Don't choose investments based upon which ones
grow to the most. Choose investments for retirement
based upon which ones will generate the most at the time in life you're going to
need the money the most. In this episode, I'm going to
answer the question, "Why does an IUL take 5 years to break
even." So, get ready. I'm going to share some insights that maybe you have never
considered before.
I'm Doug Andrew. I've been a financial strategist and retirement planning
specialist for more than 46 years. I used to have 3,000 clients in 13
western state invested in the market with all kinds of mutual funds.
I was a big bi-term investor difference proponent back then. That was from 1974
to 1980. And then everything changed and my clients were never
happier than when i got them out of the volatile
market and into max funded universal life. Because universal life
was born, it was conceived by EF Hutton who was not an insurance company.
They were credited with being the original brainchild behind
the emergence of universal life back in 1980. Up until 1988,
I had clients that could come in and fund their universal life policy in one
fail swoop. I had many clients for example throw in
a lump sum of $500,000. And back then interest rates
were high. The general account portfolio rates of the insurance companies on all
their bonds double a and AAA bonds, mortgages
on skyscrapers and shopping malls and so forth we're up there in the double
digits. So, I never less than 11 and three-quarters percent
up to 15 and a half percent from 1980 to 1990. But because
I maximum funded the contract right off the bat, we hit the ground running with
those policies. If I earned (let's say) 11, I netted 10.
Only one of the percentage points was necessary to pay for the cost of
insurance in order to generate tax-free income. I
took the least amount of insurance the IRS would let us get away with and I
put in the most premium as the IRS would allow. And they allowed
back then lump sum deposits. That was true from 1980 to 1988.
And so, people would put in a half a million bucks and if they were retired
and they wanted immediate income, they could start pulling out that 10%
that they were netting immediately. That would be 50 grand a
year of tax-free income. Well, if you've watched other
instructional educational videos that I've done, you
know that the banks and the brokerage firms lobbied
congress back in 1988. They sort of went, "That's not fair. We can't compete." You've
got to slow the flow but they didn't want to kill max
funded universal life insurance contracts for tax-free
accumulation, tax-free access and tax-free transfer because
that's where they put some of their tier one assets. In fact,
many banks, credit unions put 30 to 40 percent of their tier one
assets for liquidity and safety into max funded insurance contracts.
They borrow our money the last couple of decades that as low as one
percent. They pay us 1% to put money in a bank.
They turn around and put 30 to 40 percent of that money
into BOLI, bank owned life insurance. And they earned 5 percent on the
general account portfolio. How much more is 5 than 1? It's 500%.
it's not 4. Would you hire an employee
for 10 grand if that employee made you an extra 50
grand? That's what banks have been doing. But they couldn't compete. And so back in
1988, they lobbied congress and says, "Don't
destroy these." Because this is where they put some of their money.
"Let's slow the flow." Because people were coming
and when they saw the liquidity, the safety, the rate of return tax-free
benefits and and then when you ultimately died, 500,000
would blossom for a 60-year-old to 1,250,000 and transfer tax-free.
So, there's not a mutual fund or a bank CD around that could do that.
And so, they were afraid there would be this massive
exodus of money leaving their institutions. And it was happening from
1980 to 1988. So, they passed in 1988, June 21st the
technical and miscellaneous revenue act which had provisions. By the way,
that's an acronym. This stands for Tamra, T-A-M-R-A. And
tamra, said that from June 21st 1988 forward,
if you funded a universal life in one fell swoop at the maximum
guideline single premium taking the least amount of insurance the IRS will
let you get away with under the Tefra and Defra tax citations
of 1982 and 1984. And if you don't know what I'm
talking about, make sure you search on my channel for YouTubes that
educate you on Tefra and Defra. But if you funded it in one fell swoop
after that date, anybody before that date was
grandfathered, you didn't have to comply. You had tax-free income. The money would
grow tax deferred if you violated Tamra. If you died, it
would blossom and transfer income tax free. But if you started taking
income like that 50 grand a year in that example,
it would be taxable LIFO, last in first out. You
you would have to start paying tax on the interest which is the way annuities
are taxed. And so, if you wanted to have tax-free
income after June 21st, 1988, you had to comply
with tamra by spreading out the funding. Now, with
universal life, you can do that in 5 installments. And if you make
your first installment, let's say it's a $500,000
guideline single premium into that
indexed universal life or a regular universal life policy. You
could put in 100 grand approximately if you're over age
50. If you're under age 50, you could put in even more than that.
But let's just round it off. So, you put in 100,000 the first day of the first
year, you can put in another 100,000
the first day of the second year and so forth. So,
in 4 years and one day, you could comply with Tamra and have your whole
500,000 in there. And now your grandfathered forever
after to be able to have tax-free income because you complied with
Tamra. That's the 5 year or the 5 payment. Now, whole life, they have to
spread it out over 7 years. And that's one of the reasons I like
universal life over whole life is because
you can get in the money faster. You can get away with less insurance.
And basically, universal life was designed for living benefits. I can earn
uh 11 and 10. I can earn 9 and net 8 where
most whole life policies only credit you maybe 4 or 5 or 6 percent.
You're lucky to net 2 or 3 percent cash on cash rate of return with whole
life. Because it was designed primarily for
death benefit. So, that is Tamra. Now, let me share with you and use
an analogy to show you what you have to do to be
patient because you don't choose investments for
long-term goals based upon which ones grow to the
most. You choose investments based upon which
ones generate the most, the income at the time in life you're going to need
the money the most. So, in the various books that I've written
regarding these universal life insurance contracts... And my most recent book is
called The LASER Fund. I often use an analogy that my son came
up with of a 5-story building, okay? So, this type of insurance policy
can be compared to owning an apartment building or running your own business,
let's say. So, let's say I have a five-story
building here. Now, your goal is to fill up the building. You want to
lease it out, you want to rent it out. But this law that was passed in 1988
because the banks and brokerage firms demanded it sort (of in my opinion) is
ridiculous but (you know what?) We have to comply. So,
it means they would only let you lease out one floor at a time. But see, it
behooves you to fill it up all the way. And that's when it turns into a cash cow.
So, let me show you based on Tamra, if you fill it up all the way, it grows
tax deferred. If you die, it blossoms and transfers
tax-free. But if you start taking income out, you
now have to pay tax on a LIFO or last in first basis. In
order to have total tax-free income for life on these,
we have to fill it up one floor at a time one year at a time.
So, this is dictated under this Tamara law.
Technical and miscellaneous revenue act. And we
take the least amount of insurance the IRS will let us get away with
under the tefra, defra tax citations of 1982 and 1984.
So, under section 72(E), 7702 and 101(A) of the internal revenue code,
our money will grow tax-free. We can access it tax-free. And when we
ultimately die, it blossoms in value and transfers income tax-free because
nothing else in the internal revenue code
does that. When we use the building analogy, at the end of
the acquisition phase, this is where you're
getting your insurance contract established to accommodate
(let's say) 500,000. There's nothing magic about that number but it's it's a good example here.
The most you can put in is about one-fifth
if you're age 50 or older. So, that would be 100,00. You can put that
in the first year. If you put in more than that, the
insurance company should refund it back to you
so that you don't bugger up the tax-free access that you're using. Now, if you're
just doing it for death benefit, it doesn't matter because when you die, it
is tax free. So, what happens is in year 2, you put
in another hundred thousand. Year 3, another hundred, year 4,
another 100. And so, you're taking 4 years and one
day to fill up your building. And it just reasons that when the
building is only 20% full or 40%
full, it's probably not covering your costs.
That is true with an insurance contract. You cannot cover the cost of insurance
that is required by the IRS 100% just from having
your account 20% funded. And so, as you fill it up, you're now able
to have this cash cow because once you've maximum funded your
insurance policy, it's like leasing out the entire building.
And once you're 60% ful,l it starts to really make money
in a building or a rental property. That is true with the insurance contract. So,
during the first 5 years, it may not look very impressive because
we have to comply with these Tamra rules that you have to
jump through these hoops, so to speak. Once you do that,
it's not often compared to a bucket. So, under tefra, defra, tamra; the
first year if I put in 20%, I don't have to do that. But
if i maximum fund, in this example, if the total was 500,000
I wanted to be grandfathered to put in here,
the fastest I could put in would be 100,000 and then another 100
and then another 100 and then another 100. And then 4 years in
1 day, the last 100 goes in. Now, I have the 500,000 in.
And even though the spigot on the bucket
which is the cost of the insurance that the IRS is has to be there in order
for it to be tax-free. We want this spicket to drain out a
smaller and smaller amount as your money grows in the policy which
I explain in other YouTube videos. So, then it starts turning
into a cash cow. So, what you do is you choose long-term
investments that will generate the most. Because in every illustration, once we
comply with this and it turns into a cash cow, this thing
knocks the socks off of other types of traditional
accounts like IRAs and 401Ks that are going to be taxable when you take it out.
And this is where as the older you get, the insurance can get cheaper. The
spicket on the bucket gets smaller and smaller.
The IUL policies that I've had for 20 and 30 years, they cost one twentieth what
they did when I first took them out even though I'm older
because my cash value now is part of or 95% of the death benefit.
The interest on all this cash is more than covering that spigot on the bucket.
So, if I earn 11% this year, I'm netting 10.9 or 10.95.
But during the average of (let's say) 30 years,
even with those first 5 years while you're filling the bucket to comply,
the net rate of return if I earn 11, I net 10.
Only about 1% drains out that spigot on the
average. And so, if you're going to use a universal life policy for long-term
goals, make sure you don't act like it's
a drive up window at a bank a put and take account. No ,this is designed for
long term. And it will generate, if you have a
million dollars in here, you'll be able to take out up to a 100,000
a year of tax free income into perpetuity.
Show me anything else that can do that on a tax-free basis.
Because I did it for the tax-free income not for what it grows to when it's only
20% or 40% funded. Does that make sense?
So, when we look at a long-term goal like retirement, you want to make sure you
choose the vehicle that will generate the most
after considering the negative impact of taxes,
inflation, market volatility. That's why I like
indexed universal life because it's tax free. I eliminate
the danger of taxes going up. Inflation, I link my returns
to the things that inflate. So, inflation (even though I don't like it) doesn't hurt
me. It helps me. And also, I eliminate the
danger of market volatility because I get to participate when the market goes
up with indexing. But when the market goes down I don't lose.
So, if this is intriguing interest in you, I would
ask you to get a copy of this book. Now, I will gift you this book
if you go to laserfund.com, laserfun.com and you contribute $5.95 towards
the shipping and handling. I will pay for the book and send it out to you.
This is 300 pages of charts graphs and explanations. There's also
12 chapters in here on the reverse side of actual client
stories where you'll see actual numbers of how we have helped people do this for
long term goals. And you will see the magic behind
how complying with Tamra in the long run generates the most net spendable
tax-free income so that you do not outlive your money.