Universal life is for living benefits. In this episode, we are going to address the
question "What is the difference between term whole life and universal life?" This
is episode 1 of a series of 21 titled Secrets To A Tax-Free Retirement. And if
you immerse yourself in this education, it will help you generate an extra
million bucks that will give you $100,000 a year of tax-free income for
as long as you live. So, get ready.
My name is Doug Andrew. I've been a financial strategist and retirement
planning specialist for more than 45 years. And I have learned how to
accumulate access and transfer my money totally income tax free. That is with my
favorite vehicle which I call the Laser Fund which is a maximum-funded tax
advantaged universal life insurance contract. So, in this first episode of 21,
I want to help you understand the difference between term insurance, whole
life insurance and universal life insurance. And in the next episode, I'll
talk about the history behind how universal life came to be. I'm going to
create a little graph here to help you understand the basics of insurance. So,
let's put a line across the bottom right here. And let's say this is your life
span. And we'll maybe say that this is age 30. And somewhere along here, we'll
say is age 65 where most people sort of say "Well, that's retirement age." And out
here would be age 100. Maybe even age 120. Because people now are living beyond age
100. Term insurance is basically just the pure cost. It's called mortality cost. If
we were to get together in a fraternal organization, we got together once a year
and we passed a hat around the room. And we were a bunch of 30-year old males,
okay? That means that out of a thousand of us,
we would have to at age 30 have to put about $2 into the hat in order to have
$2,000 on hand, why? Because the mortality table says that there is just under 2
deaths per thousand 30 year olds in America. And so, that is the pure
mortality cost. So, your pure term insurance cost is usually referred to as
annual renewable term. And so, it gently goes up in price
as we get older, okay? Because every year that we get older, there are more people
out of the thousand remaining that are alive that will die. And so, you have to
keep paying a higher, higher premium with annual renewable term. And so, that is the
pure cost of insurance. Term insurance is really inherent in permanent insurance.
Whole life or universal life. This pure mortality cost is within all life
insurance. So, whole life came about, the concept was, well let's pay a level
premium for your whole life. So, instead of paying an increasing premium as you
got older and it getting more and more expensive, they calculated, "Well, let's
have a level premium that we pay throughout your whole life" if you live
to be let's say 100 years old. And so, what's happening here is you are
overpaying the early years. So, here, you're overpaying
more than the actual mortality cost. And that excess money accumulates inside the
insurance policy. It's called cash value. And this allows you to then have some
cushion or equity cash value in your policy so that when the costs are higher
than what you've been paying, you have all this excess cash value that covers
that more expensive cost of mortality later in life. So, whole life was designed
to have a level premium for your whole life. Now, there are variations of whole
life insurance or permanent insurance. Sometimes people said, "Well, I don't want
to have to keep paying premiums my whole life." Well then, we need to pay a higher
premium to age 65 and then you can stop, let's say. So, out here we're paying a
higher amount into the insurance policy to age 65. And then we stopped and there
is more excess money that is earning interest or earning dividends in the
insurance policy that allows us to stop. And the policy is
in essence paid up. And that people said, "Well, why don't we pay even a higher
price for 20 years" Okay? Or maybe 10 years. This is called 10 pay.
That is whole life insurance. What you do is you pay a certain premium based upon
how much is going to be needed in excess earning interest and dividends with the
insurance company to cover that actual pure cost of insurance as you get older.
So, that no matter when you die, there's enough money there to cover the
mortality cost and payout the death benefit. Now, the beauty of insurance is
the money inside of here accumulates tax-free. Because this is sort of like a
sacred cow in the Internal Revenue Code. You're taking pressure off with the
government to provide for widows, orphans and so forth. And as you put in more and
more money, you're able to pay a certain amount of premium and stop.
So, let me share with you how universal life came to be and what makes it
different. So, there was a product called single premium whole life insurance
where you would pay this premium once. It might be way up here. And let's say the
life insurance death benefit is a million bucks and depending upon your
age, you may pay one single premium of $200,000 or $300,000. But it was enough
money that if you paid a one-time payment of 300,000 (let's say) that that
with interest would be enough to equal a million dollars at the time you would
likely die based upon your L/E. That's life expectancy. Well, in 1980, EF Hutton
was the brainchild behind the emergence of universal life. And they did it more
for living benefits than for the death benefit. The advantage is under Section
101(A) of the Internal Revenue Code. This money in here accumulates tax-free. And
when you die, it blossoms, it increases in value so that if you've paid 300,000 and
you died the next day, the insurance companies on the hook. They have to pay
out a million. But that is in come tax-free. EF Hutton looked at that
and said, "Whoa! So, what if you could use that tax-free death benefit while you're
alive?" Well, yeah. You can actually do that. Your self insuring. So, Universal Life was
designed to say, "Hey, because we can manage this money better, we don't have
to put in maybe 300,000 for this first one that is age 40 or 45
or 50. Maybe you could get by with less money." So, you pay a single premium in
here. And you take the least amount of insurance the IRS will let you get away
with because the objective is not (1) having the most death benefit for
the least premium. Universal life was first brought out to have the least
amount of insurance that you could get away with under the IRS rules and put in
the most premium so that if you put in a half a million dollars, you're not trying
to buy a whole bunch of insurance. You want your half a million dollars to be
accumulating tax-free so that that half a million can generate 50,000 a year of
tax-free income right off the bat if you want. Or the half a million will double
every 7 to 10 years based on actual history of the interest they're paying.
So, 1/2 million doubles to a million tax-free. A million and another 7 to
10 years doubles to 2 million. And whenever you retire, if you have 2
million dollars and it's generating 7 to 10 percent, you could pull out
200,000 a year out of your 2 million dollars of cash
and now you're using it for a living tax-free benefit. And when you die,
anything left behind blossoms and transfers income tax free to your heirs.
But universal life was originally designed to be used as a living benefit,
But you can actually... It's called universal life because it's universally
applicable to maximum funding or you could pay actually a lower premium with
universal life than the whole life insurance require.
This forced whole life insurance to become more competitive. So, let me share
with you why this is so important because there are 5 parties that are
involved when you own a life insurance policy. So, what makes this so incredible
is that when Universal Life came out and it was primarily designed for living
benefits more than for the death benefit, the parties to an insurance contract and
insurance policy came into play more powerfully than ever before. There are
5 parties generally speaking to an insurance policy. The first is the
insurer. This is the insurance company that is taking the risk that if you die
sooner than later, they have to cough up the money but they know what they're
doing. They know what the mortality table is and they know that out of so many
thousand people at your age the number that will likely pass away. And they
calculate how much money you must pay into that policy so that they'll have
the wherewithal to pay out the death benefit. So, that's the insurance company.
And we use legal reserve insurance companies that have legal reserves far
more stringent than banks and credit unions. And they've weathered the Great
Depression with flying colors and 2008 when banks 400 went under and so forth.
There wasn't one single legal reserve insurance company that went under in the
Great Depression or in 2008. Now, you have 4 other parties. You have the insured.
So, that's the person that the insurance is on. Now, the owner is usually
the insured but it doesn't have to be. I'll tell you why. So, you have the
insurer, the insurered, the owner. Then you have the premium payor. The one
paying the premiums. That's usually the insured and the owner. But it doesn't
have to be. And then you have the beneficiary, who's that? That's the one
who receives the death benefit tax-free when the insured passes away. So, let me
share with you a little insight here. You can own an insurance policy on somebody
else if there's an insurable interest. Or you can own it. See, banks own insurance
policies on their board of directors. This is
bank owned life insurance. It's called BOLI. B-O-L-I. See, they want the tax-free
accumulation and growth because the owner gets all the tax-free growth and
tax-free income. It's usually insured but does it doesn't have to be. I own life
insurance on my children. I own it on my wife, I own it on my mother, my father, my
mother-in-law, father-in-law. Because I'm the owner of the insurance for the
tax-free death benefit. And also the living benefits. The beneficiary can be a
trust, it can be your children, that can be a charity. It can be whoever you name
the beneficiary. At first when the policy is taken out, you have to prove to the
underwriter that the beneficiary will suffer an economic loss by virtue of the
insured's death. But you can change the beneficiary after the policy is approved.
So, I can be a premium payor as a grandpa on policies that cover my children, my
adult children. The beneficiaries could be the family that the grandkids for the
college funding or what-have-you. And so, I can use different insureds, I can own
the policy or the trust can or what I call the family bank. And so, all these
different parties come into play. When you're using Universal Life for
retirement income which is what many people do, generally, the owner is the
insured but it doesn't have to be. The owner can be your spouse. It can be
another entity or your trust. So, there's a lot of dynamics here. I want to share
with you how you can learn more about how powerful this is. So, if this is
intriguing you, I would implore you to watch this episode next, episode 2
which talks about the history behind how EF Hutton came up with the idea and how
its structured to be a living benefit. But if you want to learn a lot more and
this is why I wrote my 11th book called the laser fund. It has 14 chapters with
all kinds of charts and graphs and explanations. But also on the flip side,
there are 12 chapters with 62 actual client stories. So, to get a free copy, you
can claim your free copy by going to
laserfund.com. You pay $5.95 shipping and
handling. And I will pay for the book and fire it out to you absolutely free.