- The cash value of an IUL
can equal and exceed the original death benefit
in as little as 12 years into the policy.
In this educational episode, I'm going to address the myth
that an IUL insurance policy will implode,
what sometimes they say will crash and burn, lapse,
you can't afford it anymore as the older you get.
So as you get older, it's gonna cost more and more
to where you can't afford it.
It's gonna blow up.
Nothing could be further than the truth.
Get ready. I'm going to dispel this myth.
(upbeat music)
So I'm Doug Andrew,
and I've been helping people optimize assets,
minimize taxes and empower their authentic wealth now
for five decades, but when I do this,
it's helping people accumulate money,
tax free is my favorite method,
(bell ringing)
and then be able to access that money tax free
during their working years, but when they retire,
to be able to turn on tax-free income
that will last as long as they do.
Now, being a retirement planning specialist
for now five decades,
I have noticed that there are three big dangers
that cause most retirees to outlive their money,
and it's been true for all five decades:
taxes, inflation, and market volatility.
As of the recording of this episode,
we're being hit with all three of those at once,
and so people get concerned
because they will outlive their money.
Inflation, when it starts hitting 15%,
which is what it was last year
as of the recording of this episode,
now, I don't care if the consumer price index
was only eight.
You need to triple that
because of the way they report inflation.
They don't include things
like the cost of gasoline and so forth,
and they can compare the price of
an eight-ounce filet minion steak last year
to hamburger this year.
They passed those laws back in the 1980s
so they wouldn't have to pay Social Security recipients
the real cost of living increase,
but we have to deal with inflation at 15% now.
Divided into the rule of 72,
your cost of living is gonna double in 4.8 years.
So if you can get by on 100 grand a year now,
in less than five years, you're gonna need $200,000
to buy the same gallons of gas and loaves of bread
that 100,000 buys today.
So inflation takes its toll.
Taxes, you have a million-dollar nest egg,
and if you need a net of 100,000 after tax,
you have to pull out 150,000, pay tax of 1/3,
33% tax bracket between federal and state,
to net $100,000 to buy gas and groceries.
Well, if you're earning even a 10% rate of return,
a million-dollar nest egg is gonna drain dry in 11 years.
You're gonna outlive your money.
See, I would rather have a million-dollar nest egg
in an IUL policy that can generate 10% tax free.
I wanna have $100,000 a year of tax-free income,
and it doesn't matter if I live 30 years.
I still have my million in there,
but I got several more years, 20 more years of 100 grand.
That's a $2 million better retirement strategy.
Plus I still have the million.
It's a $3 million better strategy
than the same amount of money in an IRA or 401k.
Does that make sense?
And then we don't wanna have our money at risk
in a volatile market during retirement.
We need predictable income.
We can't have heartburn over the market going down.
So many times we have critics out there
that don't understand IUL,
and so the myth starts around that an IUL insurance policy
is just gonna get more and more expensive as you get older.
It's gonna crash and burn,
and I can't believe how many insurance agents believe that
because they're only selling whole life insurance,
and whole life insurance has these guarantees in it.
They have to pay more money into it.
The rates of return, you know,
if you're using whole life insurance
for retirement benefits,
ask the whole life agent to give you an illustration
of the tax-favored income on a whole life policy
starting at age 60 or 65 and see how much they can generate
to maybe age 120.
I can have an IUL policy blow them outta the water
because whole life was primarily designed for death benefit
on that kind of a chassis.
Can you use it for living benefits?
Yeah, but if you really wanna use an insurance contract
for living benefits to be able to earn rates of return
that are usually at least 2% higher
than the same rates of return in whole life
and have the costs be only 1%
of the actual gross rate of return,
what am I talking about?
Do you know that ever since 1980, I've averaged 9.62.
So if I'm earning 9.6, I'm netting about 8.6 cash on cash.
Only 1 percentage point of the money that I've been earning
is paying for the cost of the insurance
retroactive back to day one,
but because I've been using rebalancing and diversifying,
my actual rates of return,
especially since indexed universal life
was introduced in 1997,
the average return has been 11.17 and netting 10.07.
So if I own a universal life insurance contract
and I put in 500 grand and it doubles to a million
and then a million doubles to 2 million,
and some people, it doubles to 4 million and 8 million,
the actual cost of insurance is now next to nothing,
and a lot of agents go, "What are you talking about?"
Because they're used to whole life insurance
or maybe somebody who set up a universal life
on an increasing death benefit
and never changed it after it was funded.
I address these issues in other videos.
So let me explain it this way.
When you set up an IUL policy correctly,
you want it to accumulate your money tax free
under Section 72e of the Internal Revenue Code.
Whenever you access money,
you want to be able to do that income tax free
under Section 7702, and at the end of the day, when you die,
you want anything left in the policy,
the cash value to blossom and increase
and transfer tax free.
You want it to transfer tax free.
Now, in order to do that,
you take the least amount of insurance
the IRS will let you get away with,
and you put in the most premium the IRS allows
because your goal is to self-insure.
You want your cash value to equal
or exceed the death benefit within 12 years,
no longer than 20 years,
and I can't believe how many insurance agents
don't know how to do that,
and so you have to comply with three tax citations,
the Tax Equity Fiscal Responsibility Act of 1982
and the Deficit Reduction Act of 1984.
These bill acronyms, TEFRA and DEFRA.
This dictates the minimum amount of insurance
based upon your age, gender and your health
that's required on the account
to accommodate the amount of money you wanna put in there
to grow tax free for your retirement, okay,
or whatever goal you're doing it for.
Now, TEFRA and DEFRA gives parity.
If you're older, if you're 55, 60, 65, 70, 75,
I had a 78-year-old friend of my family in 1980.
He had three blocked arteries,
adult onset diabetes, a prostate cancer episode,
six sisters predeceased him and three brothers,
and so he was rated Table D.
That means the actual cost of insurance
is double what it is for normal people.
That wasn't the objective is the insurance.
So we were able to cut down
his insurance benefits substantially
so that he could put in his $500,000 and earn 11 and net 10
so he could immediately start pulling out
50 grand a year tax free 'cause this is pre-TAMRA.
In 1988, the TAMRA law was passed
because the banks and the brokerage firms
couldn't compete with these.
These are safer. They pay higher interest.
They're tax free, and they blossom when you die.
Banks and credit union accounts don't do that.
So TAMRA is the Technical
and Miscellaneous Revenue Act of 1988,
and it means that if you want to have tax-free income,
you've got to spread out the funding
over four years and one day if it's universal life
and you're over age 50, basically.
If it's whole life, you have to take six years
and one day or seven pay.
It's called the seven pay test.
So I've often used this metaphor of a bucket.
So you're designing an IUL like a bucket,
and you want to accommodate the amount of money
you want to put into it, okay?
And so if you're repositioning
over the next five years, let's say, $500,000,
and it can be for a million, it can be for 500 a month,
but let's just say it's an older person
and they're repositioning money.
They're rolling money out of an IRA or 401k.
Maybe they're selling a rental property
they're sick and tired of being the landlord on.
Maybe they're repositioning money.
They got a settlement from a car accident,
or maybe it's money sitting in a bank or credit union
earning a pathetic rate of return of 2 or 3%.
So they come up with $500,000.
According to TEFRA, DEFRA and TAMRA,
they can only fill it up about $100,000 a year,
100,000 the first day of the first year, the second day,
the first day of the second year, and so forth.
So in four years and one day,
technically they could get their 500,000 in there.
Now it's sort of grandfathered to be tax free forever after
when you access money under Section 7702, okay?
Now, here's what a lot of agents don't understand.
They think that this client is gonna have to pay
for a million dollars of life insurance
the rest of their life.
Well, if this performs well, that's not a big deal,
but if they earn 11, they might only net 7 or 8.
I'm a perfectionist.
If they earn 11, I want them to net 10%
retroactive back to day one,
and so I use the level death benefit.
A lot of agents, they don't understand this, that, you know,
they hear phrases like, "Level is the devil."
No, if you're in your thirties
and you're socking away 500 bucks a month into one of these,
then you use the increasing death benefit until when?
Until you stop putting in 500 a month
and you're through funding it.
Then you switch to level death benefit
if you want the spigot on the bucket
to get smaller as you get older.
What's that? The cost of the insurance.
You ever seen an insurance policy
that gets cheaper as you get older?
Well, then you haven't seen one designed like this
'cause it will not crash and burn.
You will self-insure in as little as 12 years.
Here's how.
If I get my $500,000 in there in four years and one day,
okay, and if I earn, well,
let's just stop at that point in time.
If I have 500,000 in there,
and it's gonna be a little bit more than that
because it's earning interest while I'm filling it up,
at that point in time under the level death benefit,
the net amount at risk is now only half of this million
because 500,000 of that million-dollar death benefit
is my own money.
I've self-insured.
See the whole end goal of buy term, invest the difference
is to be able to have enough money
that you can get rid of the insurance,
accumulate enough money that equals the insurance.
That takes 30 or 40 years with buy term,
invest the difference strategies.
Here, in five years, 500,000
is half of the death benefit.
The insurance company is only charging me
on the spigot on that bucket for half as much coverage
as they were charging me five years earlier,
and even though I'm five years older,
the cost of insurance hasn't gone up that much.
The interest I'm earning on $500,000
is beginning to dwarf the cost of the insurance
on the net amount at risk.
Where did I get this million? That's under TEFRA and DEFRA.
That's a minimum death benefit for a 60-year-old, okay?
You can buy way more life insurance than that for 500,000.
That's not the objective.
So if I'm earning 9.6%, let's say,
you divide that into the rule of 72.
Your money will double in 7 1/2 years.
Many of our clients that have IUL
have earned higher than that,
but let's just say they're netting 9.6,
and so this is gonna double to a million
in another 7 1/2 years.
So on the 12th year of this policy, their cash value,
the 500,000 has now doubled to a million.
The cash value equals the death benefit.
Huh. How much is the insurance company at risk for now?
Nothing.
TEFRA and DEFRA says if you happen to die,
they need to pay out 5% more than that, 1,050,000,
but they're only gonna charge you for 50,000.
The cost of insurance for 50,000
compared to the interest you're earning on a million
is minuscule.
See, a million dollars,
there's some years that our IUL policy holders
have capped out at 25% on a million bucks.
My client in 2017 made 1/4 of a million.
So he made 1/4 of a million on his million,
and the cost of the insurance, because he was self-insured,
was only, like, 3,000 bucks.
It's minuscule.
It's not even, it's negligible.
So what happens when the million then doubles?
If you don't need to start taking out income,
if you needed to, you have a million in there.
You can start pulling out 100 grand a year
without depleting principal based on actual history,
but if you're not ready to take out income,
you want it to keep growing tax free,
a million should double to two million within what?
Another 7 1/2 years.
So now we're talking about the 20th year into this policy.
The cash value is two million.
The death benefit if you die is 2.1 million,
but the insurance company's only charging you
for 100,000 net amount at risk.
The cost, even though you're 20 years older,
for 100,000 of insurance compared to earning 25%
in a given year on two million,
that's a half a million bucks.
It's minuscule.
So see, when agents who sell whole life go,
"No, indexed universal life, it'll crash and burn.
It'll implode.
The cost of insurance will make this thing crash and burn,"
I go, "You haven't seen one structured correctly.
You don't even get it."
They don't realize that the cash value
ofttimes within 12 to 20 years
grows to equal and exceed the death benefit.
So the cost of the insurance is really nothing.
In other words, when a whole life agent says,
"Well, with whole life, you get guarantees,"
guarantees for what?
Guarantees that the death benefit will stay in force
until you die.
Well, it looks like with my IUL,
I got that guarantee within 10 years.
So what does it mean to guarantee that
when this keeps growing and my death benefit
goes up to two million, four million, eight million?
Why do I need whole life guarantees?
See, a lotta times they simply don't know
what they don't know.
So if this is helping you make a decision,
I want to gift you a copy of
my most recent bestselling book.
It's called "The LASER Fund,"
and it's been flying off of our warehouse shelves,
and you can go to Amazon and purchase one for 20 bucks,
and you'll pay another, what,
10 bucks for shipping and handling.
If you do that, thank you,
but I'll gift you a copy for free.
Simply go to laserfund.com or click on the link below,
and when you get in there to claim your free copy,
you contribute a nominal amount
towards the shipping and handling, okay?
I require a little bit of skin in the game.
I'll cover the rest of that cost, and I'll pay for the book.
I'll fire out a hard copy to you via priority mail.
When you're in there claiming your free copy,
check out the audio and video formats
if you'd like to listen and learn or watch and learn.
There's also educational webinars we do on a regular basis.
They're free. You can register for one of those.
Also, you can even schedule an appointment
with an IUL professional that I oversee
that has passed a proficiency exam,
and they can talk with you, meet over,
go to a meeting or a Zoom meeting or call you,
whatever you like to do, and they will set up one
and create illustrations at no cost or obligation.
Does that sound fair enough?
(upbeat music)