that set up something under previous tax law.
Now, I can't guarantee that, but it's called grandfathering.
So they've sort of said, "If we ever did,
it would only be on new insurance policies
taken out after we changed tax treatment,
not on previous ones."
I can't guarantee what Congress will do,
but the multi-trillion-dollar insurance lobby
is one of the strongest lobbies in the world and in America,
so I think we're okay.
But I wouldn't put it past them
because they have been spending money like crazy.
So if you wanna learn more
about a max-funded insurance contract,
I wanna gift you a copy of my most recent best-selling book.
It's actually two books in one,
it's called "The Laser Fund."
A laser fund is a properly structured
maximum-funded IUL policy,
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but working capital for business, emergency funds,
college savings, all kinds of goals,
and you can learn two different ways.
This side is left brain,
all the charts and graphs and explanations.
If you learn more by stories and examples,
you flip over to this side,
and this has 62 actual stories
of how IUL can be structured as a superior vehicle,
like a dream solution for all kinds of financial goals,
and you can read both sides
and it's a right brain and left brain approach.
Here's how you claim your free copy.
You simply go to laserfund.com, L-A-S-E-R-fund.com,
or click on the link below,
and you contribute a nominal amount
towards the shipping and handling.
I'll cover the rest of that cost.
And there's also options there
to listen and learn or watch and learn,
but I'll pay for the book.
I'll send out a copy to you.
There's also options in there
where you can attend an online educational webinar.
There's all kinds of events.
Sometimes we do live events throughout the country.
But you can also talk to a IUL professional
to see how these types of strategies may apply
in your particular set of circumstances.
So claim your free copy now,
and this is about your brighter future.
(upbeat music)