More flexibility, higher returns. In this episode, I'm going to address the
question, "What is the difference between whole life insurance and max funded IUL?
How do they compare?" You're going to be blown away with what you learn.
So, my name is Doug Andrew. And I have studied in depth life insurance for more than 45
years. And so, let me give you a little history behind whole life and universal
life. Actually, every insurance policy has a term insurance component. So, you've
probably heard of term insurance and permanent insurance. Or what is typically
called whole life insurance. For years, the term insurance is simply a policy
where you pay your a cost or risk of dying in a given year.
So, the premium may go up every year. Or you may pay a 10-year level premium and
the insurance company is charging you the average cost for that risk.
That's term insurance. But see, whole life came out when people said, "You know what?
Instead of having to pay a higher premium every year that I get older, I
would like to pay a level premium." So, I'm willing to wait over pay the early years
that I own this whole life policy because it's going to cover me for my
whole life. So, I wait overpay the actual cost of the insurance or the risk during
the early years. And I build up excess equity or cash value in that policy
because I'm way over paying in the early years. That means later at age 60-
65, I'm actually under paying. But all the cash value that has accumulated
in there where the insurance company is paying me interest is now covering the
higher cost of insurance. Because insurance is based upon the cost
per thousand of coverage and it gets higher as you get older. Well, not if the
amount of insurance that is at risk goes down. So, as you build up cash inside of
an insurance contract, that can qualify as part of the death benefit. It can also
be added on top of the death benefit. But see, there was traditionally just term
and whole life. And frankly, from 1974 when I first started as a financial
strategist until 1980, I was a huge proponent of buy term insurance and
invest the difference instead of whole life. Because mathematically, I could
prove that the traditional whole life insurance policy. Only credited you maybe
3.5, 4, 4.5 percent. There may be some companies out
there that would tout 6, 7, 8 percent dividend rates. But let me tell
you a little secret here that many of their agents didn't even understand. But
before I go any further, let me say, "Hey, whole life insurance isn't bad." I mean,
it's very good for death benefit purposes. There are many times people
need a guaranteed death benefit to be able to pay off debt or some obligation
or to provide for somebody. And they want to make sure that that death benefit
will be there regardless. And so, there are certain guarantees afforded in most
whole life insurance policies if that is your primary goal. Now, when I talk about
max-funded IUL, I'm talking about usually a primary goal being capital
accumulation to accumulate my money tax-free and be able to generate
tax-free income. If that's your primary goal and the death benefit is secondary,
I can show you how indexed universal life has far more flexibility. And the
ability to generate more tax-free income by far for as long as you live than a
whole life insurance policy. And I'm going to explain why. So, universal life
with the brain the EF Hutton clear back in 1980. And
their purpose was to maximum fund it and use it for living benefits. Not for just
a death benefit. In other words, where people could put in
$500,000 and let it grow and double to a million. And that million
doubles to 2 million. And when they had 2 million of cash value to be able to
generate 200,000 a year of tax-free income. If that's your objective,
whole life insurance does not have near the flexibility. For example, when you
take out a whole life insurance policy, you're sort of on the hook obligated to
pay a certain premium for a certain number of years.
Not on all policies. But see there's not as much flexibility. Universal life, you
can put in more money, you can skip years, you can skip payments. If I want to
accommodate $500,000 over a five year period. And I
put in $100,000 the first year, I could skip the next 4 or 5, 10
years and not put in a dime. And then start picking up and putting in money
into the universal life policy. I can put in the other 400,000 in
one fell swoop. You don't have that kind of flexibility with whole life insurance.
You're obligated for a certain amount. But I used to train insurance agents. In
fact, I had over 3,000 come through my intensive 3-day training. And I had
some of the top hole life insurance agents in America come through my
training. And they were blown away. One had a very reputable company that touted
8% dividends. I said, what is the internal rate of return on your
whole life policy? He goes 8%. I said, "No, it isn't. I'm talking about
internal rate of return." He goes, "Well, I've never been taught that term." Hmm, I
wonder why. The internal rate of return is this: You calculate based on the money
you paid in premiums. At the end of the day, if this is the cash value they say
you have, you put that cash value in to the calculation, the amount of premiums
you paid at the frequency you paid them and you calculate what interest rate
would you have to be earning to end up with this much money. It wasn't 8%.
It was 5.9%. And it took until age
70 before it did that. It was until age 95 before the internal rate of
return was it within 1% of the growth rate of return of 8. In other words,
he was earning eight but only netting 7. But it took until age 95 to
achieve that. At age 65, when most people retired the internal rate of return was
2% less. It was 5.9% instead of 8. That's whole life insurance. He had
no clue how to compute internal rate of return. Because whoever trained him
didn't want him to know that that was an important calculation. With the same
money in an indexed universal life insurance contract, if I put that in, I
have average 10% and netted 9. I can earn 11 and net 10. I can earn 10, I
can at 9. I can earn 9 and 8. The whole life policy earning 8
which most now don't earn. Only netted 6. So, I can earn a higher rate of
return with more flexibility as I'm funding it. I get the money in faster
under the Tamra law. I can fill up to the maximum level on a universal life the
policy in 5 years. Whole life takes 7 years. It's called the 7 pay test.
So, I can get the money in faster. If I want to get in a million, I can get it in
200 grand a year for 5 years. I have to wait 7 years to fund a
whole life policy and it will generally earn a lower interest rate. And it will
not generate the same internal rate of return. So, the point is this: I have more
flexibility with universal life. I usually earn much higher rates of return
by 2 or 3 percentage points. If I earn 11, I net 10 which is what I've
been doing for the last 25 years while most whole life policies have only
been earning 8 at best to net 6. Hello! And so, I like the flexibility. I
like to be able to fund it faster. It will grow to more money. I have more
options. I can participate when the market goes up and not lose when it goes
down on and on and on. So, other than that,, I don't have any
strong feelings on this subject. So, what's the takeaway on this? If you want
to see the real difference, ask a whole life insurance
agent to generate a predictable income stream based upon the amount of premiums
paid into the policy over a time period and then take out tax-free income to age
120. And then have somebody who understands how to structure a max-
funded IUL do the same amount of money. The rate of return based on historical
averages and show how much income could come out. And I assure you it will knock
the socks off of the whole life policy as far as predictable income. One last
feature that I love about IUL compared to whole life is if you are
into the banking concept, be your own banker, bank on yourself. They usually
promote whole life. Now, that's good. But what they usually show you is borrowing
money out of your whole life policy to run your business or buy a car or
whatever. Yeah. You're borrowing your money. Why would you do that? Because you
keep earning interest. But hello! If you borrow money out of the whole life
policy and they charge an interest rate and they only credit you maybe 1 or
2 percent higher, that is not going to be as good as a max-funded IUL. for
example, our clients, business owners or retirees who use indexed universal life,
they take it out the smart way because it's tax-free. So, if they borrow it out,
they are charged 4.6%. Now, if you just want zero watch loans,
you can borrow it out at 2 or 2.5%. And the insurance
company will credit you 2.5% on the collateral that is in the
policy that is held there to give you the loan. Because if you take it out the
wrong way, you may subject yourself to taxes that are unnecessary after you
recovered your basis. That's the stupid way to pull it out. If you use loans, do
you ever have to pay them back? No. They're not doing payable during your
lifetime. They're washed away with the death benefit. Why would you borrow your
money? Because if you choose, they'll charge you. Let's say 2.5%
and credit you 2.5%. It cost you a net of zero but it
makes your income tax-free. But what I do and what most of the clients do
that are trained with index loans is they borrow out let's say at 5%.
I had a business owner that borrowed a million dollars out of his
policy in 2017. He said, "I want to do the index loan. Charge me 5%." What's
5% on a million? 50 grand. He doesn't have to write out a check for
50,000. It's deducted from the interest he kept earning on his million because he didn't
withdraw it. He left the million there. He borrowed a million with his million as
collateral. What did that million earn that year on his index policy?
25%. What's twenty 25% of a million? 250 grand. He
made 250,000 of interest on his cash value on the
million while he was using a million loan out of that policy at 5%.
So, 250,000 minus 50,000. He netted
$200,000. 20% tax free rate of return net on his million while
he was using his million for his business. You cannot do that with a whole
life policy. So, if this is intriguing you and you want to learn and the answer to
this question and many more, subscribe to this YouTube channel. But also, I would
encourage you to get a copy of my most recent best-selling book the Laser Fund.
It is 300 pages of charts, graphs and explanations and 62 actual
clients stories. I will buy the book, okay? I want to gift this to you free. You just
go to laserfund.com. Pay $5.95 shipping and handling. And I will fire
out a copy of this to you absolutely free. You can learn why this is the
superior vehicle of my choice for serious cash in retirement. If it were me,
I would have 40 to 60 percent of my retirement income coming at a 8
to 10 percent payout totally tax-free. Wouldn't you?