- What is the history
behind universal life and index universal life,
how did it come about?
By the end of this video episode,
you will understand why a properly structured,
maximum funded index universal life insurance contract
allows you, in the Internal Revenue Code,
to accumulate your money tax free.
You can access your money tax free, including all the gain,
and when you ultimately pass away,
anything left in there blossoms, increases in value,
and transfers totally income tax free.
So as we proceed, you're gonna be blown away
with what I'm gonna teach you a bit
about the history of one of my favorite financial vehicles.
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So in other episodes, I give my story,
I began in 1974 and I was helping
a lot of people buy term and invest the difference,
and I began to realize a lot of people,
and when their money was in the market,
they could be subject to downturns, or recessions,
or market crashes.
And so between 1974 and 1980
I ended up with over 3000 clients
in 13 Western states that I was responsible for.
And in 1980, that's when universal life was first introduced
by EF Hutton, and they weren't an insurance company,
they were a brokerage firm.
And my clients were never happier
than when I got 'em out of the market.
But let's talk about why EF Hutton even came up
with this idea, because they realized that even
if they could earn their clients 12% rates of return,
they weren't netting 12.
If you put your money in the market
in a diversified portfolio of mutual funds,
and if you could earn 12%, which most people do not earn,
'cause they buy and sell it the wrong times,
but let's say you could.
It means that when you finally retire,
if you had a million dollar nest egg,
let's use that, and you can extrapolate from the million,
no matter how much you have,
if you have less than that or 10 times that.
If you had a million dollar nest egg, earning 12%,
you could pull out 120,000 without depleting your principle.
But that's not all your money,
between federal and state income tax,
most Americans pay about a third in taxes.
So you pull out 120,000 and you're paying 40,000 in taxes,
and you're only netting 80,000, but no,
they charge you 1% to manage that million,
so you deduct the fees, and you're only netting 70,000.
So you had to earn 12 to net 7.
But see, most Americans at best
were only earning nine and they were netting only five.
Well, unfortunately a lot of people buy
and sell at the wrong times in the market,
and according to DALBAR, most Americans are only averaging
about 3.5%.
So that's really pathetic,
and the financial services industry came up
with this 4% rule, they only want you to pull out 4%,
'cause they don't want to be sued
for you outliving your money.
That means a million dollar nest egg
would only generate 40,000,
and then you have to pay tax, even into 25% bracket,
you're only netting 30,
after fees you're only netting 20 or 2%.
So in 1980, this is what EF Hutton realized,
we can do better.
And so they realized in the Internal Revenue Code
there's three sections
that have sort of protected insurance policies
from income tax, why?
Because when you insure yourself
and you use life insurance to protect yourself, if you die,
you're trying to be responsible
and accountable so that your widow, your orphans,
they will not rely on government welfare.
And so the government says, yeah,
let's allow them to accumulate the money tax free
because why would we tax people
on something they're trying to be,
you know, independent?
And so they have never taxed it for over 108 years.
So in one form or another in the Internal Revenue Code,
currently, money inside of a life insurance policy
grows tax free under section 72e,
all the interest, dividends, and so forth.
And when you access money while you're still alive,
you don't have to pay tax on any of the gain,
if you do it the smart way, under section 7702.
And then when you ultimately die,
anything left in there blossoms
and transfers income tax free.
Now when I say blossom, some people go,
what are you talking about?
See, I'm just about 70 years old,
as of the recording of this episode.
If I died in an accident tomorrow
every million that I might have
in my portfolio, let's say,
of IULs, would blossom to about two and a half million
if I died, and people say, what?
Yeah, there's not a Roth IRA
or 401k that will, you know,
two and a half times itself when you die.
People say, well,
golly, how much does that cost?
And I go, well,
nothing's, it'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.
And so, yeah,
nothing else does this, because under section 101a,
if I die with a million in my IULs,
I'll leave behind, you know,
more than 2 million tax free to my spouse and my kids.
So EF Hutton realized that back in 1980,
and so that's when they came up with this idea, well,
let's take the least amount of insurance
the IRS will let us get away
with under these sections of the code,
and let's put in the most premium, the most money,
the IRS allows, as fast as they allow,
and turns this into a tax free cash cow, okay?
So that's what happened in 1980.
And there was this massive Exodus of money leaving the banks
and the brokerage firms into these vehicles,
'cause they were tax free,
they paid higher interest than those institutions.
And when you died, they blossomed
and transferred tax free, and so forth.
And they couldn't compete.
Well, the IRS went to Hutton and said, what are you doing?
And they said, we're not doing anything wrong,
we're adhering to these sections of the code.
And the IRS said, we think you're abusing it.
And they went to court and, and EF Hutton won,
they weren't doing anything wrong,
you know, 'cause the IRS is going,
well, who buys this much life insurance
and puts this much money into it?
Well, our clients do,
'cause they're using it for living benefits.
So they decided they need to redefine tax free
under this section of the code,
because if you violated it or overstepped the bounds,
it would move from these sections of the code
over to a different part of the code, taxable interest,
it would be deemed an investment.
No, we don't want it to be called an investment,
because investments are taxed sooner or later,
and they're usually subject to market volatility.
So you have to stay under these three sections of the code.
So EF Hutton did that
and then the IRS went to Congress and said,
we've gotta change the definition of tax free.
So in 1982,
under the Tax Equity Fiscal Responsibility Act of 1982,
they tried to dictate the minimum amount of insurance
that had to be put on the insured in order
for it to stay as tax free
under these three sections of the code.
But they didn't even understand what they were doing,
and does that surprise you?
And so two years later they had to redefine it
under the Deficit Reduction Act.
These two are acronyms, okay,
they're called TEFRA and DEFRA.
In a nutshell, the TEFRA/DEFRA tax citations dictate
the minimum amount of insurance
that you have to have on the insured,
if you're gonna use it for living death benefits,
based upon your age, gender, and health.
Now what I just said, you wouldn't believe
how many insurance agents don't even understand.
See, remember,
Hutton came up with the idea,
let's take the least amount of insurance
that the IRS will let us get away with,
that's under TEFRA and DEFRA, let's put in the most money
the IRS allows, okay,
that's under these, as fast as they allow,
and that's under TAMRA, which I'll explain in just a moment.
Now the IRS, Congress gave it parity,
that means equality, which basically means,
if you're going to use an IUL insurance policy,
primarily for living benefits,
so that you can have equality,
it doesn't matter if you are a 22 year old athletic,
marathon running female, or if you're a 60 year old male,
or if you're an 80 year old male
with three blocked arteries, adult onset diabetes,
prostate cancer episodes,
which I have a client that had all of those issues,
the cost of the insurance can be the same
for all of those three people,
because the amount of insurance that the IRS requires
under TEFRA and DEFRA is less every month older you are,
so that the 80 year old, if they earned 11,
they would net 10, just like a 20 year old.
It's just the 20 year old has to have more insurance
than the 80 year old, or say it another way,
the 60 year old gets away with having
to have less insurance under TEFRA and DEFRA
than the 22 year old, and the 80 year old gets away
with even less insurance than the 60 year old.
You also get to self-insure.
So this gave it parity,
and I had clients that were earning 11
and netting 10, and it was incredible.
They would put in $500,000 and start pulling
out 50,000 a year tax free without depleting principle.
There was this massive Exodus of money leaving the banks,
the brokerage firms from 1982, '84,
all the way to 1988, and then the banks
and brokerage firms said we can't compete,
we've gotta level the playing field.
Now they didn't wanna kill these,
because this is where they put some of their money.
In fact, 30 to 40% of their Tier 1 assets
is invested in the insurance companies,
usually in the form of BOLI,
bank owned life insurance, okay?
So they didn't wanna kill it,
they just wanted to slow the flow.
So in 1988, June 21st,
under the Technical and Miscellaneous Revenue Act,
they said, well, if you put in a whole lump sum of money,
let's say a half a million,
there's nothing magic about that number,
but let's just use it to be consistent.
If you put in 500,000,
you can no longer immediately start pulling out 50,000
a year tax free based upon a 10% payout.
If you start taking out the money, it's gonna be taxable,
LIFO, last in first out,
like an annuity or most investments.
If you want it to be tax free, it will accumulate tax free.
But if you want tax free income,
you've got to spread it out over four or five payments.
So under TAMRA we have to figure out how much can
we put in so that when we access the money it's tax free?
TEFRA and DEFRA has to do with the death benefit,
what's the amount of death benefit?
TAMRA has to do with when you access money
under section 7702, so far so good?
So let's go to this bucket analogy,
let's say a bucket is an IUL policy.
This is the repository where you want
to be able to put in X amount of money.
So let's say the amount of money
that you want to put in is $500,000
over the next five years,
10 years, 20 years, or whatever.
You used to be able to put it in one fowl swoop.
Now you can still do that,
but that's called a modified endowment contract,
it'll accumulate tax deferred.
But when you start taking money out, it's now taxable.
Most people came to me 'cause they wanted tax free income.
So if you put in a half a million, and let's say you're 60,
the minimum death benefit under TEFRA and DEFRA
was a 1,250,000, about 2 and a half times that.
Again, you could buy way more life insurance
than a 1,250,000 for 500,000,
but that's not the objective.
You want the least amount of insurance
the IRS will let you get away with,
and so it's approximately two and a half times
that if you're a 60 year old male, okay?
Now if you're a younger, you need more insurance,
if you're older, you need less insurance.
And as you put the money in, it qualifies as part of that,
so as you get older, this actually gets cheaper,
'cause the amount of insurance that's at risk
to the insurance company is less.
They only charge you for the difference.
If you've got a half a million in there,
they're only at risk for the remaining 750,000.
This will likely double in 7 and a half to 10 years.
When this has grown to a million,
the remaining amount is only 250,000.
A lot of agents don't understand this concept.
It gets cheaper as you get older
when you structure it correctly.
But let's go back to, and the TEFRA, DEFRA.
People used to be able to put in the whole 500,000
and start immediately taking out income.
When TAMRA was passed, they said,
no, you can only put in about 20% a year
would be the maximum.
So in this case, this would be about a hundred thousand.
A hundred thousand the first year, second year,
third year, fourth year,
fifth year, okay?
And if you did it that way, then when you access money,
forever after, it's totally income tax free.
Pretty phenomenal, okay?
So a lot of times we compare this to like a building
that I'm gonna show you here in just a moment.
But if you want to have one of these done correctly,
you've gotta find an IUL specialist or professional
that understands how to calculate
the guideline single premium,
which is the amount of money that you wanna put in
during the first 11 years basically,
or you can put it in five years.
The guideline level or guideline annual premium
is the amount that you can put in on an annual basis
for the rest of your life, if you wanted to,
if you wanted to just sock away money every year
for the next 20 or 30 years.
TAMRA, I've just explained,
you can put only that much into the policy,
but with whole life, it's a seven year period.
With universal life, you can get the money in
in five years or even less, okay?
You have options, the level death benefit option,
option A is where your cash qualifies
as part of the death benefit,
so the insurance can get cheaper as you get older.
If you use the increasing death benefit,
you only wanna use that while maybe you're putting money in,
the minute you stop putting money in,
you wanna switch to this one,
if you want the cost of insurance to get cheaper, okay?
So you have to meet with an IUL professional
that understands these concepts,
and that's why I encourage people, hey,
make sure, because the biggest reason why these don't work
is because the advisor was not proficient
in understanding how to do this.
So I mentioned this building,
let's say the IRS said, you know what?
You can build a five story apartment building,
and if you will only lease out
or rent out the first floor the first year,
and then the first day of the second year,
we'll let you lease out the entire second floor
of this building,
I don't care if this is commercial or residential.
And the third year you can lease that out,
the fourth year and the fifth year.
In fact, the first day of the fifth year,
which would be four years and one day,
we'll let you fill up the rest of the building.
And if you will wait to do it this way,
all of your rental income from this, forever after,
will be totally tax free.
Sounds silly, doesn't it?
But I would do that to have tax free income forever.
This is what TAMRA dictated with life insurance.
If you will only fund it no faster than five installments,
all of the money you ever take out of this,
all your profits forever, will be totally tax free.
That is TAMRA.
And so this is the beauty behind it,
if this is resonating with you,
I want you to be able to learn.
So here's how, this is my 11th book,
it's called "The Laser Fund",
it's co-authored with my two sons Emron and Aaron,
they're specialists in IUL.
And I want to gift you a free copy of this.
How can you claim yours?
You simply go to Laser Fund, L, A, S, E, R,
laserfund.com or click on the link below,
and you contribute a nominal amount towards
the shipping and handling,
and I'll cover the rest of that cost,
I will pay for the book, I'll fire out you a free copy.
This is 300 pages, and then there's options there
to listen and learn, and watch and learn,
there's master classes, and everything else.
But this is about you and your brighter future.
I'll pay for the book, it's actually two books in one.
This side, the white side,
is for the left brain learner, it has 14 chapters
with all the charts, and graphs,
and explanations.
If you learn more by stories, right brain,
you flip it over and read this one,
this is 100 pages with 62 actual client stories
of how "The Laser Fund" is the dream solution
for a lot of financial goals, not just retirement.
So this is about you and your brighter future,
claim your free copy, and make sure you meet
with an IUL professional that is a professional,
that knows how to do it correctly.
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