- An indexed fund will incur market losses,
indexed universal life will not.
In this video episode,
I'm going to address the question,
what is the difference between an indexed fund
and indexed universal life?
Get ready, a lot of financial advisors
have no clue what the difference is.
(upbeat bright music)
So, I'm Doug Andrew.
I've been a financial strategist
and retirement planning specialist now
for north of 48 years, doing what,
helping thousands of clients optimize their assets,
minimize taxes, and empower
what I call their authentic wealth to enjoy life
as they would like,
without having to worry about their money,
especially in the golden years,
not outliving their money.
So I take a lot of pride in helping people,
especially as they approach retirement,
to make themselves immune from taxes,
inflation, and market volatility,
because those are the three big dangers
that cause most retirees to outlive their money, okay?
And so if you've watched very many
of my educational episodes on this channel,
"3 Dimensional Wealth,"
you will soon learn
that one of my favorite financial vehicles
that allows people to accumulate their money,
totally income tax-free,
and then when they want to access money
even before they retire,
before age 59 and a half,
they can access money totally income tax-free,
including all the gain.
And then when they ultimately die
anything left behind blossoms,
increases in value, and transfers income tax-free.
And that's what I call a LASER Fund,
because I want to have liquidity safety ready return
and tax benefits.
This spells an acronym, LASER, L-A-S-E-R.
It means Liquid Assets Safely Earning Returns.
In fact, it's the title of not only what I call
a max-funded index universal life structure correctly
and funded properly,
but it's the title of my 11th book
that's been flying off of our warehouse shelves.
And I wanna gift you a copy
of this 300-page book at the end of this episode.
So stay with me.
So a common question that I get asked
and that I see also on the internet
that is misunderstood by most financial advisors
who simply don't know what they don't know,
they assume that an indexed universal life insurance policy
is investing your money, the cash value,
inside of that life insurance policy
into an indexed mutual fund.
And I just roll my eyes and I go,
"Oh brother."
You don't know what you don't know.
So let's start out and let me explain
what an indexed fund is,
and then how that differs
from indexed universal life.
And you will know more than 99% of financial advisors
out there that simply don't understand this, okay?
Now, the reason why I like max-funded indexed universal life
is because of predictable average rates of return
of eight to 10%.
I've earned many 20-year periods
in excess of 11% netting 10.
I have earned an average,
for the last 42 years, of 9.62%.
If you round that down to 9.6,
divided into the rule of 72,
your money doubles every seven and a half years.
And we have actually seen many, many people
experienced that, just like I have, okay?
And so people say,
"Well, how does that work?"
Well, back in 1980, when EF Hutton,
who was the original brainchild
behind the emergence of universal life said,
"Hey, why don't we sort of buy term insurance
and invest the difference under a tax-free umbrella?"
And they came up with this idea,
"Let's take the least amount of insurance
the IRS will let us get away with,
and let's put in the most money,
the most premium the IRS allows,
and let's design a life insurance contract
for living benefits primarily."
And so back in 1980, interest rates were high
and I never got credited
less than 11 and three quarters percent,
even as high as 15 and a half percent from 1980 to 1990.
I was earning 11 and netting 10,
and so if I had clients put in 500,000,
many of them started taking out 50,000 a year
of tax-free income immediately,
'cause they were netting 10%,
because they took out just a small amount of insurance,
but they used the policy
primarily for tax-free accumulation.
Because it's been protected in the Internal Revenue Code now
for more than 108 years.
And so this worked very well
until interest rates started coming down in the nineties,
and in 1997, they introduced indexed universal life.
Now, this is not an indexed fund.
in the 1990s, a lot of insurance companies
introduced variable life insurance.
And this is where the cash value
that is protected in the Internal Revenue Code,
it grows tax-free under Section 72E.
It allowed people to send out that cash value
into a mutual fund or mutual funds of their choice.
But what would happen if that was a mutual fund,
like an indexed fund
like the Standard and Poor's 500?
That's a common index.
You could have the Dow Jones,
you could have the Russell 2000,
but an index is simply a measuring tape.
This is a measurement
of if the economy is going up or down,
and this is why many times, you know,
Wall Street will report,
"Well, the S&P was up today,"
or "Down to the Dow Jones."
That's an index, it's a measuring tape, so to speak.
And so a lot of times,
people realized that, historically,
if you were to diversify your investments
in the stock market,
into those 500 companies
that are in the Standard and Poor's 500,
or the Dow 30, or whatever,
that you would be diversified
and probably in any 10-year period,
you would make money,
seven of those 10 years,
70% of the time you'd make money.
The other three years, 30% of the years,
you would lose, okay?
Now, that's been historically true,
but in the decades, from 2000 to 2010,
there were actually five lost years versus five up years,
and indexed universal life averaged 7.23%
during that worst decade.
Whereas the people who had their money
actually in the market,
they were still down 38% at the end of 2010.
If they had 1 million bucks in the S&P 500,
in a mutual fund portfolio in the S&P 500,
that $1 million dropped down to 600,000 twice
during that decade.
And by the end of 2010,
it was barely back up to 600, and 20, 630,000.
It took until 2012 to come back to $1 million.
Whereas people with indexed universal life
had doubled and even tripled their money tax-free
during that 12-year period.
So people go, "How, what's the difference?
Okay, so an indexed fund
is where your money is actually invested in the market.
I've never owned a variable life insurance policy.
I never will because my clients were never happier
in 1980 than when I got 'em out of the market.
And so they wanted to have that great rate of return,
but in the nineties,
interest rates started to come down.
But I did not want them putting their cash values
back into the market,
because people who did that with variable life insurance,
they actually lost, sometimes 20, 30, 40%
from 2001 to 2003, and again, in 2008.
That's an indexed fund.
If you have your money invested
in an indexed mutual fund,
you will lose money when the market goes down.
And so that's an indexed fund.
Your money is at risk in the market.
So people, many advisors think
that an indexed universal life
is like a variable life insurance policy
where you're telling the insurance company
to take your cash values
and invest it in like a mutual fund,
the S&P 500, no!
You would've lost 40% in 2008 had you done that.
Our clients didn't lose a dime in 2008
in indexed universal life.
They may not have made very much,
but they didn't lose a dime, why?
Are you ready?
Okay, so let me simplify it by saying this.
Let's say you had $1 million,
and you can extrapolate
if you have less or more than this,
but let's say you have $1 million.
In an indexed fund, again, $1 million
could go down to $600,000
if you had a 40% drop in the market,
like happened twice in that Lost Decade, we call it,
2000 to 2010.
Why didn't indexed universal life lose one dime
during those five down years?
It's because the $1 million
is sitting in your insurance policy
in what is called their general account portfolio.
What is that?
The insurance company is very conservative.
They are investing their billions,
and some of these companies have trillions, okay?
In AA and AAA bonds,
in mortgages on shopping mall and skyscrapers.
They only loan maybe 40, 50, 60% loan to value.
If they have to foreclose on a skyscraper,
they usually come out making money.
So they're very conservative,
and the general account portfolio rates
in the 1980 to 1990 were, you know, between 11 and 15%.
But as interest rates came down,
they then were only earning eight and seven and six.
So I'm gonna come clear down to four.
If the insurance company on mortgages and bonds
are earning 4%,
and by the way, this is where banks and credit unions
take some of your money
and put it into insurance companies.
They pay you 1%,
they turn around and make four times at 4%.
If your $1 million is in an indexed universal life,
it stays safe in the insurance company,
earning in this example, four, 4%.
So that means that year,
you would earn 40,000.
Now, anytime you want,
you can just settle for the general account portfolio rate.
In this example, 4%, 40,000.
But a lot of people,
they feel bullish about America
because seven out of 10 years,
the market is up.
So to not lose when the market goes down,
they tell the insurance company,
"Hey, link."
Now, you don't have to link all of your million
and you can diversify.
But for the sake of simplicity,
let's say you linked your entire $1 million to an index.
Now, you could diversify and link,
you know, 300,000 to the S&P,
300,000 to the Dow,
300,000 to the Russell 2000,
and leave the last 100,000 of your million
earning the general account portfolio rate of four.
Yeah, you can diversify like that.
But let's say you put the whole million
and linked it to the S&P 500, okay?
Now, you're not telling the insurance company
to take one dime of your million
and invest it in the S&P 500.
It must stay safe in the insurance company, earning four.
So what does the insurance company do?
You are relinquishing the for sure 4%
you're telling the insurance company,
you don't need to keep that 4% or interest
or that 40,000 on hand
and credit that to me at the end of the year.
I'm willing to give up the interest this year
on my million to go for it.
So the insurance company does what
with that 40,000 they're earning?
They buy upside options in the index you chose,
the S&P 500 in this example.
So they buy upside options.
So the number one purchaser of options in the world,
they buy them hourly.
What does that do?
It means if the S&P goes up 8%,
that 40,000 will double to 80,000,
they have the wherewithal to pay you 80,000 bucks
or credit you 80,000 on your million.
If it goes up 12%,
they'll pay you 120,000
because of the price of options, okay?
Now, they may have to cap you at 12%,
or 15, or 16%, but the floor is zero.
Why, because if you guessed wrong,
and the market crashed 40%,
if your money was in an indexed fund,
you would lose 400,000 of your million,
you'd be down to 600,000.
Not it, with indexed universal life,
you still have your million, okay?
You didn't earn anything,
0% was your hero.
You didn't lose 40%.
You didn't make anything,
but you didn't lose.
So what happened to those options?
They expired worthless 'cause the market was down,
but you didn't lose your million.
And so they expire worthless.
And this is why in the worst decade, 2010,
it was the ending, starting in 2000,
five of those years,
you may not have earned anything, zero.
But the other five years,
you would've earned whatever the index did
up to a cap of 16% back then,
and you would've averaged 7.23%.
Your million would've doubled to 2 million.
When people that had money in indexed funds,
they didn't even have their money back yet until 2012.
By then, indexed universal life
had two and a half to three times people's money.
That is the difference.
So if you want to learn more about indexing
and how you can apply this strategy
where you get to participate when the market goes up
and you do not lose when the market goes down,
you need to study this.
Chapter six of this book will teach you about indexing,
and clear up any of the questions you may have.
Now, here's how you can claim your free copy of this book.
You can go on Amazon and pay 20 bucks,
and thank you if you do,
but I will gift you a copy.
You simply go to laserfund, L-A-S-E-R fund.com,
you contribute a nominal amount
towards the shipping and handling,
I'll cover the rest of that cost,
and I will pay for the book,
and I will fire out a copy to you, hard copy.
There's also options there
if you would like to also listen and learn
or watch and learn,
check out some of the educational webinars
we do on a regular basis.
You can even schedule a time to talk
to an IUL specialist with no obligation,
no cost, to see how these strategies may apply
in your particular set of circumstances.
But hopefully, now you understand the difference
between an indexed fund and an indexed universal life.
If you do, you'll know more than 99% of financial advisors
out there that don't have a clue what the difference is.
They think that indexed universal life
is investing your money in a volatile index,
and you can be subject to market losses.
No, you do not want to lose when the market goes down
and you wanna participate when the market goes up.
That's called indexing.
So here is to your brighter future.
(upbeat bright music)