- A minuscule portion of the taxes you'll save
will pay for tons of life insurance coverage.
In this educational episode,
I'm going to address how do you self-insure with IUL?
This is one of the most common misunderstood concepts
with life insurance.
Get ready.
(upbeat music)
So I'm Doug Andrew.
I've been a financial strategist
and retirement planning specialist now
for nearly five decades,
helping people optimize their assets, minimize taxes,
prepare for a comfortable retirement
so they will not outlive their money.
And one of my favorite financial vehicles bar none
to help people achieve their goals,
having their money be liquid,
safe, earning a predictable rate of return,
and also being totally immune
from the negative impact of taxes,
inflation, and market volatility.
Those three negatives, those three dangers
are what caused most retirees to outlive their money.
So I make people immune from those.
What vehicle does that?
It's a max-funded indexed universal life insurance contract
structured correctly and funded properly.
If it is, it is deemed what I call a LASER,
L-A-S-E-R, fund.
LASER's an acronym
that stands for Liquid Asset Safely Earning Returns, okay?
And so at the end of this episode,
I'm gonna gift you a copy
of my most recent bestselling book called "The LASER Fund,"
so that you can understand this
because there's so many misconceptions out there
and whenever I hear people criticize or say,
"Well, how do you self-insure?"
They don't know what they don't know.
So here we go.
I want to use this insurance contract for living benefits.
It is the brainchild of EF Hutton back in 1980
and they designed universal life
to be used primarily for living benefits
not the death benefit for tax-free accumulation
and tax-free income
that would knock the socks off of, you know,
accounts like IRAs and 401ks.
Now, what EF Hutton realized back in the 1970s and '80s
is that in the Internal Revenue Code, for decades,
and now it's been 108 years,
there's really only one vehicle
in the Internal Revenue Code
that allows you to accumulate money tax-free
under section 72e of the code
and then allows you to access that money,
all the growth and gain
when you do it the smart way, tax-free.
And that's under section 7702
of the Internal Revenue Code.
And then at the end of the day,
when you pass away,
whether it's at age, you know, 40, 60, 80, 120,
anything left in the account transfers tax-free
and it usually blossoms,
it increases in the value and transfers tax-free
under section 101a, okay?
Now this is insurance, life insurance.
I'm talking about permanent insurance.
But up until 1980, there was only whole life
and that accumulated money tax-free
and they were okay,
but they were primarily designed on a chassis
for death benefit to guarantee that the money
would transfer in a tax-free death benefit
when you ultimately died.
And so you had to pay a certain amount of money into it
to have those guarantees,
but it was primarily to guarantee the death benefit.
And so EF Hutton just said,
"We can get rid of the need for those guarantees
in short order by maximum funding it
and having people self-insure within five years or less."
So this was the emergence of universal life
and to this day there are a lot of agents
that don't understand this,
and you hear, you know, the Dave Ramsey say,
"Oh, the problem with life insurance
is it's got this ART, an annual renewable term,
component in it
and the cost of insurance goes up higher and higher
the older you get."
Yeah, the cost per thousand goes up.
Yeah, and then he stops, because bless his heart,
he doesn't get it.
The cost per thousand goes up,
but the amount of thousands
that the insurance company is charging you
is going down dramatically.
And so you ultimately are self-insured.
There is no cost of the insurance
because your cash value equals
and exceeds the death benefit usually within 12 years.
This is called self-insuring.
So please watch how this works.
Under these sections of the code
and the money accumulates tax-free,
you can access it tax-free.
When you die, it blossoms and transfers tax-free.
Now because this was introduced in 1980,
there was a massive exodus of money
that began to leave the banks,
the brokerage firms and so forth into these.
And I had clients put in 500,000 bucks
in 1980, '81, '82 in one fell swoop
and they could put in 500,000
and they actually could do that
clear up until June 21st of 1988.
And back then it was a high-interest environment
and the general account portfolios
of the insurance companies were earning
on their Triple-A and Double-A bonds
and mortgages on shopping mall and skyscrapers
between 11 to 15 or 16%.
Interest rates were high.
My mortgage on my house at that time was 12%
and the second mortgage was 18%.
CDs that banks were paying and interest rates are relative.
So when I started putting money into universal life
and I had clients doing this,
they would put in 500,000
and they earned between 11.75 and 15.5%
through the 1980s to the early 1990s, okay?
And then indexed universal life came out in 1997
when interest rates started coming down
so that people could still earn, you know, 11, net 10,
but let's just round down to 11
'cause that's what I've averaged now
ever since 1980 is 11.17,
by rebalancing and diversifying
and also by making sure that we rebalance every single year.
Now a lot of times advisors think they know
what I'm talking about and they don't
and they tout diversification in their mutual funds.
They tout rebalance in a portfolio,
but then they close off their mind
when I start talking about the same thing
with indexed universal life and they don't get it.
And it's like you don't even get it then
for your own investments that you're proposing.
So what happened is this money was leaving
into the insurance policies and the IRS came and said,
"We think you're violating or overstepping
or trespassing these sections of the code
because who puts a half a million dollars
into a dinky, little life insurance policy?
Maybe a hundred thousand dollars policy."
Did you understand what I just said?
People were putting a half a million
into a hundred thousand dollars death benefit policy
and the IRS said, "Who does that?"
And EF Hutton said, "Our clients do."
Well, then, in 1982 and 1984,
under the Tax Equity and Fiscal Responsibility Act
and the Deficit Reduction Act,
the IRS convinced Congress
to pass these tax citations that said,
"Come on, in order to not violate the definition
of tax-free life insurance,
you've got to have a commensurate amount of insurance
coming along for the ride, attached to the account,
so that this doesn't move over to the taxable section
of the Internal Revenue Code investments."
You've got to stay under the insurance protected
tax-free portion of the code, these sections.
And so TEFRA and DEFRA basically said
that you had to have a minimum amount of insurance attached
but you could take the least amount under TEFRA and DEFRA
that the IRS would let you get away with.
And now your money turns into this tax-free cash cow
and the cash can equal and exceed the death benefit
if you wanted to.
So stay with me and I'll show you how.
And then because there was a massive exodus of money
leaving the banks and brokerage firms into these
'cause they were safer,
they paid higher interest, they were tax-free,
they blossomed when they died, they couldn't compete.
So June 21st, 1988,
under the Technical and Miscellaneous Revenue Act,
they said "We wanna slow the flow.
We don't wanna kill these."
Why?
Well because this is where banks and credit unions
put 30 to 40% of their Tier 1 assets
for liquidity and safety.
They borrow money from the public, OPM, and pay one or 2%.
They turn around and make four to 8%
in insurance companies that are safer,
six notches higher in safety generally, okay, over banks.
They reposition the money you're putting in the bank
to make it more safe by putting it into insurance companies
in BOLI, bank-owned life insurance,
and they turn around
and make four or five times what they pay you.
That's called a four or 500% return.
This is how money works.
You can bypass the minimum.
So TAMRA slow the flow.
These have to do with the minimum amount of insurance.
This has to do with how fast you can fund it
so that when you access money under 7702, it stays tax-free.
If you violate TAMRA,
it only accumulates tax deferred like an IRA or 401k make.
But when you go to access it, it now becomes taxable.
You know, most people want to generate tax-free income.
So how do you self-insure?
I've often compared this metaphorically to a bucket.
Let's say the IUL is a repository,
a bucket that's gonna hold money.
You are designing the bucket
to accommodate the amount of contributions
you wanna be grandfathered to put into it.
You're not obligated to put that much in,
but you cannot put in $1 more
or the insurance company must refund it.
So let's say you're a 60-year-old male
and you want to be grandfathered
to be able to put a half a million dollars into this bucket.
You can take 30 years to do it.
You can start out with a big lump sum
and that goes for 10 years.
You know, it's so flexible.
That's why it's called universal life.
But let's say you wanna get the money in
as quick as possible.
And so the minimum amount of insurance,
'cause you could buy a ton of life insurance for 500 grand,
that's not the objective.
TEFRA and DEFRA says if you're 60,
you can get away with a million of life insurance.
Now agents who do not understand this,
they say, "Well, you should always choose
the increasing death benefit.
Level is the devil."
What?
You only choose the increasing death benefit
with indexed universal life
if you are socking away, you know, 100, 200,
500 bucks a month, starting at age 30,
until you finally stop putting money in the bucket,
you've reached your limit
and then you switch over to the level death benefit.
What does the increasing death benefit means?
It means if I put in 500 grand and I die,
the insurance company's gonna pay out my million
plus 500,000.
Well, they're gonna keep charging you
for the original million if you do that.
If you are using it for living benefits,
you say, "No, no, no, I want the level death benefit."
If you're gonna be putting in enough money
in the first five or 10 years and you're older,
you choose the level death benefit to self-insure.
Why?
When I want to reposition 500,000,
TAMRA says, "I can only do it about, you know,
20 to 25% a year, 100, 125 grand."
We'll just say 100 grand.
You can put in 100 grand the first day of the first year,
the first day of the second year, another 100 grand.
The first day of the third, first day of the fourth,
first day of the fifth year
is technically four years and one day
into the IUL contract.
So far so good.
Now every time I add money to it,
the cash that I'm putting in
and the interest I'm earning on that cash
is part of the death benefit under the level death benefit.
People say, "Why would you do that?"
Because I'm not interested in increasing that.
I'm interested in increasing that.
And so in order to do that,
you wanna have the spigot on the bucket,
which is the cost of the insurance gets smaller
as you get older.
This is what Dave Ramsey doesn't understand.
You are letting the insurance,
even though the cost of insurance per thousand goes up,
the amount of thousands you are being charged for
is half in four years in one day.
Why?
Because if I have 500 grand in there,
the original death benefit is a million and I die,
they're only paying out a million.
So the net amount at risk is only 500,000.
They are only charging me after four years and one day
the actual cost of the insurance
for 500,000 of net amount at risk,
not the full million anymore.
With the increasing death benefit,
they're charging you for the whole million.
The spigot on the bucket remains large.
So what's the effect of that?
I wanna earn, let's say, 11 and net 10 as soon as possible.
If you earned 11 and you kept the increasing death benefit,
you're gonna be lucky to net six or seven
because that spigot on the bucket
is gonna be remain huge.
As you get older, the cost on a million dollar of insurance
is just gonna keep getting bigger and bigger and bigger.
Now, hopefully, the cash is earning enough
that it's offsetting that
but you're earning 11 and netting six, seven, or eight.
I'd rather earn 11 and net 10.
How do I do that?
I self-insure.
So after I get this in in four years and one day,
I've averaged 9.62% on mine since 1980.
A combination of universal life
and then later indexed universal life.
If you understand the rule of 72, you divide 9.6 into 72,
my money will double every seven and a half years.
So seven and a half years
from four years and one day
when I've got my total I'm allowed to put in in there,
this is doubled.
So in the 12th year,
now this 500,000 has doubled to a million.
So my cash is equal to the death benefit.
Yep. What's the insurance company at risk for?
Zip.
I'm self-insured.
This is like buy term, invest the difference, on steroids.
The end goal of buy term, invest the difference
is to have enough money
that you can get rid of your term insurance
30, 40 years down the road.
I did it here in 12 years.
So my cash equals the death benefit.
TEFRA and DEFRA simply says,
"If you happen to die that year,
the insurance company will pay out 1,050,000
because the death benefit has to stay 5% ahead of your cash.
But if you don't die
and the 500,000 doubles to a million,
in another seven and a half years,
that million doubles to 2 million.
If you die that year,
the insurance company pays out 2.1 million.
They're only charging you
for that 50 or that a hundred thousand.
The cost of insurance on a hundred thousand
versus the interest you're earning
on $2 million is minuscule.
If you were to look at the later years of my IUL policies,
if I earn 11 in a given year now,
I'm netting 10.9 because the cost of insurance
is only costing 1/10th of 1%.
But retroactive back to day one,
it's been an average of about one.
I earn 11, I net 10 because I self-insure.
Hopefully, this has given you some insights
and opportunities that you didn't know existed before.
If you wanna learn more,
I would recommend you study this book
called "The LASER Fund."
It's my 11th book.
It's been flying off of our warehouse shelves
and if you go to Amazon,
they're 20 bucks plus shipping and handling.
If you do that, thank you.
But I'll gift you one free.
So you can claim a free copy
by going to laserfund.com, L-A-S-E-Rfund.com
or click on the link below.
You contribute a nominal amount
towards the shipping and handling.
I require some skin in the game and I'll pay for the book.
I'll fire out a hard copy to you via priority mail.
But while you're claiming your free copy,
if you'd like to listen and learn or watch and learn,
there's audio and the video formats.
You can also register for a free educational webinar,
which we do on a regular basis.
You can even schedule an appointment
to talk to a specialist who understands
how to structure these correctly, like I just talked about,
so that you can self-insure as quickly as possible
and have your insurance get cheaper as you get older.
Have you ever seen an insurance policy
that gets cheaper as you get older?
Well, I guess Dave Ramsey hasn't either,
but that doesn't mean they don't exist, okay?
Sometimes people say, "Well, I've never seen one of those."
Oh, really? So that's your reasoning.
Have you ever seen your brain?
Well, how do you know that even exists
if you've never seen that?
Because they've never seen it, it must not exist.
That's fallacious thinking.
So make sure you claim your free copy.
It's actually two books in one.
This side is the left-brain side
with all the charts and graphs.
This side is the right-brain side with all the stories.
And if you want to use your whole brain, read both books.
But this is not about me, this is about you,
and I don't want you to miss out on opportunities
to where you can sort of have a minuscule portion
of the interest you're earning on your life insurance
actually pay for your life insurance.
Nothing's free, but I don't pay for my life insurance.
It's being paid for with a minuscule portion of money
that would otherwise go out the window
in unnecessary income tax
that most Americans shell out
if they put money in IRAs and 401ks.
So I'll take as much insurance as I can get
if I don't have to pay for it.
I let Uncle Sam pay for it indirectly.
Does that make sense?
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