This was passed in the final hours of the year 2020. In this episode, I'm going to address
section 7702 the changes that took place with the stimulus package that is thousands of
pages long and how do they affect life insurance. So, my name is Doug Andrew. I've been a financial
strategist and a retirement planning specialist for more than for 4 ½ decades. And one of
my favorite instruments to allow people to accumulate their serious cash --money earmarked
for serious goals like retirement totally tax-free and be able to access that money
tax-free during their golden years, and when they ultimately die, it blossoms and transfers
tax-free is a max-funded indexed universal life insurance policy. Why? Because it passes
the liquidity, safety and rate of return test with flying colors. And it's been a tax-free
sacred cow in the internal revenue code for over 107 years. Now, the merits of an insurance
policy are that the money accumulates tax-free under Section 72E of the internal revenue
code. All the money you are earning, the interest dividends and so forth is tax-free. Why? Because
the government doesn't want to hurt you for accumulating money taking ownership to take
the pressure off of them having to take care of you with welfare or whatever in your golden
years. So, this is why people accumulate money tax-free for their retirement. And if you
happen to die, Section 101A of the code says it will blossom and transfer-tax-free as life
insurance death benefit. That's tax-free. Why? Because they want to make sure that widows
and orphans aren't draining on government welfare programs. So, why would they want
to tax something, take money away from people who were trying to leave behind something
that would've sustained them and their family have they live longer. So, that's why it's
been sort of a sacred cow. It's tax-free. Now, section 7702 actually allows people to
access money out of an insurance policy totally income-tax-free while they're alive. And this
is what I have used for years to be able to create tax-free income. So, that every million
of cash value in my universal life policy can generate 70, 80, 100 thousand dollars
a year of tax-free income because I'm earning maybe 9 netting 8. Maybe some years, I'm earning
11, netting 10. Some years, maybe I'm only earning 6, netting 5. But I have average payouts
of 8 to 10 percent. That's tax-free income. But in order to have tax-free income, you
have to jump through what are called Tefra, Defra, and Tamra hoops. It means this: Back
in the 1980s, --1982, 1984; You had to have a commensurate amount of insurance coming
along for the ride so you don't exceed the definition of life insurance under those sections
of the code. So, If I want to reposition at age 60, let's say, $500,000 into an insurance
policy, I have to have at least 1,250,000 of life insurance. Now, the objective is,
is to have my half a million grow tax-free. Maybe double to a million in as little as
7 to 10 years. Well, I can do that. And that money as it grows qualifies as part of the
death benefit so that the cost of the insurance goes down as you get older because the amount
of insurance at risk is getting less and less. This is what makes it such a tax-free cash
cow for retirees. Now, Section 7702 also said under Tamra that was passed June 21st, 1988,
that the fastest you could fund it is over 5 years if it's universal life. 7 years if
it's whole life. It's called the 7 pay test. That's a misnomer with regarding to universal
life. So, that means if I want to put in 500,000, the most I can put in is 100,000 a year every
year for 5 years. Now, I could put in 100,000 the first day and the first year. And by the
fourth year and first day of the 5th year, I can put it my last 100,000. Now, I'm qualified
to have tax-free income forever after out of that contract. That's the Tamra test. That's
section 7702. Well, that's been that way since 1988. Now, in March in the year 2020, the
insurance industry started to introduce legislation to be able to allow people to put in money
faster. And all of those rules pass back in the 1980s were based upon 4% interest guarantees.
See, whole life insurance for years has been based upon they will guarantee you 4% or at
least the actuaries are based on that. And so, they tout, "Well, this is guaranteed to
be no less than 4%." Well, when US treasuries ended up being less than 1%, interest rates
are low, that means insurance companies are hard-pressed to be able to guarantee 4%. So,
they introduce legislation but it was tabled. In the We hours, the final hours of 2020,
they slipped that back into the economic stimulus package and it got passed. So, Section 7702
has been now altered. I don't know what the total ramifications are but I can give you
a few glimpses. And then subscribe to this channel, 3-Dimensional Wealth. And as I get
more information, you will get answers to those because I'm going to post several videos
in the next few months that will help you understand what this means for you. But in
a nutshell, this is what it means: For whole life insurance, it appears that it means that
whole life won't be able to tout the 4% guarantee anymore that new policies will only based
on 2% guarantees. So, whole life insurance is going to have to perform based upon dividends.
It can't be touted as "Oh, look at our guarantees. They're 4%." Because it's going to be downt
to 2%. Now, universal life, we don't worry about the guarantees because you're linking
to an index. In other words, the guarantee with indexing is zero. What? Zero? It means
that if the market goes down, you will not lose. Zero is your hero. We're not worried
about guarantees because in indexed universal life, the objective is to have your cash value
grow to be close to the death benefit as soon as possible. Maybe 10 or 15 years so the cost
of insurance gets cheaper as you get older. You're self-insuring. Now, what does this
mean? Based on that example, it appears as though, instead of as being restricted to
$100,000 for 5 years, I may be able to put in maybe 130,000; 150,000. With the new section
7702, I may be able to get in the 500,000 faster. Maybe as soon as 2 years and 1 day
instead of 4 years and one day. What does that mean? Well, it will likely mean that
if you can get the money, the half a million in there faster, it will grow faster because
universal life has often outperformed whole life because the fastest you could fund a
whole life with 7 years. Universal life was 5 years. Actually 4 years and 1 day. Now,
if I can get the money in that I want to put in there, in 2 years and 1 day, let's say,
it's going to grow faster if I want to achieve an internal rate of return within 1% of the
gross rate of return instead of maybe waiting 10 years or 15 years. That may happen in 8
years. Maybe 7 years. So, you'll be able to get a great internal rate of return quicker
because it looks like you'll be able to put in the money faster. Or you maybe able to
reduce the death benefit in order to put in the amount of money you want so it performs
better as a capital accumulation account. So, whatever happens with section 7702, stay
tuned to this channel because I think in the long run, this is going to be better for you.
You're going to get better internal rates of return. You'll be able to get away with
les insurance. In other words, have less cost or for the same amount of insurance, you can
fund it faster, put in more money or put in the money faster which accelerates the performance.
So, at the end of the day, when the insurance companies adapt to this, I think it's going
to be a positive. They have not done anything to alter 7702 since June 21st, 1988. And they
just sneaked in in the final hours of the year 2020. So, stay tuned, I am here for you.
I want to empower you and I will post future episodes that will show you what this means
for you. Especially as you consider taking out new indexed universal life policies and
how they can perform even better than they have in the past because they've been superior.
Now, I think they're even going to get better. If you want to learn more, if you want to
understand what I'm talking about, Tefra, Defra, and Tamra, Section 72E, 7702, and 101A,
I want to gift you a copy of my most recent bestselling book The Laser Fund. Claim your
free copy. I'll pay for the book. You go to LASERFUND.COM (L-A-S-E-R, fund, ".com"). And
you contribute a nominal amount to cover the shipping and handling. If it's short, I will
cover the rest of that expense. I will pay for the book and fire it out to you. And in
this book, you will learn about all of these nuances of max-funded index universal life.
Why I call it the Laser Fund, liquid assets safely earning returns. And as you learn these
basics, then when I share new videos about how section 7702 changes and enhances this,
you're going to be well-equipped to understand it instead of going "What's Tefra, Defra,
and Tamra?" You'll know when you study this book.