Grandfather yourself to reinvest tax-free. In this episode, we are going to
address the question, "Do I have to pay back the loans on my indexed universal
life insurance policy?" This is episode 13 out of 21 in a series titled Secrets To
A Tax-Free Retirement. I would recommend you invest a few hours watch the entire
series and empower yourself to accumulate an extra million bucks or
more that will generate $100,000 a year of tax-free income as long as you live.
So, my name is Doug Andrew and I've been a financial strategist, retirement
planning specialist for more than 45 years. My favourite vehicle for people
especially planning for retirement so they don't outlive their money and
eliminate the dangers of taxes inflation and market volatility is what is called
a max-funded, tax-advantaged indexed universal life insurance policy.
It's what I affectionately call the Laser Fund because it meets the test for
a prudent investment --liquidity, safety, predictable rates of return and as tax
free to boot. So, in this episode, I am explaining how you can grandfather
yourself. Now, what does grandfather mean? It means that if they change tax laws, in
the future, you're grandfathered --you don't have to abide by new tax laws
because the government... And I can't guarantee this but there's always been a
precedent set that whenever they pass new tax law, so it does not adversely
affect something you established under previous tax law,
your grandfather. So, if you've watched previous episodes in this series, I've
had indexed universal life insurance policies and regular universal life
policies that I've owned before TEFRA, and DEFRA and TAMRA. I haven't had to
abide by those. I was grandfathered. So, one of the neat ways to access money out
of an insurance contract is by borrowing. It's the smart way to do it. In the
previous 2 episodes, I talked about you can borrow conservatively and use a zero-
wash loan because loan proceeds are not deemed earned passive or portfolio
income. They're tax-free. There's nowhere on a tax return to put it. The IRS knows
you receive it. The insurance company reports it. But it says section 72 E, 7702.
It's tax-free. It's not even worth auditing because it's never been taxed.
And so, the secret is when you borrow out the money,
you could borrow out to income for 20 or 30 years in retirement and you don't
have to pay tax on that because it is not taxable income. Now, sometimes people
ask, "Well, no. I don't have to pay that back?" The short answer is no. The loan
balance is sort of phantom. So, let's use in an example. Let's say have a million
dollars accumulated in your indexed universal life insurance policy at
retirement. And it doesn't matter if you have a million, 100 thousand, 10
million. You can extrapolate from my numbers here. So, every million that you
have accumulated, if it's earning let's say 10% net which is what I've earned
for the last 25 years on the average. That means a million bucks would
generate 100,000 a year of interest income. If you take it out the
smart way with a loan, you borrow out 100,000 and your million keeps
compounding to a million one a million 2 million, 3 and compounding. And so,
this cash value compounds and stays ahead of the loan balance. This loan
balance I call it phantom because it's not doing payable during your lifetime.
When you ultimately die, this is washed away with what? --This increased
compounding account. This minus this. This asset that's growing minus this
liability equals the same amount of money you would have had had you pulled
it out the dumb way and paid taxes of maybe 33% on that
100,000 every year. So, do it the smart way. But here's how you grandfather
yourself, you ready? So, using that example, let's say that I
retire at age 60. Now, I've had many clients who retired in their 30s. You
don't have to wait till you're 59 ½ or you have to start pulling it out
at age 70 ½ of age 72 like you out of an IRA or 401K. But
let's just say at age 60-65, every million you have earning 10% you
pull out 100 grand. So, let's use that example. So, I withdraw 100,000.
I do that up to my basis. But what I do is I borrow it from day one. So,
I borrow out 100,000 and it's tax-free. Now, why would I borrow
it when the IRS says I can recover my basis by just withdrawing it?
I don't have to pay tax until I've gotten all my money back that I invested in it.
Because of the grandfathering provision which means that if I pull out 100,000
a year and I called it a loan. Let's do it for 10 years. 100
grand for 10 years is a million. Now, this account over here is worth 2
million and I have a loan balance of a million. Now, these have interest
associated with them. But but 2 million minus million equals the same million
that I would have had have I pulled it out the dumb way and paid tax. But if I
pull out 100 grand a year for another 10 years, another 10 years.
Let's say for a total of 20. 20 years times 100 grand is 2
million. Now, I have this phantom loan balance of 2 million over here. But see
this is now worth 3 million or more. Okay, now what value is that? Well, you
wouldn't believe how many times when people later in life have a windfall of
money, they didn't even see it coming, maybe an inheritance. Maybe they finally
sell a bit a large piece of real estate or downsize it. They're they're sick
and tired of taking out the trash and fixing toilets and evicting tenants on
these rental properties. And all of a sudden they decide to sell and they have
a windfall. Maybe they struck it rich on an investment or their business or
whatever. This happens more often than you would believe. So, let's say they have
2 million dollars and they come and they say, "You know what? congress doggone
them. They have passed laws now that you cannot open a new insurance contract
under the same tax benefits that you did before." I'd say, "No problem. You're
grandfather. Well, I already maximum-funded my previous one." I go, "I know. You
put in the maximum you were allowed. You could reinvest 2 million dollars back
into that grandfather contract." How? I'm maximum funded it. Because you borrowed
instead of withdrawing your money. You borrowed it out. So, you have this phantom
loan. It's not doing payable during your lifetime. It doesn't
mean you can't pay it back. Why would you want to? Because if you pay back the loan,
the 2 million and the interest that accumulated on that 2 million that was
offset by the compound interest over here, you're allowed to put that 2
million dollars in one fell swoop. Because the insurance company said, "Oh,
new money, new investment." Your 2 million hits the ground running, so to
speak. If you're earning 10%, you put in 2 million dollars by paying off a loan
it's just new money back in the insurance policy. And that 2 million at
10% allows you to start taking out 200 grand a year tax-free instantly the
moment you put it in there. You don't have to wait 5 years under TAMRA. You
don't have to comply with TEFRA, DEFRA and TAMRA. You have a
grandfathered contract to reinvest money up to the amount that you borrowed out
because the IRS says, "Oh, you were just repaying a loan." Even though it's not
doing payable in your lifetime, you were repaying a loan. The insurance company
goes, "That's a reinvestment of new money. It's tax-free." And they've already jumped
through the Tefra, Defra and Tamra hoops. You hit the ground running. This
single strategy here has helped many many people who came up with new money
down the road in retirement for a grandfather to count to be able to put
it to work again tax-free without having to wait 5
years to qualify under those I RS tax rules that relate to a brand-new
insurance contract or what I call a bucket. So, that concept is a very
little-known strategy that many financial advisors and even insurance
agents are not aware of. Would you like to grandfather yourself
to reinvest in the future money back into a tax-free contract? Learn how you
can do that. Now, I implore you to watch the
other videos in this series Secrets To A Tax-Free Retirement. It's a free course.
And also if you want to learn more, my 11th book is titled The Laser Fund. I
authored it with my two sons --Emrin and Aaron. We have actually an 18-hour
masterclass on this that you can go through. But reading the book, there's 300
pages containing charts, graphs, explanations of all of this in great
detail. And you can study it and reread and so forth. But I want to give you a
copy of this free. I'll buy the book. You go to laserfund.com
to claim your free copy. You just pay $5.95 shipping and handling and I'll fire a
copy out for you.