- Why does Congress allow interest or gains
in a life insurance policy
to accrue tax-free
against tax revenuers wishes?
By the end of this video episode, you will understand why
for more than 108 years,
as of the recording of this episode,
permanent life insurance policies
accumulate money tax-free,
you can access that money, income tax-free,
and when you pass away, it transfers
totally income tax-free.
(relaxed music)
So I'm Doug Andrew.
I've been a financial strategist
and a retirement planning specialist now
for north of 48 years.
And during that time period, I've been very, very blessed
and grateful for the receptivity of over 12 books now
that I've been able to author.
I have a lot of other books in me
that I wanna publish before I check out.
I turned 70 here in a couple of months
and no, I do not color my hair.
Everybody asked that on this channel.
But the purpose of this 3 Dimensional Wealth channel
is to give you insights into opportunities
that maybe you did not know existed before.
And I have taught over 90,000 hours
in educational seminars and live events
to audiences in excess of 20,000 people.
And many times people will ask, well Doug,
it's obvious your favorite financial instrument
where you think people, at retirement in particular,
ought to have 40 to 60% of their retirement assets
generating cash flow or retirement income
that doesn't even show up on their 1040 tax return.
Yep, that's correct.
And that isn't a max-funded index
universal life insurance policy,
that's where I put my serious cash
and many savvy investors choose to do the same.
Now, sometimes people go, what?
Is this legitimate?
Yes, I mean, it's been around for 108 years
in the Internal Revenue Code under three sections
that today are known as Sections 72e, 7702,
and 101a of the Internal Revenue Code.
In a nutshell, Section 72e says that,
the interest, the growth, the dividends, whatever,
that happens inside of a life insurance policy
in a permanent policy that accumulates cash values
'cause you're overpaying,
you're overfunding the policy in excess
of the cost of the actual term insurance
mortality cost of the policy.
You're building up equity in the policy
that grows tax-free and that is provided for
under Section 72e of the Internal Revenue Code.
And people say, well, why does Congress allow that?
Well, believe me, there's been many times
tax revenuers who were hard up for money
wanted to tax those, and I'll talk about
different studies they've done in the past.
But basically, when you are accumulating money
tax-free inside of an insurance policy,
it is helping the government to not have
to provide welfare benefits to widows and orphans
and so forth.
Or if you're going to use it as a living benefit
like I do instead of just the death benefit
for tax-free income, it's tax-free
because I took pressure off of the government,
I took ownership instead of relying on the government
to provide for me with social security
or additional welfare benefits or what have you.
So they've been smart enough thus far to say,
no, leave these tax-free
'cause it's actually saving us money.
It's not costing us money by allowing these things
to be tax-free.
We don't wanna have to be providing benefits
to more widows and orphans and people out
living their money in retirement.
So it's been a sacred tax-free cash cow
under Section 72e.
Now back in 1980, EF Hutton, who was a brokerage firm,
they weren't an insurance company,
they realized that life insurance
was primarily viewed as a death benefit
or death insurance, and they said,
what are we thinking?
Why don't we
maximum fund an insurance policy,
instead of taking the amount of insurance that we want,
the coverage, let's say a million dollars
of life insurance coverage, and trying to shop
for the least premium, like term insurance,
let's flip it and let's take the least amount
of insurance we can get away with
under the IRS rules, under their definitions
of life insurance,
and put in the most money, the most premium
that the IRS allows.
And under Section 72e it would allow you
to grow the money tax-free, but you can also access money
while you're alive totally income tax-free
to provide tax-free income
or tax-free working capital for your business
and so forth.
This was brilliant.
And so this was the emergence of universal life
'cause whole life was designed to
overpay the early years, underpay the latter years
but it was built on the chassis primarily
for death benefit.
Universal life was originally designed
to be used primarily for living benefit.
And so this is provided under Section 72e,
but when you go to access money,
if every million dollars you accumulate inside
of a life insurance policy can generate 70,000,
80,000, 100,000 a year of tax-free income,
which would be like a 7, 8, or 10% payout
without depleting the million dollar principal,
that outperforms the financial services industry standard
of a 4% payout, which is called the 4% rule.
It's more than double, and it's tax-free.
So this became the preferred instrument for savvy people
so they could accumulate their money tax-free
and then generate or turn on tax-free income,
or business owners, they can access money tax-free
anytime they want as working capital for their business
or maybe their real estate investments,
what have you.
And so this was incredible
and that's under Section 72e and 7702.
7702 talks about how you can access money
out of the policy while you're still alive.
And there's the dumb way and there's the smart way.
The dumb way is by withdrawing money.
It's tax-free until you've recovered your basis.
If you put 500,000 of premiums into an IUL policy,
and after you have 500,000 in there
earning average returns like I have,
at 9.6% in seven and a half years,
it doubles to a million.
Or if you're earning 7.2%,
it doubles to a million in 10 years.
And then if you don't need the money, it'll double
from a million to 2 million in another
seven and a half to ten years
and so it accumulates tax-free.
But to be able to turn on income, if you do the math,
if it's earning average returns of, let's say 9%,
$1,000,000 can generate 90,000 a year
of income without depleting principal.
That's pretty incredible.
When a lot of times people who have money in the market,
the 4% rule says on a million dollars
in the stock market, you're only supposed to pull
out 40,000 a year, which is pretty pathetic
And you have to pay tax.
You pay tax even at a 25% tax rate.
That's 10,000 of the 40,000,
you're only netting 3% or 30,000
and out of a max-funded insurance contract,
you can pull out 90,000, three times as much money
and it's totally tax-free.
This is why it's so incredible.
And naturally people then ask, well,
is this legit?
Why does Congress allow you to do this?
To be able to accumulate money tax-free,
and then be able to access the money tax-free,
under those two sections of the code?
Again, it's because it's taking pressure
off of the government to provide benefits for you.
You're taking ownership for your retirement
as a living benefit.
And also if you die and you leave behind widows, orphans,
that they will not be a drain on society
or social dollars taxes.
And so it's been sort of a sacred tax-free cash cow
in the Internal Revenue Code.
And of course, Section 101a says,
at the end of the day, when you die,
anything left in there usually will transfer tax-free
But it blossoms off times,
meaning that if I died tomorrow in an accident,
every million I might have would maybe blossom
to two million and transfer tax-free
because now it's transferring out
in an actual life insurance death benefit
and those have always been tax-free,
why would you tax life insurance
that's designed to help widows and orphans
be financially independent and not outlive their money
and be taken care of?
Does that make sense?
So even though it's been a sacred tax-free cash cow,
so to speak, whenever government gets hard up for money,
they always think, should we tax this?
Should we go pluck this little luscious plum
that has trillions of dollars sitting in there
that's not subject to income tax?
Now ever since 1986 Tax Reform,
there's only three types of income
that Americans pay income tax on
and that's earned income, passive income,
and portfolio income.
If you have income in retirement,
that does not fall under the definition
of earned income, wages, and salaries,
of passive income, which might be rents and leases,
and portfolio income, which might be interest and dividends,
there's nowhere on a tax return to put it, it's tax-free.
It's that cut and dry.
But you wouldn't believe there are tax revenuers
that when they wanna pass
all of their little spending packages,
they will do studies to see,
hey maybe we ought to tax life insurance.
And so the last big time I remember doing this,
'cause I started in 1974,
and they came so close,
and it was in 1990.
So in 1990, actually the General Accountability Office,
and also this was the report that involved
the Committee on Finance, the US Senate,
the Chairman on Ways and Means,
Senate, Finance Committee,
they all did this big, huge study for months.
And this was the summary right here in this report.
And in a nutshell, when they went through, they said,
should we tax the inside buildup
of cash value inside life insurance?
Number one.
The second big consideration is
when people go to access money and they're still alive,
we think they should be paying tax on the gain.
And they went through a study,
and even though they tried to convince
the tax revenuers who wanted to find some money to spend
even though they recommended that they be taxed,
the majority ruled and said, you know what?
That's not a good idea.
It will cost us in the long-run
more than it makes us in the short-run
and they were smart enough to say no, leave it alone.
And so far so good.
Now in other episodes, I'm gonna talk about
how even if they changed the rule in the future,
I think we would be protected if you owned one
because of grandfathering the ex post facto provision
of the Constitution.
But if this is intriguing you
and you're going, wow,
I think I want one of these.
I wanna gift you a copy
of my most recent 300 page bestselling book,
it's called The LASER Fund.
This will teach you how to diversify
and create the foundation for a tax-free retirement.
And you'll understand how a max-funded IUL
structured correctly and funded properly
would qualify to be called a LASER Fund.
LASER's an acronym that stands
for Liquid Assets Safely Earning Returns.
And so you have to structure it correctly
and fund it properly, this will teach you how.
This is actually two books in one.
This side is about 200 pages, 14 chapters
with all the charts and graphs and explanations
if you're a left-brain learner.
If you're more of a right-brain learner,
you flip the book over and read this one.
This is 100 pages, 12 chapters
with 62 actual client stories
of how a properly structured IUL policy
could be deemed a Laser fund to be used
for all kinds of goals, not just retirement,
emergency planning, real estate,
working, management, and capital and so forth,
all kinds of uses.
It knocks the socks off of a 529 college savings plan.
You'll gain insights as you read this
and I would recommend you read both,
use your right brain and left brain.
Here's how you can claim your free copy.
You simply go to laserfund.com, L-A-S-E-R fund.com.
Click on the link blow.
And you contribute a nominal amount
towards the shipping and handling.
I'll cover the rest of that.
I'll pay for the book.
I'll send out a hard copy to you
but there's options in there too.
If you like to listen and learn, watch and learn.
There's also some information
If you want to join an online webinar
and also talk to a specialist
to see how this may apply
to your particular set of circumstances,
but this is about you and your brighter future.
(relaxed music)