- Cap your losses during market crashes.
In this educational episode,
I'm going to address the question,
what happens when you use a multiplier
on indexed universal life
and the market goes down or loses?
Get ready.
If you understand this, you will be blown away.
(upbeat music)
So I'm Doug Andrew.
I've been a financial strategist
and retirement planning specialist now
for five decades coming up this next year,
helping people optimize assets and minimize taxes.
But if you've watched very many of my educational episodes
on this channel, my favorite financial vehicle
to help people accumulate their money tax-free
then be able to access that money tax-free
for retirement income, let's say,
and at the end of the day, when they die,
anything they leave behind blossoms,
increases in value and transfers tax-free
is a max-funded indexed universal life insurance contract,
but it must be structured correctly and funded properly.
If it is, it is deemed a LASER fund.
To me, LASER is an acronym
that stands for liquid assets safely earning returns.
So I'm assuming you may already understand
indexed universal life a little bit to this degree.
So let's get into the question,
"Well, what happens if I use a multiplier?"
So let's start out and make sure you understand indexing
and then I'll talk about multipliers
and then the beauty behind multipliers
when the market crashes.
So here we go.
And I'm gonna simplify indexing for you.
When you accumulate money
and you're overfunding that insurance contract,
you're taking the least amount of insurance
the IRS will let you get away with
because your objective is living benefits.
You want to be self-insured
in as few as 12 years where your cash value
equals and exceeds the death benefit sooner than later.
And so let's say at a point in time
you've got a million dollars of cash value
in that IUL policy,
you can extrapolate whether it's a hundred thousand
or it's 10 million,
but when you have a million bucks of cash value in there,
let's say that you feel bearish about America
and you think we're headed for recession.
Well, I would recommend that you just settled
for the general account portfolio rate.
Now, back in the 1980s,
the general account portfolio rate
was between 11 and three quarters and 15.5%.
Interest rates started coming down
and especially after the turn of the century,
the general account portfolio is normally around 5%.
They need one of those percentage points for them.
And so the net would be, let's say,
4% on a 5% gross, general account portfolio, GAP.
This is, you know, invested in AAA bonds
and sometimes AA bonds
and mortgages on shopping mall and skyscrapers and so forth.
Very little into stocks.
So this is what they're earning
on their general account portfolio,
which is billions, even trillions of dollars.
So you could just say,
just pay me the 4% this year, that's 40,000.
And that's, of course, better
than most banks are, but it's tax-free.
So it's way better.
And so that's 40,000 bucks at the end of the year.
You have 1,040,000
and that's gonna compound the next year.
But most years, in a 10-year period,
you'll have seven gain years compared to three loss years.
So most of the time I would recommend linking to an index.
And so your money's not in the market.
You're linking to an index or indices
and this is how it works.
When you feel bullish about America
and seven of 10 years the market goes up,
your chances are pretty good.
So you're telling the insurance company,
"Hey, you can take the interest on my million, the 40,000,
and use it to fund an options budget to buy upside options
in whatever index or indices I choose,
the S&P 500, the Dow Jones,
the Barclays US Dynamic Balance Index,
Russell 2000, whatever."
Okay, you diversified.
And so they take the 40,000 of interest,
but your million has to stay safe
in the insurance company, earning four.
So they're taking your interest on that
and they're funding an options budget.
So if the S&P, let's say, goes up that year 8%,
they have the wherewithal
because the 40,000 of options blossoms to 80,000,
they can pay you 80,000 bucks on your million tax-free.
If it goes up to 12%, they can pay you 120,000 up to a cap.
Now during different time periods,
I've had caps of 16%, 17%, 21%, 25%, sometimes no cap,
but there's usually a cap.
The trade off is if the market crashes, you don't lose.
You may not make anything,
but you don't lose your million dollar principal.
The options expire worthless.
So that's the beauty of indexing.
It's not an index mutual fund.
So hopefully you understand that.
So in my book, "The LASER Fund,"
and I want you to stay with me,
I want to gift you a copy of this book free
if you just pay for the shipping and handling.
And so I'll show you how to do that at the end.
But in my book, I'll show a million dollars of cash value
in an IUL policy like a bucket.
And if the general account portfolio rate is 40,000,
you can just settle for that if you want.
But if not, it can fund an options budget
so that the insurance company has the wherewithal to pay you
if the market goes up, the gains.
But if the market goes down, zero is your hero,
'cause you don't lose if the market goes down.
Like in 2008 when the market dropped 40%,
none of our clients lost a dime due to that market crash.
They may not have made much of anything,
but they didn't lose.
And so the remaining 960,000 in the insurance contract
grows at 4% and comes back up to a million again.
So it's like a breakeven,
but zero is your hero when the market crashes.
Now, many people are satisfied with just that,
just not losing when the market goes down
and let's just make money up to a cap.
There are other strategies.
Sometimes you can choose a one year point-to-point
with no cap, but they'll usually subtract a 5% fee
or a threshold at the back end.
So if the market went up 12%,
they subtract five, you'd only net seven.
So we usually don't use that,
except when the market does crash.
So for example, in March of 2020,
due to the COVID-19 pandemic,
the market went down 30%
and many of our savvy IUL professionals called their clients
and they had them link to a one year point-to-point
with no cap.
Well, the market came up 66.33% minus 5%.
They got credited 61.33% in one year.
We had one guy that had $852,000 in March of 2020,
didn't add a dime to that.
March of 2021, that was worth 1,387,000 bucks.
So we made over a half a million.
So you could sometimes do no cap.
Well, then what is a multiplier?
So here we go.
When you use multipliers,
and not all insurance companies offer these,
but this particular company you might choose a multiplier
and they will charge a 7.5% fee.
Now what this fee is,
this is to fund more in the options budget.
So based upon what I just explained,
if the general account portfolio rate is four,
4% would be 40,000 on a million bucks.
And you're saying,
"You know what, I feel so bullish about America.
I think it's gonna go up and I wanna capitalize on this.
So I want to give you more of my money to buy options
than the just 4%.
I want to give you another 7.5% of my million.
That's 75,000 bucks."
So now they have 75,000 plus 40,000,
and that funds a bigger options budget.
So what's happening is that when the S&P goes up that year,
if it goes up, they will pay you 2.7 times
whatever the S&P does.
If the S&P just went up 10, you'll get 27%.
Of course, you subtract out the 7.5% that it cost you,
but you're gonna net 19.5%.
That would be during a normal type of market.
That's a multiplier.
But we actually have had people
that have used multipliers
when they had the one year point-to-point with no cap,
those people who used multipliers on top of that,
they times the 61.33% by 2.7.
They ended up with over 158% returned by using a multiplier
because they were so confident
the market was gonna be higher a year after the drop 30%
due to COVID-19.
Does that make sense?
Sometimes people don't want to go that aggressive
and so there might be a 5% fee
and the 5% fee for the options budget
means that you're giving up another 50,000 on a million.
So now they have another 50,000
on top of your, let's say, 4%, 40,000.
So now they have 90,000 to funds an option budget,
and they'll pay you usually about double
whatever the market does.
If it earns 10, they'll pay you 21.4
and then you have your 5% fee that you take off of that.
So that's called a multiplier.
And like I said, when we have certain opportunities,
like in the March of 2020 to March of 2021, COVID-19,
the market dropped 30%.
This client diversified and had 6,000 in one strategy,
6,000 in another, 6,000 in another.
But he assigned 18,000
to the one year point-to-point with no cap.
And at the end of the year, he got 61.33%,
it's worth 29,000.
But using a multiplier,
they would've had a credit of 158%.
And so this is the magic behind multipliers.
If you feel pretty good about the market going up,
this is the person I talked about
that had 850 grand, he got 61.33%, he made 535,000,
and at the end of March of 2021,
he had 1,387,000.
But if he would've chosen a multiplier, which many did,
he would've had 158%, not just 61%.
So the beauty of this is that when you choose a multiplier,
I like to sort of compare it to a cap on your losses.
Remember, the beauty of indexed universal life
is you might make money up to a cap,
up to 12% or 16% cap based on the price of options.
Well, that's what you could make up to,
but the floor is zero, zero's your hero.
Well, if you feel bullish about America, you can say,
"Well, I wanna go for it
and I wanna make 2.7 times what it does.
But I only wanna risk a 7.5% loss.
If the market crashes 30% or 40%,
I wanna cap my losses at 7.5%."
So that's why I said at the beginning,
you can cap your losses when the market crashes
when you use multipliers.
Now, savvy IUL producers that I train,
they know when to alert their clients
to participate on maybe a one year point-to-point
with no cap 'cause that doesn't happen that often.
And also when it would be very good to use multipliers.
So I hope that this education
has helped you understand this better.
If you wanna learn more,
I would suggest you study my book, "The LASER Fund."
It's actually two books in one.
I want to gift you a copy.
I'll show you how to get one in just a moment and claim it.
But this side is the left-brain side.
It's about 200 pages, 14 chapters,
with all the charts and graphs and explanations.
If you learn more by stories,
you turn it over to this one
and this is about a hundred pages, 12 chapters,
with like 62 chicken soup for the financial soul stories.
If you wanna use your whole brain,
then you read both of these books.
This retails on Amazon for 20 bucks,
and if you go there and purchase it,
you're gonna pay another probably 10 bucks
in shipping and handling.
Thank you if you do that.
But I'll gift you a copy, okay?
I'll pay for the book to claim your free copy.
You simply go to LASERFund.com,
and I require some skin in the game.
You cover the shipping and handling.
That's a nominal charge.
And then I'll pay for the book.
I'll fire up the hard copy to you.
Now while you're in there claiming your copy of the book,
there's also options if you like to listen and learn,
or watch and learn.
But there's also educational webinars
we teach on a regular basis.
They're free.
You can even schedule an appointment.
You can fill in an appointment slot
to talk with an IUL professional.
If you already are pretty convinced
that you wanna see how an IUL contract structured correctly,
a LASER fund would work
in your particular set of circumstances.
So claim your free copy
and I'll see you on the other side of your brighter future.
(upbeat music)