3 ways to access cash.
Sad, dumb and smart.
In this episode, I'm going to address the question "How do you withdraw cash from a
life insurance policy?"
Put on your seatbelt.
You're going to learn somethings that you probably didn't even know existed before about
how to accumulate, access and transfer your totally tax-free.
So, my name is Doug Andrew.
I've been a financial strategist and retirement planning specialist for more than 46 years.
I've authored 11 books.
I have a national radio show.
I've helped so many of my clients, thousand of clients across the country.
And then from 2003 to 2007, I trained over 3,000 CPAs, tax attorneys and financial advisors.
In 2005, I let all of my professional licenses automatically just expire to become consumer
advocate.
To write books and to empower and educate people like you.
This is what I love to do.
I'm 68 years old and I want to continue to educate and enlighten people with opportunities
that maybe they didn't know existed before.
So, when people ask that question, "How do you withdraw cash from a life insurance policy?"
I usually say, "Well, there's the sad way, the dumb way and the smart way."
And they go, "What are you talking about?"
Okay, in a nutshell, the sad way is by dying.
Now, to be honest with you, it's one heck of a return but I don't recommend it, okay?
But if I put it $10,000 into a million or 2 million-dollar life policy and I die the
next day, you know, sometimes I tease my wife...
She doesn't like me to do this.
If I go out riding 4-wheeler or hunting or whatever, she goes, "Be careful.
Last time you were fishing, you almost fell off that cliff or whatever on that lake."
And I go, "Honey, If I go to Alaska fishing..."
She'll always worry.
And I say, "Honey, listen.
Will you do me favor.
If I get eaten by grizzly bear, would you promise to try to look down and look sad for
my funeral?
Because you're going to be loaded with tax-free cash."
And she goes, "You're more valuable than all of millions of dollars" and so forth.
But see, it's the sad way to access money.
But if I put in 10 grand and I die the next day or the next month or the next year and
I leave behind 2 million, 3 million, 5 million, whatever the death benefit was, that's totally
tax-free.
That's calculate the rate of return.
It's incredible.
But I don't recommend it.
But that's a nice benefit.
Now, most of the life insurance policies that I've helped people with, they came to me not
necessarily wanting or needing life insurance death benefit.
They were okay with it.
People don't object to death benefits.
They object to paying for them.
The way I would structure the index universal life insurance policies for my clients, it
was designed to allow them to accumulate their money totally tax-free, be able to access
that money tax-free when they retire so that every million bucks can generate 60, 70, 80,
100 thousand dollars a year of tax-free income without depleting the principal.
Nothing else does that.
IRAs and 401Ks cannot generate that.
You cannot predictably have that kind of income if your money is in the market and then you
have to pay tax on it and everything else.
So, this has been the dream solution for many people's retirement.
But other financial goals.
You maximum fund the insurance policy.
Take the least amount of death benefit the IRS will let you get away with.
And then it turns into this cash cow.
So, when we talk about withdrawing cash, if you're going to do it for living benefits,
my heavens!
You want to use the smart way because the dumb way would be too withdraw your money.
Here's why.
So, what's the dumb way?
Well, when you have cash value inside of an insurance policy and you need to access it
for whatever reason, you can withdraw your money.
It's called a partial surrender oft times.
And so, there's a problem when you withdraw your money.
I mean it's your money.
I mean, it's your money.
You withdraw it.
But then that restricts how much you can reinvest or put back.
And so, I don't like to withdraw it because it limits, it reduces down grandfathered room
I had to invest on a tax-free basis.
Life insurance cash values are taxable FIFO.
Where as most investments are taxed LIFO.
LIFO means first in first out.
So, if you put (let's say) $500,000 into an annuity.
An annuity is a savings account with with an insurance company in it's simplest form.
And you put in 500,000.
Let's say you were earning 10% which most of them are not.
But it's simple math.
500,000 at 10%, you could pull out 50,000 a year, right?
Well, the IRS says, "That is the last money you're earning as your interest.
You're pulling out the 50,000 only if you start accessing some of your basis, the original
amount you put in there, do you get a tax break on that."
So, the last money you're earning is the first money out.
Most investments are taxed LIFO.
Insurance is one of the few in the internal revenue code that's taxed FIFO.
First in, first out.
So, if I put a half a million dollars into insurance policy, I was earning 10% which
I have many, many years.
50,000 a year...Because I had many clients do this back in the 1980's.
They put in a half a million and they start 50,000 a year of tax-free income.
See, the first 10 years you're just simply recovering your 500,000.
50,000 a year times 10.
The first money in is the first money out.
You've already paid tax on that so it's tax-free.
But see that would be dumb because you know have to start paying tax in the 11th year
in that example.
So, now you keep pulling off 50,000.
And now you're into your gain or your interest.
That's dumb.
The IRS actually says, "You don't need to that."
Just change the nomenclature.
Change what you call it and we will not tax you.
This is not loophole.
Don't call it a surrender or a withdrawal.
Call it loan.
And people go, "What?
Borrow?
My own money?
Why would I borrow my own money?"
Watch.
The smart people do this.
So, when clients come to me and they need money for a business venture or an emergency
or to help their kids with college funding or retirement, they know the procedure.
It's a one-paged form from the insurance company.
So, they put their name at the top and their policy number which is like an account number.
And then it says "Would you like to withdraw a million dollars?"
Okay?
If they have a million or 2 million, it doesn't matter whether they have a half a million
or 10 million.
But I have a client who's a business owner.
And he usually pulls out money to have an earnest money on a huge apartment complex
we must buy.
And so he say, "Doug, send me one of those forms."
Well, he knows what to do.
And when it says, "Do you want to withdraw a million?"
Or check this box, "Do you want to borrow a million?"
Which one do you think he checks?
Borrow.
See if he withdraws it, he can't put the million back with the same guideline that he could've
putted in in the first place.
So, he's permanently reducing the ability to have money grow tax-free.
But then if he takes out more than as his basis, then he has to pay unnecessary tax.
So, he borrows and he 2 choices, okay?
Do I check this box?
A zero wash loan.
Well, at the economy is struggling and everything like that, he may do the zero-cost loan.
So, he may say, "Well, I want to borrow a million."
Now, in order to call it a true loan, the insurance company has to charge a nominal
interest rate.
So, that might be 2%.
And so, they charge you 2% on the million.
That's 20,000.
But he doesn't have to write out a check.
He doesn't have to pay that out of his pocket.
So, on a million-dollar loan, if he chooses what is called a zero-wash or zero-cost loan,
at 2%, the insurance company is going to charge him $20,000 of interest that year on the million.
Now, he doesn't have to write out a check.
How is that covered?
Well, the insurance company collateralize that loan with his cash value.
And they will credit him the exact interest rate they're charging him.
SO, he's earning 2% on the money that he did not withdraw.
It's still sitting there.
The insurance companies simply use his cash value as collateral.
In other words, his money was not touched.
It's still growing.
The insurance company loaned him the equivalent of the cash or the interest that he's paying
on that is credited.
So, earns 20,000.
That covers the 20,000.
It's a zero-cost.
Why would you do that?
Because loan proceeds are not deemed, earned, passive or portfolio income.
They're totally tax-free.
And this has been established in the internal revenue code forever.
So, it makes the million dollar totally tax-free.
Well, he has another option.
He usually chooses this one.
He says, "You know what?
I'll pay a little bit higher interest rate.
You can charge 4.5 or 5 percent."
And this is called an index loan or participating loan.
So, on a million, you charge me 5%.
That's 50,000.
What would you do that when he could get away with just 20,000?
Because the insurance company will credit him the indexed rate on the full million that
he left in there earning interest.
There have been years where he borrowed it 5% and he earned 16.
He earned 25% in 2017.
Did you understand what I just said?
He pulled out a million.
They charged him 50,000 on his ledger.
But they credited him on the same ledger.
250,000 on that same million.
He was earning a net of $200,000 tax free on his money while he was using the money
for something else.
This is incredible.
This is why people when they retire if they simply borrow (let's say) out of a million
dollars of cash value in the insurance policy, if the borrow (let's say) 80 or 100 thousand
dollars a year, they borrow at 5 and they keep earning just 7.
That will tweak their cashflow by 2 percentage points.
If the insurance company is only able to credit 8% at the given year.
He can still probably pull out 100,000 even though they're only crediting 80,000 because
of this arbitrage or spread by taking out money the smart way by continuing to earn
higher interest than the insurance company is charging.
The loan is never doing payable during your lifetime.
Did you hear that?
It's washed away when you die.
You can pay it off if you have new money.
And sometimes that smart.
If you have new money you just reinvest.
The insurance company is just, "Oh, they're just reinvesting."
The IRS is, "Oh, they're just repaying a loan that they technically didn't have to pay.
But they're doing it."
And that means people with new money down the road can throw money back into a grandfathered
insurance contract and hit the ground running because they've already complied with all
the IRS guidelines to have the money be tax free.
So, if you've gotten a few epiphanies or insights or a-ha's, you have no idea what you still
maybe don't know.
And that's why I've written 11 books and that primarily focus on how to optimize your financial
assets.
My most recent book number 11 is called The LASER Fund.
See, laser is an acronym that stands for liquid assets safely earning returns.
And in this book, you'll learn how to diversify and create the foundation for a tax-free retirement.
It's 300 pages.
It's actually 2 books in one.
One is 14 chapters with all kinds of charts and graphs and explanations.
But if you learn more from stories, you flip it over and you read this side.
This is 12 chapters and 62 actual client stories.
I'l l tell you what.
I'll buy the book.
It retails for 20 bucks.
But if you go to a laserfund.com, claim your free copy.
And you do that by simply paying $5.95 shipping and handling.
That's frankly doesn't quite cover the shipping and handling.
But I'm more passionate at this stage in my life (I'm 68) to educate people.
So, let me fire out a free copy of this book to you and you'll learn more about how to
optimize you asset s and minimize taxes and empower your retirement to have double, triple,
maybe quadruple the net spendable retirement income.
And then if that intrigues you, you can watch other episodes on this channel and learn about
how to accumulate, access and transfer your money tax free.