Section 7702 changes that can help you. In this episode, I'm going to address section 7702,
what do the changes mean? If you're a financial advisor or a consumer,
this can impact you. So, get ready. I'm going to show you recent changes that can actually help you
with your max-funded indexed universal life insurance contracts.
So, I'm Doug Andrew. I've been a financial strategist
and a retirement planning specialist now for more than 4 and a half decades.
I got my insurance license and my series one securities license clear back in 1974. So, I've
been around the block a long time. And I witnessed the emergence of universal life in 1980.And so,
section 7702 affects the way that you access money and you fund a life insurance policy especially if
you're going to be using it for living benefits more than just the death benefit. And so,
I'm going to do a little review here. But in a nutshell, this new legislation that was just
recently passed in the last few days of the year 2020 affects section 7702. And this has
not been touched since June 21st 1988. It's been a long time. Basically, there are 3 advantages.
You will see that if you're maximum funding your life insurance policy to be able to get the best
net internal rate of return as quick as possible to use it for retirement income that's tax-free,
you will now be able to put in more money, you'll be able to put it in at a faster pace which will
reduce the cost quicker. So, those are the 3 big benefits and I'm going to illustrate these numbers
for you. So, especially if you're a financial advisor, you're going to be very interested
in studying these examples as I proceed. Now, if you're a consumer, if you're a policyholder, I'm
going to do a little review here in just a moment. But please pay attention to the screen as I show
you what's going on here because this happened on December 27th of 2020. It was really a surprise.
Changes were made to the U.S tax code as part of the federal consolidated appropriations act.
And so, for life insurance policies issued on or after January 1st 2021,
these changes may have modified some or all of the tax-related premium limits in your policy.
People go, "what's going on?" So, the purpose of this as as a result, this u.s tax code change,
the tax-related premium limits... And we call these Tefra and Defra and Tamra the guideline
level and the guideline single premium. And I'll review those in just a moment. So, they have been
updated accordingly. So, let's do a little review so that you understand what I'm talking about.
For years, ever since universal life was first created in 1980, it was the brainchild of EF
Hutton and they weren't an insurance company. But they decided to introduce a life insurance
contract where you could take the least amount of insurance the IRS would let you get away with
and you put in the most premium as the IRS would allow as fast as they allow. And it turns into a
tax-free cash cow. So, back in 1980, I had about 3,000 clients I was responsible for in 13 western
states. And they were never happier than when I got their money out of the market and into
these maximum funded universal life insurance policies. Now, Indexed universal life didn't
come out to 1997 and that tweaked the rate of return as interest rates started to come down.
I have averaged 8, 9.6, 10.07 percent rates of return for the 40 years that
universal life has been out. When EF Hutton first came out with it people were throwing in
big lump sums like 500,000. I had clients put in 500,000 back in 1980, '81, '82. They were earning
11 netting 10 because only one percentage point paid for the insurance that the IRS had had to be
there in order for it to be tax-free. And so, they're earning a net rate of return of 10%.
On 500,000, that's 50 grand a year. They started pulling out $50,000 a year tax-free instantly. The
IRS came in and said, "What are you doing?" Hutton said, "We're not doing anything wrong." They went
to court. EF Hutton won. Long story short, in 1982 under the tax equity fiscal responsibility act,
that spells the acronym Tefra and then 2 years later because they didn't know what they were
doing, they passed under the deficit reduction act, defra. This Tefra, defra corridor dictated
the minimum amount of life insurance, death benefit. You had to have attached to it okay
so that it qualified as tax-free under section 72e and 7702 and 101.8 in the internal revenue code.
72e says money inside of a life insurance policy will grow tax-free with the interest
and dividends. 7702 talks about how you can access the money tax-free for retirement income.
101a says that when you finally die, it blossoms in value and transfers income tax-free. Nothing
else in the internal revenue code does that. And so, in order to fall under that definition,
you had to stay out of the category of being defined as an investment because investments are
taxed sooner or later. And they're usually subject to market volatility. We don't want to be under
that definition. So, in order to stay tax-free, you have to comply with Tefra and Defra. In 1988,
the technical and miscellaneous revenue act was passed, June 21st. And this affected section 7702.
And this is how fast you can put the money in. So, Tefra and Defra relate to the amount of insurance.
Tamara relates to how you can access your money tax-free. If you've watched any of
my educational videos I usually compare this to a bucket as a metaphor. So, let me show you
the metaphor of a bucket and then I'm going to give you some quick examples of what this means.
I would often compare a life insurance policy to a bucket. This is a repository. It is a container
that holds your money. So, you're determining how much money you want to put into the bucket. So,
let's say you want to put in 500,000 over 5-year period, 10-year period, 20-year period,
30... It doesn't matter. So, you determine the amount of money you want to be grandfathered
to be able to put into the bucket. And you want all your compound interest to be tax-free.
So, in order to do that, under Tefhra and Defra, you had to determine the least amount of insurance
that you had to attach in order to qualify as tax-free under those 3 sections of the code.
So, for a 60-year-old, if you wanted to put in $500,000, you had to have a minimum death benefit
of $1,250,000, okay? You could buy way more life insurance than a million two-fifty for 500 grand.
That's not the point. What you want is the least amount of insurance that you can get away with.
You want to be able to fill it up with money and earn a rate of return of 11 back in 1980. People
were earning 11 up to 15 percent. But they were netting 1% less than that. If they earned 11 they
netted 10. That was the objective, not the death benefit. So, Tefra and Defra dictated the minimum
amount of insurance for a 60-year-old. It was a million two-fifty. For a young 20-year old, they
had to have more because their life expectancy was greater. But an 80-year old, they could get
away with less insurance. But Tefra and Defer gave parity. So, parity means the older you are
and even if you're unhealthy, you can squeeze down the death benefit under Tefra and Defra.
So, if your objective is the greatest net internal rate of return. A 60-year old can earn 11 and net
10 just like a 22-year-old athletic marathon running female or an 80-year old. We had a
79-year-old friend of our family and he had three blocked arteries adult-onset diabetes
a prostate cancer episode. He was able to earn 11 and net 10 and he only had to have
a little bit more insurance than the amount he was putting in. Because the objective was tax-free
income not the death benefit, okay? That was Tefra and Defra. Now, if you're earning 11 and netting
10, this spigot right here on the bucket is the cost of the insurance that the IRS says has to
be there in order for it to be tax-free. It's actually watering a nice money tree at the end
of the day that's going to blossom. If you put in 500,000 and you die, it's going to blossom
to a million two-fifty and transfer tax-free, okay? So, it's really not a cost it's a benefit.
But that has to be there or it moves away from tax-free insurance in the internal revenue code
over to taxable investments. We don't want that. In 1988, a lot of brokerage firms banks, and
credit unions were complaining because these were safer. They paid higher interest. They have better
rates of return and they blossom when you die. There's not a bank or credit union around that
will do that. And so, they wanted to slow the flow because they were imploding. But they didn't want
to kill these because this is where a lot of banks and credit unions put your money that you put in
the bank, did you know that? You put your money in a bank, they pay 1%. They turn around and put it
in these and earn 5%. They earn 50,000 on every million and they only have to pay you 10,000.
Hello? They're making 5 times what they're paying you by bypassing and putting your money in
the insurance companies which are safer. So, Tamra was passed in 1988 and it said, "Oh,
if you want tax-free income, you cannot put in all the money all at once." I've been using 500,000
as an example. You could only put in about a fifth with universal life. With whole life, you had to
take 7 years. But universal life is my favorite because it was designed for living benefits. So,
you can fill up the bucket faster. I can put in a hundred thousand the first day of the first year
and another 100,000 the first day of the second year. So, in the fifth year which is
actually 4 years in one day, I can finally put in the 100,000 and my bucket is full.
Now, it turns into a cash cow. And anytime I take income, it's tax-free.
If I violate Tamra, it still grows tax-deferred. But if I take money out, it's now taxable,
LIFO like an annuity. I don't want that. So, that's Tamra. That's 7702. So far so good?
Now, I'm going to gift you a copy of my most recent best-selling book at the end of this.
And if this is intriguing you already, share this video, put a comment, please like. But subscribe
to this channel because i post an in-depth answer to a financial question almost on a daily basis on
this channel. And at the end, I'm going to gift you a copy of my most recent bestselling book,
300 pages where you can learn more about this, okay? So, let's talk about 7702. What
it basically said is that for a million-dollar death benefit, we'll just use the same example.
If you're a 65-year-old male, okay? You can now put in $624,000, okay? This number down here,
54,000, you can put in 54,000 every year you want for the rest of your life. But the most you can
put in to the policy during the first 11 years or so is 624,000. This down here is called the Tamra.
You can put in 107,000 a year and be able to take out tax-free income. You don't violate Tamra,
what I just talked about. So, what did it used to be like? Under the previous, okay? Before the
changes, you could only put in 497,000. So, you're able to put in more money, you're able to put it
in faster you could only put in 82,000. Now, you can put in 107. So, let's just do a summary.
After this law was passed, I could now put in for a million dollars of life insurance 624,000,
I can put in more money. I can put it in as much as 107,000 a year instead of 82,000 a year.
I can get more money in there tax-free and that will perform better. And the cost,
the spicket on that bucket will get smaller faster. This is an advantage, okay? So,
let's look at somebody age 65. See after? Now, you can put in this, before you can only put
in this. That's a 25 increase in the amount of money that you can sock away tax-free.
This is again the guideline level premium what you could put in every year the rest of your life.
That's gone up. Tamra, you can put in 107 instead of 82. That's a 31% increase. The Tamara limit
down here went up as far as the ratio between that and how much you can put into the bucket.
So, pretty much all around, it's a better situation. Well, that's for a 65-year old.
How about a 75-year old? This is after you can put in 837 versus 728. So, let's summarize that
one. After this law was passed ,a 75-year old can put in 837,000. Now, people say,
"Why would you pay 837,000 into a million-dollar life insurance policy because you want 837,,000
to generate tax-free income forever after. That's why. You're not doing it for the death benefit.
In fact, the net amount at risk if you put that much money in, the insurance company
is only charging you for the difference between that and the million dollars of life insurance
because 837,000 of it is your own money now. The cost of the insurance has gone down quicker.
So, you come out ahead because you can put in more money than you used to be
able to put in as a 75-year old. Well, let's go to the younger ones. Here is a 55-year old
after, okay? You can put in 439, you used to only be able to put in 314. Wow! So, that is
40% increase. You can put in 40% more money and have it grow tax-free under this new law.
You can put it in faster. You can put in 50% faster money, you can put in more money quicker.
That makes it perform better and makes the cost go down. That's the net result of all of this. Let's
look at a 45-year old. Here's after, here's before, okay? You can put in 310 versus 198.
That's a 56% increase in what you're allowed to set aside tax-free. Under Tamra, okay? You're able
to put it in again faster. 77% increased under Tamra. What about a 35-year old? Here is after.
You can put in 221. Golly! Versus 128. Notice you can only put in this much money because
you're younger. The insurance that's required is higher because your chance of living a long time
is much greater. The net of this is you can put in 221 whereas before you can only put in 128.
72% more faster money into your insurance policy. It's going to turn into a tax-free cash cow
faster because you're getting money in quicker. You're able to put in under the
Tamra substantially more money. 62 instead of 30 000 a year. This is incredible, okay? Now,
could you take less life insurance? Yeah. But frankly, I think most people are going to want
to put in more money because most of my clients ended up opening new insurance policies every 2 or
3 years that was a nice problem because they had more money. Now, you can put more money into your
existing policy instead of being stopped. Because if you put in one dime more then the limits,
the insurance company was forced to refund it to you. So, let's take a 25-year old, last example.
This is after you put in 158. Before, you could only put in 83,000, okay? Into
a million dollar life insurance policy. I can put in way more money, nearly 90% more money.
I can put it in faster. I can put in 52,000 a year instead of 21,000 a year and still have tax-free
access to my money down the road. This means that bucket I showed you that usually took 4
years and 1 day or 5 years to fill up, this young 25-year old can fill that up in 2 years and 1 day.
Doesn't take 5 years. You can fill up the bucket with money and preserve tax-free accumulation and
tax-free access in as little as 2 years and 1 day. For the older people, 3 years and 1 day instead
of 4 years in 1 day which is what it was for 60, 65, 70 year olds. This is very, very exciting and
a lot of people don't understand the impact. Your insurance company is probably making these changes
right now. But I wanted to be on the cutting edge and share this with you. If you want to learn more
about max-funded indexed universal life insurance policies, I want to gift you a free copy of my
most recent best-selling book. Here's how you can claim your free copy. So, if this is intriguing
you, my most recent best-selling book, book number 11 is flying off of our warehouse shelves.
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universal life insurance policy is the dream solution, the financial swiss army knife for
all kinds of financial goals not just retirement to do what? Accumulate your money tax-free
and then be able to access your money tax free if you're in compliance with section
7702. And when you ultimately die, anything in there blossoms and transfers income tax-free
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