If you get a lump sum pay out income tax-free, keep it income tax-free. In this episode,
I'm going to address the question "What to do with a lump sum insurance payout?" And
when I tell you that "Hey, the best thing that you can do is to keep it tax-free", you're
next question is, "What's tax free? How do I do that?" I am going to share the steps
in this episode. So, when people ask that question, usually they're getting an insurance
settlement. Most of the time it's in the form of a death benefit. Life insurance. And so,
they receive a life insurance death benefit proceed because their spouse passed away or
their mother or father passed away and they were named the beneficiary of the insurance
policy. Now, one of the benefits of life insurance is that when the person, the insured dies
then the death benefit is paid out income tax-free. It's a sacred cow in the internal
revenue code. This is provided under section 101(A) of the internal revenue code even before
the code. But the code came around in 1913. It's been this way for over a century because
you're taking pressure off of the government to take care of widows and orphans beneficiaries
from having to rely on the government. It actually saves the government money if they
keep it tax-free. Well, if you receive a settlement from an insurance company because of an accident
or a liability or you're settling a case, oft times that money is also income tax-free.
So, if you're getting a lump sum whether it's 100,000 a million, 10 million, 50 million;
if it's tax-free, why not keep it tax-free? Now, when I tell that to people they go, "Whoah,
I've never thought of that. How do you do that?" In fact, most CPAs and tax attorneys
I go, "Why would you ever advise a client to take a tax-free insurance pay out and put
it into a vehicle that they're going to have to pay taxes on from that day forward? Keep
it tax-free." And they go, "How do you do that?" It's amazing what they don't know.
So, here's how you can keep it tax free and put that money back in vehicles that will
continue to grow tax-free. And I'm going to show you how we do that in our own family
in what I call our family bank that will go into perpetuity and keep it tax-free for generations.
Now, first of all, I need to warn you because many, many widows who have recieved a lump
sum insurance payout of a million bucks, 5 million dollars, I remember a mining disaster
in Utah where they were like 220 widows that received lump sum benefits anywhere from a
quarter million up to a million bucks totally income tax free when a mine collapse and there
were all these miners that died. And 5 years later, there was nothing to show for those
millions of dollars because what did they do? They went out and they loan it to the
children. They went it to a venture with a partner on a restaurant. I can tell you all
kinds of horror stories. And sadly, a lot of times widows and widowers are given the
wrong advise and they end up losing it. Let say that you're going to lump sum pay out
of a million bucks. Now, that is generally income tax-free. And so, I go, "Hey, keep
it tax-free." "Well, how do I do that?" Well, would you consider that insurance to be a
positive or a negative where you just got a million bucks income tax-free? Well, I've
always thought insurance was a necessary evil but I sort of like it right now. It protected
me. It gave me a million dollars and I don't have to pay tax on it. I go, "So, why don't
you put it back into a portfolio of insurance contracts?" "Well, can I take income?" And
I go, "Hello? Absolutely." But see most people don't know how to do this. See people come
to me and they want living benefits. And so, what they do is they take out insurance policies
or insurance contracts for the living benefit. This wasn't my idea. This was EF Hutton's
idea clear by in 1980. And so, universal life was born and it was designed to be used for
living tax-free growth and tax-free income. So, you're doing the opposite. Instead of
trying to get the most insurance protection as you can for the least premium, you're doing
the opposite. You're taking the least amount of insurance the IRS will let you get away
with and you put in the most premium. So, if you got a million dollars tax-free, I mean,
you can use some of it for something or another. But I would take the majority of that. And
I would put it back into another max-funded insurance contract but I would take the least
death benefit. So that your money is growing at a net internal rate of return of 6 to 10
percent. That million should double every 7 ½ to 10 years. So that a million grows
to 2 million and then to 4 million and then to 8 million. And we have many, many clients
who've experienced exactly that. And they funded it with tax-free proceeds from insurance
pay outs. So, for example, in our family, everytime the oldest person or person passes
away which usually the older people, we take 20% of that tax-free death benefit and automatically
we pay for another tax-free insurance policy. And normally, that will fund 2 million. If
they took out a million and that's what they received at death, they take 20% of that or
200,000. And that can usually purchase 2 million dollars of insurance on the next oldest healthy
family member. And so, everytime as an older person dies in our family, our family bank,
this is where we accumulate money for all kinds of goals in our family. Kids, grandkids,
college, religious missions, military, the purchase of a first home; they borrow from
the family bank. And they are able to do that tax-free out of their life insurance policies.
But they do it by putting it in there. And everytime somebody dies in our family, we
sort of have celebration. Now, we not only celebrate their life. But see, we get this
tremendous infusion of tax-free capital and it keeps us blossoming and growing. So, we
use it for tax-free capital into perpetuity. But if somebody came to me, a widow and they
have a million dollars from their husband's life insurance proceeds, I've told many of
them, "Hey, let's take out a policy for you. And let's make room for a million dollars
to put into that." Now they can't put it in all at once. It take 5 years to fund it. 200,000
a year to comply with a tax law called Tamra. But in 5 years or as little as 4 years and
one day, their million is into a new insurance company on their life. And that covers them
from maybe 2 ½ or 3 million. So that when they ultimately die, it blossoms. But what
does it mean? It means their million bucks is just generating an internal rate of return
tax-free of 6 to 10 percent. They could pull out 60,000 to 100,000 a year of tax-free income
without depleting principle. There's nowhere else they can do that. And so, I say, "Let's
keep it tax free. Why would you take a million dollars of tax-free payout and then put it
into an investment that's going to be taxable. That's silly. Keep it tax free." And they
go, "Golly, I've never heard of this before." Well, it because so many people aren't educated.
They're so used to going to financial planners that say, "Oh, put your money in this mutual
funds or in the stock market or do this or buy this real estate." And there might be
some minor tax-advantages. But it's not 100% tax-free like maximum-funded insurance contracts
are. So, my recommendation would be this: Take whatever tax advantage insurance payout
you get. Use anything for maybe final expenses or whatever. But take the remainder and keep
it tax-free so that you can take tax-free income for as long as you live. And when you
ultimately die, whatever is in there will blossom, double, triple may or even more and
transfer income tax-free to the next beneficiary so that the estate continues to grow. We will
never in our family out live our family growing in our posterity because of our family bank
being funded by tax-free insurance and everytime somebody passes away, a portion of that goes
into the next insurance contract which keeps our family bank funded into perpetuity. So,
if you want to understand this better and read some stories about how this works, I
would recommend reading most recent book The LASER Fund. It's actually 2 books in one.
This is the left brain side and this is the right brain side. This side has about 200
pages with all kinds of charts and graphs and explanations. If you like the logic, the
numbers. If you like to learn by stories, be sure and read the chapter in the right
brain side. There's 12 chapters here about how to use this for all kinds of goals from
college funding, retirement, emergency funds. But for a state planning in our family bank,
you'll read stories in here about how this works from one generation to the next by taking
tax-free insurance pay out and keeping that money tax-free forever. The book retails for
20 bucks but I want to gift you a copy absolutely free. So, to claim your fee copy simply go
to laserfund.com. Contribute $5.95 toward the shipping and handling. It's a little bit
more than that. But if you'll do that, I'll pay for the book and send it out to you absolutely
free. Or you can also watch this next episode and learn a little bit more about how you
can accumulate, access and transfer your money totally tax-fee.