This can get cheaper the older you are. In this episode, we are going to dive
deep into answering the question "Doesn't universal life insurance cost more the
older you are?" This is video 4, episode 4 of a series of 21, that if you immerse
yourself in Secrets To A Tax-Free Retirement which is the name of the
series, you're going to empower yourself to have an extra million dollars or more
that will generate 100,000 a year of tax-free retirement income into
perpetuity.
So, my name is Doug Andrew and I've been helping people optimize their assets and
minimize taxes and prepare for retirement now for more than 45 years.
My favorite vehicle by far is a max-funded tax-advantaged, indexed universal
life insurance contract that when it's structured properly and funded correctly,
it will knock the socks off of any IRA or 401K that you could show me. Now, in
this episode, I'm going to talk about the history behind why it's tax-free and how
the IRS challenged it when EF Hutton, the brainchild behind the emergence of
universal life first came out with the idea back in the 1980s. As I mentioned in
previous episodes, when I saw that this was by term and invest the difference on
steroids, I began to help many, many people put their money into the
universal life insurance product that came out in 1980. Now, there were several
companies that began to emerge. And back then, you could just self insure. As I
mentioned in another episode, if I found somebody who wanted to optimize $500,000
and it could come from all kinds of sources whether they sold some real
estate or they took some money out of a bank or credit union that was earning
lower interest or they rolled money out of an IRA or 401K. All of the resources
they wanted to create greater liquidity, safety and more predictable rates of
return and have it be tax-free, they would tell me the assets that they
wanted to reposition. So, for the sake of this video, let's say that we are going
to a grandfather ourselves to be able to put in five hundred thousand dollars. You
don't have to put it in all at once. But let's say we do. Back in 1980, I had many
people doing that. They would throw in $500,000 in one
fell swoop. And back then, they were crediting between 11 and 3/4 to
15.5%. Let's just say 11. As I mentioned in another episode, from 1980 to
1990. I never earned less than 11 and three quarters. So, let's say it's 11 and I'm
netting 10% cash on cash rate of return. Only one of those percentage points pays
for the insurance that the IRS says has to be there in order for it to be
tax-free. That's called the internal rate of return. There's a lot of insurance
salespeople that do not know how to calculate the internal rate of return.
They think their life insurance, if it's crediting 7 or 8 percent with
some whole life touted to do 4 years, that's not the internal rate of return.
In fact, a lot of whole life insurance if it was earning 8% in
dividends, you would only net 5.9% by the time you were
95 years old. See, with universal life, I can earn 11 and net 10. I can earn
8 and net 7. There have been years I have earned 16 and netted
15. One year I netted 24 out of a 25% gross
return in 2017. So, how do you do that? When people would put in a half a
million dollars and if they're earning a net of let's say 10% which they
were back then. That would mean they could pull out 50,000 a year of
tax-free income. Well, we had this massive amount of money that was being
transferred an exodus out of the banks and the credit unions, the brokerage
firms. Because these were safer, they paid higher interest, they were tax-free. And
when you die, they blossom they increase in value and transferred income tax-free
nothing else did that in the Internal Revenue Code. But see, the IRS said, "Hmm,
Hutton. We think you're overstepping your bounds." And so, they basically took him to
court. EF Hutton won. They weren't doing anything wrong. It's insurance. The IRS
said, "Well, who puts a half a million dollars into a dinky little insurance
policy? The actual amount at risk is only
$10,000. Because the death benefit was just slightly higher than the amount of
money you put in there?" They said, "Our clients do. They were not violating
sections 72E, 7702 and 101A of the Internal Revenue Code." So, long-story
-short, the IRS went to congress and said, "We need to change
the definition of tax-free insurance under those three sections of the code."
In 1982, they came out with a portion of the tax equity Fiscal Responsibility Act.
That spells the acronym TEFRA, T-E-F-R-A. Now, you probably may not be surprised but
the IRS didn't even understand what they were doing. And so, 2 years later, they
had to redefine it again. Because they didn't understand what it was really
doing. And so, under the deficit reduction Act of 1984, that's DEFRA, D-E-F-R-A. So,
this is called the TEFRA-DEFRA corridor. Let me share with you how this can be
powerful for you. So, under the TEFRA and DEFRA tax citations, the IRS
basically dictated the minimum amount of insurance benefit, the death benefit that
must come along for the ride under a maximum funded insurance contract in
order for you to not violate the definition of tax-free accumulation, tax
free access and tax free transfer under section 72 E, 7702 and 101 A of the
Internal Revenue Code. Now, the neat thing about Tefra and Defra is it said, "You know
what? We know your objective is to have tax free living benefits. So, you don't
have to have a whole bunch of insurance unless you're a young person." They gave
it parity. Now, what's parity? That's equality.
Because they knew that people were using this for living tax-free retirement
income in a lot of instances. And so, Tefra and Defra said that for a 60-year-
old who wanted to set aside $500,000, there must be some risk that the
insurance company is incurring in order for it to qualify to be tax-free under
those three sections of the code. A 60-year-old who wants to set aside
500,000 was required to have about a million two hundred and fifty
thousand dollars of life insurance. Now, they could buy a way more life insurance
than $1,250,000 for half a million dollars. But that wasn't the objective. They didn't want to get as
much insurance as they could. They wanted the least amount of insurance the IRS
would let them get away with and put in the most money. In this case, a half a
million. It's the back door approach. So, if I want to put in a half a million,
Tefra and Defra says that age 60, I have to have a million two hundred and fifty thousand of insurance
attached. Now, if you were 21 years old, you had to have more insurance because
it gave parity. If you were 80 years old, you could get away with even less
insurance. Maybe to put in 500,000, you only needed
800,000 of insurance. What does this mean? The older you are, the less
insurance you're required to have in order for it to comply and be tax-free.
What does that mean? You wouldn't believe how many insurance agents do not
understand what I'm about to tell you. It doesn't matter how old you are. Even how
unhealthy you are .The cost of the insurance is the same the amount of
insurance required goes down the older you get. And as your money grows, the
insurance becomes cheaper as you get older. Did you hear that? Now, let me
explain why. If my objective is to put in some money and earn an internal rate of
return, let's say of 10% because that's an easy number. And I've actually
averaged 10.7% for the last 25 years. That means if I put in a half a million
dollars, I want that half a million to grow at 10% tax-free. Half a
million will double to a million in 7.2 years. In 15 years, it
will double again to 2 million. And see, I want my money to grow tax-free. So, the
minimum amount of insurance is a million two fifty at the outset. Under Tefra and Defra, I
have to have a million two hundred and fifty thousand of insurance to put in a half a million. So,
the insurance company is only at risk for what? The difference. Because a half a
million of it is my own money. I'm self-insuring.
So, the insurance company is only at risk for the remaining 750,000 if I die. They
only charge me for what they're at risk. But if my half a million in 7.2
years doubles to a million. And the original death benefit was a million two
fifty, I can add it on top. But I don't do that. I want to have living benefits. So
now, I have a million of cash and the insurance companies only at risk for the
remaining 250,000. The amount of insurance that they're charging me for
is less the older I get. So, you say, "Wait a minute. A million is going to double to
2 million and you started out with a million two fifty." That's right. Now, the
insurance grows with your cash. It must stay 5 percentage points ahead of it.
So, when I have 2 million of tax-free money, the insurance now is 2.1 million.
It's only 5% greater so the cost of the insurance is going down. See,
oft times I say, "You know what? I earn 11, I net 10 on the average." But the
insurance policies that I have had for more than 30 years, it's actually one
twentieth the cost that I paid when I was 30 years younger. Have you ever seen
an insurance policy that gets cheaper as you get older? Then you haven't seen one
designed correctly like I'm talking about. It means this: If I now have 8
million dollars and I earned 11% this year, gross, I would net 10.9,
10.95. It's draining now a little tiny portion because my
8 million bucks is generating cash like crazy. And the cost of the insurance
is way less than it was when I was 30 years old even though right now
I'm 68. So, this actually gets cheaper as you get older. Now, what if you're totally
uninsurable? You can own this on someone else, a surrogate, your spouse, your kids.
Banks on these on people. The owner of the insurance contract gets all the
tax-free accumulation and growth. So, if you cannot qualify for the insurance, you
can still get all the tax-free growth and income
by using someone else's life to ensure. But if your insurable, I would recommend
you get it on you. In our family, we always keep insurance on the oldest
family members so that when they pass away, it blossoms. We take 20% of that
death benefit tax-free and put it into another insurance contract on the next
oldest healthiest family member. And our family is empowered and endowed with
tax-free capital for generations. So, the big takeaways are these: Under tefra and
defra tax citations passed back in 1982 and 1984, it dictates the minimum amount
of insurance based upon your age, your gender and your health. But it doesn't
matter how old you are or even how unhealthy you are. You can own this on
yourself if your insurable or on somebody else. But it doesn't matter if
you're a 21-year-old athletic marathon running female or a 68-year-old geezer
like me. Or an 82-year-old friend of our family who had 3 blocked arteries,
adult onset diabetes, a prostate cancer episode, 3 brothers pre-decision went
6 sisters. He was still healthy enough to qualify. The cost of the insurance is
the same. Meaning, the 21-year-old, the 68-year-old, the 82-year-old, the amount of
insurance that they're paying for it goes down as you get older and if you're
more unhealthy. So, that if our goal is to all earn 11 let's say and net 10, then
every one of us with the money we put in can earn 11 and net 10 percent tax-free
rates of return because the amount of the insurance required is less the older
you are. And as your money grows, the insurance becomes cheaper. This is so
powerful. If you want to learn more about how this works and actually see charts,
this is why we wrote our 11th book, The Laser Fund. It's over 300 pages. Charts,
graphs, explanations. 62 actual clients stories of how this works. And I want to
have you claim your FREE copy. What you is just go to laserfund.calm and pay
$5.95 shipping and handling and I'll fire out a copy of this
300-paged book for you. And I also implore you to watch of the other videos
in this series, Secrets To A Tax-Free Retirement. This one next will help you
connect the dots.