Option B can allow more money to be paid into an IUL, but
beware. In this episode, I'm going to answer the question
"What is option B in universal life?" And I'll give you some clues on when you
should use it and when you shouldn't use it. Get ready.
You're going to understand some things that even life insurance agents
don't understand.
So, my name is Doug Andrew. I've been doing this for
more than 46 years. I got my insurance license clear back in 1974.
And one of my favorite vehicles to accumulate money tax
free and then allow you to access money tax free
at actual historical rates of return of 6 to 10 percent net has been
maximum funded indexed universal life insurance contracts. So,
when people ask that question --"What is option B?"
They must at least know they're talking about universal life.
So, most insurance companies say that option
B... There's 2 options. Option A, option B. Option B is what is called the
increasing death benefit option. Now, there's a
couple of outliers out there insurance companies that...
That's option A. But generally speaking, I would say over 95%
of insurance companies say that option B is the increasing death benefit
whereas option A would be called the level death benefit.
And I'm going to show you when you should use one
versus the other. So, let me explain this. And if you're a little bit confused,
I want you to stay with me or you can click on the link below and
get a copy of my 300- page bestselling book The LASER Fund.
I'll pay for the book. You just pay $5.95 shipping and handling
and you can learn more detail about this. But when you set
up a universal life insurance policy for what it was originally designed for
--living benefits more than even the death
benefit, then you're trying to get the most premium
into the policy as fast as the IRS allows for the least amount
of death benefit they will let you get away with. And so,
you're trying to put in the most money. So, let me simplify this. It doesn't
matter if you're stocking away, a thousand a month, 10,000 a year,
100,000 a year, a million, 10 million. Let's use a
$500,000 example. So, if you want to be
grandfathered or allowed to pay into a universal life insurance
policy, a grand total of $500,000
you used to in 1980 be able to put that in in one
fell swoop. And if you were earning 10% which
many were back then from 1980 to 1990, I had
clients put in a half a million and they started
pulling out 50,000 a year tax-free. Their interest and they've been doing it ever
since without depleting principle. It's incredible and it's tax-free.
Well, congress made some laws in the 1980's.
They're known as Tefra Defra and Tamra. You can learn about these on this
YouTube channel. And that basically said, you can't put in
the full lump sum if you want to have tax-free income. It's
always tax deferred. When you die, it blossoms and transfers
income tax-free. But if you want tax-free income,
you cannot put that all in at once after June 21st
1988 under that tax citation. And so, the most you can put into a
universal life generally speaking especially if you're over age 50
is about 20% a year. So, that would be 100,000. So, let's say you put in a 100,000
the first year. And you can put in another 100, the
second year you can have up to 200,000 in there.
Then 300. And then 400 and then in 4 years,
and one day, you can finally put in the last 100,000.
Since you slowed the flow, you took 4 years in one day
to get the money in there, now forever after,
when you take money out of this, it's tax-free.
If your objective is to get the highest net internal rate of return as possible,
you're doing the opposite of a normal insurance policy.
Instead of trying to get x amount of death benefit for the lease premium,
you're trying to put in the most money that you
want to be grandfather. You don't have to. You're not obligated to put that much in.
But that's what you want to. You want to take the least amount of insurance
the irs will let you get away with. So, I'm going to take a 60 year old as an
example. A 60 year old could buy a grundle of
life insurance with a half a million bucks. I mean you
could buy millions. That's not the objective.
The IRS says, "Well, if you're doing this for living benefits, the minimum
would be a million, okay? A 1.25 million, okay? That'd be $1,255,000
of insurance. Now, that insurance
when you purchase 1.25 million, 1,250,000 of death benefit
and you put 500,000 in there, if your objective
is to have the highest internal rate of return, in other words, in
the 46 years that I've owned them, I averaged 8.2%
from 1980 up until 1997. After 1997, indexed
universal life came out. You can learn about that on this YouTube channel.
And I've actually averaged 10.07%. But some years, I don't earn anything.
Other years, I've earned 25%. But if that's what you're trying to do
and then you want the cost of the insurance
that the irs says has to be there or it will not be
tax-free. It goes to another section of the code which are taxable investments.
And most investments are taxed sooner or later.
Later even IRS and 401Ks. Of course are taxed later. Then
you want to have the least amount of death benefit. So, at age 60, it would be a
million 250. Now, option A, when I take it out and by
the way, you can switch the options anytime you want as many times as you
want. Option A says, "Hey, under these Tefra and
Defra tax citations, this money, this
100,000, this 2 hundred, 3 hundred, the money I put in, this 500,000
can qualify as part of the death benefit. So, that means if I put in 500,000
and I die, the death benefit is still a million and two fifty.
Okay? People say, "What? Your money is part of the death benefit?"
Yeah, if that's your objective is to have the highest net internal rate of
return, here's why. You put in 500. Now, 500 of the million
two fifty of required death benefit is your own money,
the insurance company is only at risk for what? The remaining 750,000.
They will only charge you for the amount that they are at risk, 750. Now, I put
500,000 into an indexed UL and in 7 years
it doubles to a million. So now, it's a million.
Now, they're only at risk for the difference between a million which is my
own money. And the remaining 250,000. And so,
they're only charging me for 250,000 the net amount at risk. Now, you take the
million and it doubles in another 7 years to
2 million. Well, that's more than the original death
benefit? So, the tax citations tefra and defra says,
"Well, the death benefit now will grow with
your money. And it has to stay 5% ahead of
it." So, when my million doubles to 2 million of
cash value, the death benefit is 2.1 million.
So, they're only charging me for 100,000 net amount at risk.
And the charge for that is way more than covered with the interest on the 2
million dollars of cash value that's tax-free. This is why option
A will help you accumulate the most money and basically the cost of
insurance will go down as you get older. That's why it's
the preferred option. If that's your goal is the highest amount
of net spendable income. If you want to earn
like I have 11 and that 10 on the average,
you choose option A, the level death benefit because you're self insuring.
So, when do you use option B and what is it?
So, with whole life insurance, a lot of times people
tell you or insurance agents say, "Well, don't you
want the cash value added on top of the death benefit?"
Well, if you're doing it primarily to maximize what you leave behind,
if your number one objective is maximize what you leave behind,
yes. So, option B says that when you put money in there
and this money grows you know a half a million doubles to a million and then a
million doubles to 2 million. That cash value is added on
top of the death benefit, the original
required death benefit. So, you're always going to be paying for
1,250,000 of life insurance. Now, insurance gets more expensive as you
get older. So, that's going to keep going up because
you have to keep paying for 1,250,000 under option B.
But if you happen to die, all your cash is added on top of that.
But the cash won't grow as well as it could have
if you allowed it to be part of the death benefit.
But if you want to maximize what you leave behind that if all your money
growing to a million, 2 million is added on top of that,
there's a trade-off. That means if you earn 11 you won't net 10.
You might earn 11 and only net 6 or 7 or 8.
But if you want to maximize what you leave behind, you may want to choose
option B. When do we use it? Well,
if somebody is going to primarily fund their
insurance policy out of income and they want to put it in
in 7, 8,10, 20 years, we might use option B to get more money in over a
longer period. But there's probably going to be
somewhere down the road where you will switch to option
A once you've finished funding. It just simply allows you to
be able to put in more money as you go. Or
let's say you're under option A. And all of a sudden... This has happened a
few times. Maybe five percent of the time with my clients.
You find out that you are diagnosed with a terminal illness. When that happens and
you know the doctor says you've got 2 years or
less, you may want to switch to option
B. That doesn't mean the original death benefit is added on top of your cash. It
means whatever it is at the moment you switch,
all cash value from that moment forward will be added on top of the death
benefit. Because all of a sudden your objective
changed from, "Hey, I'm going to live 20 or 30 years and I want the highest net
internal rate of return. I want every million to pay out
80 to 100 thousand a year. Now, if you don't care about
it because you're not going to be around, you want to maximize what you leave
behind, you can switch to option B. And the money that grows
inside of there from that point forward is that
added on top of the death benefit to maximize what you leave behind to your
beneficiaries. But that's about the only time we use
option b, is if people sort of want to fund it or
they're they're taking money out of iras or 401Ks
and instead of doing it in 5 years in a strategic
rollout is what we call it, they spread it out over 20
years. Well then maybe you can choose option B to begin with. But
generally speaking, if you're trying to have that the greatest internal rate of
return, the cost of the insurance be as small as it possibly can as soon as it
can, option A the level death benefit is
the best option because your cash qualifies as part of the death benefit
and you are self ensuring. Pretty soon, the
amount of risk is so small that the interest on all your money
tax-free is way more than covering the cost of the insurance. The
insurance is actually getting cheaper as you get older
under option A. That is usually the one that we use.
So, if you've been going, "Whoa! I never understood this before."
Hey, I don't blame you. Most insurance agents do not understand what i just
taught you. If you want to learn more, again, claim
your free copy of this book LASER Fund. It's a 300-page book
with all kinds of charts, graphs explanations. And you flip the book over,
there's 12 chapters here with 62 actual client stories.
You will learn about this and many other features of max funded indexed universal
life. And then you'll understand why option A
is generally the best way to go. To get your free copy, you can click the
link below. Go to Laserfund.com. You simply pay 5.95 shipping and
handling and I'll pay for the book. And you pay for the shipping and begin
to learn and empower yourself on how to accumulate access and
transfer your money totally tax-free.