Get grandfather to stay tax-free even if congress changes tax laws.
In this episode, I'm going to answer the question,
"What if congress or the IRS does away with
tax-free advantages of indexed universal life insurance?"
Get ready. I'm going to share some things with you that most advisors don't even
know.
So, I'm Doug Andrew and I've been doing this for more than 46 years.
Helping people optimize their assets with one of my favorite vehicles,
a max funded indexed universal life insurance policy since 1997.
Prior to that, a fixed universal life since 1980 when they first came
out. It is the only vehicle in the internal revenue code
that allows you to accumulate your money totally tax-free,
be able to access that money anytime, totally tax-free.
And when you ultimately die it blossoms in value it increases in value by double,
triple sometimes or more and it transfers income tax free.
Nothing else does that in the internal revenue code.
You can learn why and how in some of my other episodes
because that has been a sacred cow in the internal
revenue code for over a century. Since I think 1913
where section 72 E allows you to accumulate your money inside of an
insurance contract tax-free. Because you're taking pressure
off of the government to take care of widows and orphans or people in
retirement and so they give you tax advantages. If
they taxed it, then they would be shooting themselves
in the foot, okay? It allows under section 7702 for you to
access money income tax free because you're using it usually
for retirement and and you don't want to rely on the
government having to shell out money or welfare whatever.
And so, this will help people not be totally reliant on government programs.
And so it's been a sacred cow tax-free when you access money. And
section 101(A) of the internal revenue code says that
when you ultimately die, whatever is in there, it blossoms in
value and transfers tax-free. On that last point, let me just
illustrate by saying, "I'm 68 and a half right now. If i die tomorrow in an
accident, about every million that I would have
in indexed universal life insurance policies
would blossom to about 2.5 million and transfer income tax free
immediately to my wife, to my kids, my grandkids, a
church, charity, whoever I leave it behind to as
a beneficiary." Nothing else does that in the internal
revenue code. Allowing you to accumulate access and
transfer your money totally income tax-free. Municipal bonds don't do
that, Roths don't do that. They don't blossom when you die.
So, that's why it's one of my favorite vehicles or dream solutions for
many goals. Not just retirement, but college funding. Because you don't have
to wait till you retire to access money tax free. I have business owners
that use it for working capital and they're in their 30s and 40s. I have
people using it because they retired when they were 38
because they built up a business sold it and put the money into
a max-funded portfolio of indexed universal life.
So, when we talk about, "Golly, this is so phenomenal." People say,
"This sounds too good to be true. I'll bet you when the IRS finds this out,
I'll bet when congress figures this out, they'll take away those tax advantages."
Well, let me tell you what I tell them. Number 1, this is not a
secret. The IRS and congress is very well aware of these. They are the ones
who set the parameters, the rules. They say if you'll do it this way, it's
tax free. This is the smart way to take it out. Use
a loan instead of a withdrawal. They're the ones who say, "Hey, this is an
advantage." Why would they say that? I'll share with you why. But this is no
secret. They know what they are doing. It's not like, "This is a
loophole and when they find this out they're
going to close it up." They've been tempted sometimes. Sometimes
government revenuers I call them who are hungry for taxes, taxes, taxes
consider taxing these. And the last time they did that was in 1990.
And I'm going to tell you the 3 conclusions they came to when they were
getting greedy back in 1990. "Hey, let's
consider taxing the inside buildup of insurance
policy cash values. There are trillions in there. Let's go get some."
And this is the conclusions they came to. This was a report about this thick. I
still have a copy of it. It had a blue cover on it and it said,
"Should we tax the inside buildup of cash value inside of permanent life
insurance policy?" So, this also included whole life but especially universal life
because it was outperforming whole life by a lot even by 1990.
It had been around only for 10 years but they could see where this massive
exodus of money was leaving the banks, the credit unions, the brokerage firms
into these universal life policies because they
paid higher interest. They were tax free. They blossomed when you die
and nothing else could do that. So, they said, "Should we tax them?"
After months of study from the general accountability office,
the house ways senate and finance committees, okay?
They looked at all of it and these were the 3 conclusions they came up with:
Number 1, they were smart enough to do the math. And they realized that if
they taxed them and they took 20 or 30 percent like they
normally do out of income and what have you, if they tax
them because of the strain it would put on
people that were planning on that money for retirement, widows, orphans if you
die, if they taxed that and they took away 20 or 30 percent,
they would end up shelling out in additional welfare benefits to widows
and orphans and retirees who were out living their money.
It cost them (when they calculated it) way more than it made them. They were
smart enough to realize in the short run, we might
bring in this much tax revenue but in the long run we're going to shell out
this much. Now, congress actually does stupid things
like that many, many times. But in 1990, they knew better. So they
said, "Leave it alone. It will not make
us money. It will cost us money." Now, the second reason
is actually sort of comical. If you read between the lines, it was
because a lot of congress people own
these policies. And they didn't want to shoot themselves in the foot. They didn't
want to hurt themselves. A lot of banks, credit unions, owned these
policies and they didn't want to bugger that up so they said,
"Don't rock the boat. Leave it alone because this is where we have our money."
Okay? Now, the third reason. They basically said,
"If we ever did consider taxing these, (the inside buildup inside of a
insurance policy) we would recommend grandfathering
because the precedent has always been set."
So, what's grandfathering? That means congress
is never supposed to pass new tax law that adversely affects something you did
under previous tax law in this example. Your grandfather.
You don't have to abide by or adhere to the new
tax rules because you established your account. You took out your insurance
policy before those applied. And that precedent
has been set. So example, when universal life first
came out in 1980, quickly in 1982 the Tefra act was
passed requiring a certain amount of insurance
had to be attached to the account or it would violate the definition of tax
free under section 72(E) and 7702 and 101(A) of the internal revenue code.
They didn't know what they were doing and they had to redefine it in 1984 with
the deficit reduction act. So that's tefra, defra.
I had my first universal life policies prior to tefra and defra.
I didn't have to abide by tefra and defra on those. I was grandfathered.
I was home free. Same thing with tamra. I put in lump sums prior to 1988. After
1988, you couldn't put in one fell swoop and fund it in one single payment or
else you wouldn't have tax free access down the road.
I didn't have to comply with tamra on the ones I took out prior to 1988. I was
grandfathered. I never had had to comply with that. Only the policies I
took out since then. This is why many people hurry and are
taking out universal life insurance contracts and
getting grandfathered so if congress ever did anything stupid.
And tax revenuers wanted to change the tax laws,
they'd be grandfathered. Now, I can't guarantee grandfathering but
I think it's the exposed factor provision of the constitution that says
you're not supposed to pass new laws that adversely affect
something you did under previous tax law. Yeah, congress seems to get away with
doing all kinds of stupid things. But I feel pretty good that we're protected
here because the insurance industry is one of the
strongest lobbies in America and the world.
If they buggered that up, most of these congress people would probably be voted
out of office. And so, that's why I feel like
grandfathering will be here to stay because they've
always allowed it, the precedent has been set.
And that's why i like to put my money into something based upon the actual
history that will likely pass any scrutiny or
changes in tax law in the future which i think is highly unlikely in the
first place. So, if this is intriguing you and you
want to learn more, subscribe to this channel. Look
at some of the other educational videos that I have posted to
answer question about taxes, how to prepare for retirement and convert to
tax free and get grandfathered. I want to empower
you click on this episode next. And if you want, you'll have
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