This makes you money. It doesn't cost you money. In this episode, we are going to
address the question how much does a max funded IUL, index universal life
insurance policy actually cost.
I'm Doug Andrew and I've been doing this for more than 45 years. In fact, way back
in 1974 when I began helping people optimize their financial assets and
minimize taxes and empower their true or what I call authentic wealth, I actually
had a series one securities license. And by 1980, I was responsible for over 3000
clients and 13 Western states. But these clients were never happier than when I
got them out of the market with the whipsaws and so forth and put them into
max funded indexed universal life insurance came out in 1997. But in 1980,
when EF Hutton who is credited with being the brainchild behind Universal
Life, came out with it it wasn't whole life, it wasn't term. It was universal
life. It was universally applicable on both ends of the spectrum. If you want a
death benefit for a lower premium, then maybe whole life at that point. You could
get Universal life for the most death benefit for the least premium. But Hutton
said, "Wait a minute. Why don't we do the opposite? Why don't
we take the least amount of insurance we can get away with and put in the most
premium?" And this thing turns into a cash cow.
It was brilliant because it accumulates your money tax-free. Later, you're able to
access that money for retirement income or any other purpose
totally tax-free. And when you ultimately die it blossoms in value and transfers
tax-free. No other vehicle in the Internal Revenue Code does that.
Municipal bonds don't do that, a Roth doesn't do that. And so, when people ask
what is it cost, sometimes I go, "That's the wrong question." How much does it make
you? In other words, a business owner understands that if
you invest $100,000 on an employee but that employee makes you
an extra $500,000, was that a cost or an investment? And so,
when you max fund a universal life policy and then in 1997
and my preference became indexed universal life what is known as IUL,
what you're trying to do is get the cost down as low as possible as soon as
possible. So, generally within 10 years, the cost of the insurance that the IRS
says has to be there under tax citations TEFRA, DEFRA, TEMRA. The cost of the insurance
is down around 1% or so. It means that if you're earning 11, your
netting 10. If you earn 8, you're netting 7. If you earn like some years, our
clients have earned 16, they've netted 15. Or if they earn 25,
they netted 24. So, in other words, one of those percentage points
paid for the insurance and all the fees because the IRS said if there's not
insurance attached to this under the guidelines of TEFRA, DEFRA and TEMRA tax
citations, then it's not going to be tax-free. But to me, that's not a cost.
It's a benefit because i'm netting 10%. I'd have to be earning 15%
in a tax deferred account like an IRA or 401K to be able to net 10%
after tax. And after fees, I'm only netting 9. In an IUL, I only
have to earn 10 to net 9 and I've done that predictably for 25
years. So, let me share with you something most
advisers don't even understand. So, under TEFRA and DEFRA tax
citations, a lot of advisers, even insurance agents don't understand that
when you take the least amount of death benefit to allow the greatest aggregate
premiums to be put into the policy, when you do that, you have the choice of
having your cash and the money you're earning, the interest you're earning on
that cash value qualify as part of the death benefit. So, if I start out at age
60 and I create a max-funded IUL that will accommodate $500,000,
I can't put that in all at once without
violating TAMRA. But I can put in maybe about 100 grand a year. And so, it's going
to take a little while for that to build up to be able to have the cost of the
insurance be 1% or less. But if I put in 500,000. And in a 60, the
minimum death benefit required is a million two hundred fifty thousand. Once
I have 500,000 in there, the actual insurance, the the risk to the
insurance company is only the remaining 750,000. But if
my 500,000 in 7 years at 10% or in 10 years at7%
which is the low and the high of what I've earned four years on mine. That
means my 500,000 would double to a million. Now, the insurance
company is only at risk for 250,000. They're only going to charge
me for 250,000 of risk. Well, pretty soon, most of my clients
who have used IULs within 10-12 years the amount of
cash in the policy exceeded the death benefit required under Tefra and Defra. And
that allowed the insurance policy now to increase at five percentage points above
my cash. But now the insurance has gotten cheaper as I've gotten older because the
amount of insurance they're charging me for is less even though the cost per
thousand of insurance goes up when you get older. You're paying for way less. I
pay one twentieth the amount of money for insurance that I did 30 years ago
because I'm earning so much interest on my policies. The cost of the insurance
now is only draining out maybe one tenth of 1%. But on the average in the
first 10, 15, 20 years, it's usually within one percentage point of
the gross rate of return on the IUL. So, what does that mean? That means that
if you were looking at the overall cost when people say, "How much does that cost?",
normally I will show people like a ledger and I'll say, "Now, let me compare
this to a tax-deferred IRA or 401K in the market, in the mutual fund or to an
annuity or to this vehicle or municipal bond, whatever." So I could compare to all
these vehicles. And I would say, "Now, let me cover up what this one is over here.
Ahich one would you choose and they would see that the accumulation was
usually quite a bit better at age 60 or 65 when they hope to retire in the IUL."
They didn't know it was in IUL. But then when I would show them income coming out
tax-free. That you only had to pull out $100,000 to net a
100,000. In a tax-deferred IRA or 401K, you had to pull out
150,000. Pay tax of a third to net 100,000. And they
would see the IRA or 401K totally run out of money in 11 years.
Maybe at age 76. And the IUL lasted to 120. Pulling out a
100,000 bucks a year tax-free. And they would add that up. And if you lived in
extra 20 years, it was an extra million dollars of income. Or 2 million
dollars of income. And then I would say, "Well, this is what it is." And I've
uncovered and I said, "It has a death benefit. This is an insurance contract." "Oh,
I don't need insurance." I go, "What does that have to do?" Make me the
beneficiary then. "Well, what does that cost?" I'm going, "What do you mean what
does it cost?" Look at what it did. Didn't cost you anything. It made you money. It
didn't cost you money. I mean, if I were to go to my employees and say, "Hey, we
have some additional benefits this year for all of you." We have free life
insurance. How much would you like? Now, predictably, they go, "As much as I can get?"
Yeah, see we don't object to insurance benefits. We object to paying for them. So,
the way I look at it, if I earn 11 a net 10 or if I earn 8 and net 7, that
one percentage point is not a cost. That is money that would have gone out the
window in unnecessary income tax if I had an IRA or 401K. I'd have to be
earning 12 to net 8 in a 33% bracket. That's money that would go out
the window in taxes. Plus another 1% in fees. So, why would you have that fee
incurred taxes and fees when the insurance is actually paying for itself?
So, it's not a matter of what does it cost. What does it make
you? So, if you want to see how to make an insurance contract get cheaper as you
get older, you must read this book The Laser Fund. It's 300 pages containing
charts graphs and explanations. You'll understand this and you'll see how it
works in real life with 62 actual client stories on the flip side. And so, go to
laser fund.com and I'll pay for the book and send it
out to you. It's it's a free gift. You pay five ninety five shipping and handling
and start to empower yourself with answers to questions like this and many
others that we post on this YouTube channel.