What is IUL, indexed universal life? What does it mean to max fund and IUL?
In this episode, you will understand what IUL is and what it means to max fund an IUL policy
and by the end of this video, you will understand why a properly structured and maximum funded IUL
is designed to accumulate your money tax-free and then it allows you to
access your money totally income tax free and when you ultimately die whatever is left
behind blossoms increases in value and transfers income tax-free. So, get ready.
So, I'm Doug Andrew, I've been a financial strategist now for 48 years and helping people
prepare for long-term goals like a comfortable retirement and one of my favorite vehicles a bar
none is a max-funded IUL policy. I've owned several throughout my lifetime my children own them.
As I explain in other episodes, I think it's the dream solution for many financial goals
especially long-term goals like retirement. So, let's just talk about what is an IUL policy
and what does it mean to max fund it? So, I'm going to explain that it began clear back in 1980, okay?
Now, I started in 1974 and I had over 3,000 clients that I was responsible for in 13 western states by
the year 1980 and clear back then I was helping a lot of people with a product to be able to insure
them with life insurance term insurance and then we would have them invest the difference. But the
biggest problem a lot of people won't invest the difference unless they're disciplined to do so
and so we would have two-thirds of their money automatically go into a portfolio of mutual funds.
The problem was as even if we could earn 12 percent in the mutual funds after paying tax
sooner or later on an IRA 401k, they weren't netting 12 they were only netting 8. But Dalbar
who studies investor behavior says most people only really earn about three and a half percent
if they have their money in the market. That's pretty pathetic. Even if you bought and held
like Warren Buffett says you would only earn 9.14% average on any 20-year period based upon American
history since the great depression. If you earn nine percent before tax you're only netting six
percent after-tax. Well, back in 1980 EF Hutton who was not an insurance company they
were the brainchild behind the emergence of universal life. It wasn't a term. It wasn't whole
life. It was designed for living benefits and so what EF Hutton realized back then is that for
decades in the internal revenue code money inside of a life insurance policy or contract accumulates
tax-free under section 72(e) of the internal revenue code. All interest dividends or whatever
are tax-free. When you access money while you're still alive out of that insurance policy it can
be totally income tax-free. It doesn't trigger tax like if you dipped into an IRA 401k if you adhere
to section 7702. So, 72(e) it accumulates tax-free. 7702 you can access the money income tax-free
and then at the end of the day when you pass away the cash values increase or blossom and they
transfer income tax-free under section 101(a). These three sections of the code in one form or another
have been around now for more than 108 years. So, when we talk about what an IUL is that
was universal life back in 1980, interest rates were high. In fact, from 1980 to 1990 I never got
credited less than 11 and three-quarters percent on my universal life policies. But I got credited
as high as 15 and a half percent so interest rates were high. 11 and three-quarters up to 15 and a
half percent but then in the 90s interest rates started to come down. So, in 1997 they introduced
indexed universal life and I remember the company ING was the first one to introduce it and it
allowed policyholders to be able to earn higher rates of return without the risk of losing money
when the market went down. But when the market went up you got to participate. So, in this series,
you will learn if you watch other episodes how indexing works. But that's what IUL is indexed
universal life because you can tell the insurance company, "Don't put my money at risk but I think
America is going to be you know blowing up", you feel bullish about America. So, you can link your
returns to an index or indices and they might be the S&P or the Dow Jones or the Russell 2000 or
you can diversify. But be sure and watch those episodes because your money is not invested in
the market, it stays safe in the insurance company. It is earning the general account portfolio rate.
You're just relinquishing the interest that they're earning on your money that year to
be able to purchase options if the market goes up then they can pay you a higher rate of return
and if the market crashes you just relinquish the interest but you did not lose one dime of your
principle. Be sure and watch those episodes and by the way post a comment or share this with other
people that may be interested in understanding and getting educated. So, when we talk about these
three sections of the code they've been around for over a century. All EF Hutton realizes why don't
we structure an insurance policy instead of trying to pay the least amount of premium into the policy
for the death benefit we wanted. Let's flip the objective and use it for living benefits. What that
means is let's take the least amount of insurance the IRS will let us get away with and let's put in
the most premium that the IRS allows or the amount that you really want to sock away and accumulate
for your life to use in retirement. Does that make sense? So, this allows us to do it on a tax-free
basis. Now back in 1980 when they introduced this. Golly, I said this is it. This is like buy
term invest the difference on steroids because it's tax-free and so we had a massive
exodus of money that began to leave the banks the brokerage firms and so forth into these because
they're safer, they pay higher interest, and they're tax-free, and banks and credit unions
and brokerage firms could not compete with that. And so, what happened is the IRS came in and
said what are you doing? EF Hutton wasn't doing anything wrong they went to court and
EF Hutton won. But then the IRS went to congress and said we've got to change the definition
of tax-free under these three sections of the code and if you violate those definitions it's going
to go over to a different section of the internal revenue code. It's going to be taxable and usually
if it's an investment they call it an investment then it will be subject to volatility. No, we want
to get rid of market volatility. We don't want it to be taxed sooner or later and so we want to
keep it protected under these three sections of the code. So, in 1982, under the tax equity fiscal
responsibility act and then two years later because they didn't know what they were doing
it wasn't clear enough. Congress passed the under the deficit reduction act and these spell
acronyms TEFRA and DEFRA and you can learn about these in my book. But simply put TEFRA and DEFRA
simply dictate the minimum amount of insurance that the IRS requires that you have to have in
order to sock away your money and not violate these sections of tax-free accumulation access
and transfer based upon your age, your gender, and your health. But they gave parity. So, what's so
beautiful about this it didn't matter if you're a 22-year-old athletic marathon running female
or if you're a 60-year-old or a 79-year-old. You could get the same rate of return on your IUL
policy whether you were 80 or whether you were 20. Why? Because even though the cost of insurance
goes up as you get older the amount of insurance becomes less every month you get older if you
structure this correctly. So, you will see in other episodes that this can actually get cheaper as you
age as you get older. Because what you're doing is you're accumulating the money tax-free and
if you earn in one year 11% you can net 10 that one percent differential is the cost of the insurance.
But it will be one percent when it's done right on the average whether you're 60 or 79 years old
or 20 years old. The amount of insurance required is less the older you get and you will understand
this when you begin to see illustrations based upon your age and situation. Even if you're not
healthy you can squeeze down the death benefit even lower so don't rule yourself out. So, that's
what a max funded policy can do for you and then a few years later this was in 1988
under the technical and miscellaneous revenue act they wanted to slow the flow the banks
and brokerage firms couldn't compete. They said we don't want to ruin these, why? Because this is where
a lot of banks and credit unions and brokerage firms put some of their money. They don't want
to bugger up this tax-free accumulation but they they wanted to slow the flow. So, that if somebody
had a lump sum of money they wouldn't take it all out at once out of the bank or the brokerage firm
and put it into one of these which they were doing people were doing that. I had people put
in 500 grand in one fell swoop and they started pulling out 10% or 50,000 a year instantly tax-free.
They've been doing it ever since because they're grandfathered. But see, TAMRA said oh if somebody
wants to put in a lump sum like five hundred thousand dollars or fifty thousand or whatever
you can only put in uh about 20% a year especially if you're over age 50.
So, if you wanted to put in five hundred thousand you could only put in about a hundred thousand a
year and I explained that in other episodes. But that's TAMRA and so these have to do with the
amount of insurance that's required and TAMRA has to do with how fast you can put the money in there.
So, when we use an indexed universal life it also means that the money in the insurance company
is safe earning what is it called their general account portfolio rate. That might be you know
only three or four percent but if you want to earn higher than that because you think the economy is
going to do well this is what you can do. I compare this to like a bucket. Let's say this bucket
is a repository an IUL policy and so what you're doing is designing it to accommodate the
amount of cash contributions you want to make into the bucket and then the TEFRA, DEFRA, TAMRA
tax citations talk about the minimum death benefit that's required down here. This is
TEFRA, DEFRA, TAMRA. So, if this were a 60 year old male for example that wanted to be able to
put in a hundred thousand dollars over the next 5 years or 20 years into the IUL policy.
The minimum death benefit underTEFRA & DEFRA would be 250,000. For a younger person, it would
be way more than that maybe a million but the cost of a million for a 20-year-old is no more
than for a 60-year-old. But see, the cost of the insurance which is the spigot on the bucket
is actually watering a nice little money tree that's going to blossom at the end of the day.
See, if you put in a full hundred and you die it blossoms to 250 tax-free
and so at the end of the day, it's actually not costing it's making you money but that
one percent difference. If I earn 11 and I net 10. If I earn eight and I net seven that one percent
is money that would otherwise go out the window in maybe unnecessary income tax if I follow the herd
and put my money in IRAs and 401ks. Does that make sense? So, it's like it doesn't cost me
anything nothing's free but it doesn't cost me anything because that one percent would be paid
out in unnecessary tax or whatever and I'm gonna recoup it at the end of the day. So, let's say you
put in a hundred thousand TAMRA said well you can only fill up maybe twenty thousand a year
and now everything that you pull out of here thereafter your grandfather is tax-free.
That's what TAMRA says. If you put in the whole hundred thousand in one fell
swoop it'll grow tax-deferred. But if you go to access the money now the income will be taxable
LIFO last in first out. You don't want that. If you're going to use it for living benefits.
But it doesn't matter if you die the death benefit is always income tax-free. That's the beauty behind
this. But when we talk about indexed universal life if you were 60 and you wanted to put in 500,000
the minimum death benefit would be a million two fifty. That is dictated under TEFRA DEFRA
and then TAMRA says oh I can only put in a hundred thousand a year
in order to comply with TAMRA and now everything. This bucket could grow we've had people put in
500,000 at doubles to a million and seven and a half years and nine point six percent average
return and that million doubles to two million in another seven and a half years not two million
doubles the four million in another seven and a half years and lo and behold in the 30th year
this 500,000 is now worth eight million dollars and that is generating eight hundred
thousand a year of tax-free income without depleting principles for as long as they live.
That's the beauty behind indexing. So, when you meet with an IUL professional there will be
terms that they may use and they'll explain what they mean like GSP is guideline single
premium. That's the amount of money you want to put into the policy or the bucket. Guideline level
premium is the amount that you could put in on an annual basis without ever being stopped by the IRS.
The guideline annual premium okay is basically synonymous it means the same thing.
TAMRA means that's as much as you can put in and still preserve tax-free access and then you
can use a level death benefit or you can use an increasing death benefit option and they'll show
you how you may want to flip between those two options and for living benefits, you want to solve
for the least amount of insurance you can get away with and you want to accommodate most of the
assets you want to reposition and so it's sort of like a five-story apartment building. If you build
a five-story building and the IRS said, hey, if you will only lease out the first floor the first
year and then you can lease out another floor of the second year and then third-year fourth year
and finally in the fifth year. Even the first day of the fifth year which would actually be
four years and one day after you started now you can lease out the rest of the building.
We will allow all of the rental income to be tax-free the rest of your life. I would do that.
That's what you're doing by complying with TAMRA in an IUL policy. So, I would recommend
again you study and understand how this works. This book the laser fund over 300 pages charts graphs
explanations and 62 chicken soup for the financial soul stories and so you can go to laserfund.com
and claim your free copy if you don't have it yet. You contribute a nominal amount towards
the shipping and handling and I'll cover the rest of that cost. But this is to your brighter future.