Indexing allows you to participate with the upside in the market
but not lose when the market nose dives. In this episode, I'm going to address the
question, "How does indexing work with universal
life?" Get ready you're going to be blown away
with information that many financial advisors don't even know.
Hi, I'm Doug Andrew. I've been a financial strategist and retirement planning
specialist for more than 46 years. I've been helping people optimize their
financial assets, minimize unnecessary taxes and empower their
authentic wealth for 4 ½ decades. And my
favorite vehicle to help them accumulate their
money tax-free then be able to access that
money, anytime, not even at retirement. In their
30s, 40s, whenever, totally tax-free. And then when they
ultimately pass away, to have it blossom, increase in value and
transfer income tax free is what i affectionately call the Laser
Fund. Now, I've written a book called The LASER Fund because it explains
what a laser fund is. Laser is an acronym that stands for liquid
assets safely earning returns. Because the laser fund which is the max
funded indexed universal life insurance policy,
if it's structured correctly and funded properly,
it will allow you to be able to accumulate your money
totally tax free. And I've earned average returns between 6 to 10 percent
tax-free for decades using this. But when it was first introduced in 1980,
it was just universal life. And from 1980 until 1997,
for the first 17 years, universal life being
on the market, I averaged about 8.2% because the
general account portfolio rates of the insurance companies
were between 11 and 3 quarters and 15.5 a percent
from 1980 to 1990. Then interest rates started coming down. And
interest rates are relative. When interest rates are high for earning,
they're high for borrowing. Mortgages back in the
1980s were as high as 18 and 21 percent. But see, when interest rates came down,
banks only paid maybe 1%. Most portfolios of insurance companies
on their triple A and double A bonds on the mortgages
they have on skyscrapers and shopping malls and what have you
were more in the 5, 6, 7 percent range.
And so, that's when indexing was introduced in 1997.
And when I saw that, I said, "Wow, this is a way to participate
with the market and earn higher rates of return. But when the market crashes not
to lose." So, let me explain indexing in a very
simplified manner so that you can understand this
because frankly i could stump a lot of financial advisors out there like
Dave Ramsey, Susie Orman, Rick Edelman, David Bach. I know all these people
personally and they've never been taught this. When I say
indexing, they think i'm talking about index mutual funds.
No. That just means you're putting money in a mutual fund that is invested
in the S&P 500 index. You will lose
maybe 40% like 2008 if you use indexed mutual funds.
I'm not talking about that. I didn't lose one dime
due to that market crash in 2008 using indexed universal life.
So, watch how I explain this simply so that you can understand how dynamic this
is. Once you get it, you'll understand why I've
averaged between 7 to 10 percent internal rates of return
ever since 1997. So, I'm going to use an example
of a million dollars of cash value in an insurance policy,
an indexed universal life. Now, if you are just starting out and you're putting
in 500 bucks a month or 1,000 a month, you don't need
huge lump sums. Many times people would come to me with $500,000
and when they had it maximum funded the 500,000
would double about every 7 ½ years averaging nine 9.6%
as you're going to see. The half a million they put in would double to a million in
7 ½ years. That million would double to 2 million
in another seven and a half years. The 2 million would double to 4
million in another 7 ½ years.
And the 4 million doubles to 8 million in another 7 ½
years. And so, people who started out with
$500,000 without adding a dime, 30 years down
the road have 8 million bucks. And these
people are generating 800,000 a year of interest
income. Many of them don't even need that much so they only take out 3 or 4
hundred thousand a year of tax-free income. And the rest is compounds
tax-free. So, let me show you how to do that
because many financial advisors who think they know what I'm
talking about and they really don't know what they don't know because
you can't be aware of something you're not aware of,
they go, "I've never seen an insurance policy do that."
I go, "Well, you haven't seen the ones that have been designed to do this. I can show
you hundreds and thousands of clients who
have earned rates of return averaging between
6 to 10 percent during the last 20 years since 1997 when indexing was
first introduced. So, let me talk about the general account
portfolio of the insurance company. Legal reserve insurance companies have
to have reserves on hand that are liquid and safe so that if there's
like a run on the bank so to speak, a panic or whatever, that if people need
their money, they can liquidate it. And so, they have legal
reserves that are far more stringent than banks and credit unions.
So, where is that money? Some insurance companies of course have
billions of dollars. One of the companies I put my money into
manages about 3 trillion dollars. Do you know how much money that is? That's
about as much as the IRS collected in income taxes in an
entire year. One insurance company, okay? This is
called the general account portfolio yield that they report
every year that they're earning on all of their assets. Now, most insurance
companies have maybe 15, 20 percent of their
money in triple A and double A bonds. Maybe another 15 or 20 percent
and and mortgages on shopping malls and skyscrapers and so
forth. Very little of their money usually is invested in stocks.
If it is, it's in very stable stocks. When you look at the general account
portfolio of these insurance companies for the last 30 years,
the average yield has been maybe between 5
up to 17%. The 17% was more like the
high interest rates of the 1980s when universal life was first introduced.
The average for me, for my lifetime ever since 1980, for 40 years has been
more between 8 and 9 percent. Now, the last 10 years, I was showing this illustration
during the worst decade since the great depression. And so, when I talk
about the last 10 years, this is the worst 10-year
period 2000-2010. From 2010 to 2020,
I've actually earned a little bit higher rates of return. But I
i like to use the worst decade. During that time period, the general account
portfolio rate was usually 6 percent or a little higher.
So, if the insurance company was earning 6 percent on their
billions or trillion dollars of assets, they need about one of those percentage
points for them for a profit. They're in business to make a profit.
This is the net. And so, 5 percent is what
I earned on my money. So, let's say, I have a million dollars of cash value
at this point in time. I'm going to use a snapshot
and I have a million bucks in my universal life policy.
Now, the neat thing about indexed universal life, you can
any time just settle for the general account portfolio rate. That would be
five percent here. So, let's say if I feel bearish about
America, I think we're headed for a re recession or something, I can just say,
"You know what? Just pay me 5%." That's 50,000.
Now, it's tax free. If I leave it there,
now, I have a 1,050,000 at the end of the year and it's compounding.
If I take it out, it's tax-free as income. That's the beauty
of universal life insurance. If the 50,000 is the general account portfolio
rate, I can just settle for that and that's
maybe good advice when the economy is tanking
because you're earning at least 5%
instead of having your money at risk in the market. But anytime I feel
bullish about America. Then I can opt to link to an index.
And so, many times especially during election years, I do this. So, in 2011,
when Obama was running for his second term,
he's an incumbent running for a second term, I know that whether
you're republican or democrat, you're going to try to make the economy look
vibrant booming dynamic with all kinds of fiscal and monetary
policy. So, I knew my chances were better than not that the economy would
grow faster than the 5-percent rate. So, I
linked to an index back in 2011. I do that
during election years and you sort of can tell. This isn't rocket
science. So, let's say you linked to an index. So, let's use the S&P 500.
So, if you link to an index, here's the key, if the S&P were to go
up 10% that year, the insurance company must pay you
10%. If the S&P was a thousand at the beginning
of when you said link. And this isn't a calendar year necessarily.
So for example, in 2011, November 15th, I said link.
So, one year later, November 15th of 2012, just after the election was over, if
the S&P was 1,000 and a year later it was 1,100,
that's a 10% increase, do you understand?
They must pay me $100,000. They're contractually obligated.
They can't they can't get out of that. Now, some
people say, "How can the insurance company afford to do that?"
Well, they're big boys and girls, they know what they're doing.
Here is the key, listen very close. This is what many financial advisors do
not understand. When I have a million dollars in the
insurance company and I opt to link to an index,
I am not authorizing the insurance company to take
one dime of my million dollars and put it at risk
in the market. My million dollars is not invested in the S&P 500,
okay? Where is it? It's in the insurance company safely tucked earning
5. Well, how can they afford to pay me 10?
Because I'm authorizing them, I'm relinquishing the for sure 5, that
50,000. They're earning 50. And I'm saying,
"Don't you dare mess around with my principal of a
million. You can take the interest on my million and do whatever you need to do
to have the wherewithal to pay me whatever the S&P does.
Well, this is not rocket science. What do they do with
the 50,000 of interest? They buy upside options in the index
or indices I chose. That would be in the s&p 500.
So, they buy upside options. They're the number one purchaser of options in
the world. This particular insurance company,
and so 50,000 of options, if the market goes up, that easily
doubles to 100,000. They can afford it because
it made double with those options. If it went up to 15%,
they pay you $150,000 because 50,000 will triple 250,000.
It's not how can the insurance company afford to do this.
They're just buying upside options. Well, what's the trade-off?
If I guessed wrong and there was a terrorist attack in 2011
and the market tanked during 2012, the options expire worthless.
But I don't lose my million. If my million was in a variable insurance
policy, if my million was in the market like 2008, it would have been only worth
600,000. But in 2008, I didn't lose my million.
It was safe. I didn't make anything because the options expired worthless.
But I made money if the market went up. And in 2011 to 2012,
I actually made 160,000, 16%. But see the insurance company has to cap
you because they don't have your full million
to be invested in the market. You've told them, "No", you want to be safe. They only
have the interest on your million. So, they
cap you at 15 or 16 percent, sometimes 25 percent, sometimes 12 percent. They cap you. The
trade-off is zero can be your hero if the market
loses because you don't lose. Does that make sense? So, what does
it all mean? The worst decade since the great
depression, 2000 to 2010 when most Americans were still down about
38%. It took until 2012 before their million
came back to break even. Many of our clients using indexing
tripled their money during that time period.
But from 2000 to 2010, you would have at least doubled your money. Here's how:
With a zero-percent floor, okay? You don't make money some years
but you don't lose. And a 15% cap... The caps were 16 to 17 back then,
only at 15 the last year 2009 to 2010.
But I brought it down to that. Your average would have been 7.23%. If
you know the rule of 72, that means your money
doubled. A million doubled to 2 million tax-free when most Americans barely
were back up to 630,000, it took 2 more years before they had their million back.
In that 2 additional years, the 2 million went to 3 million
because I used diversification and rebalancing.
What's that? This is where you can diversify. This is one option
here. This means 5 years, I earned
zero. The other 5 years, I earned whatever the index did. But only
2 of those years did I cap out. That's the average of this.
But this insurance company has 15 different
indices to choose from. Here's one. I can choose a 2-percent floor
so that I'll make 20,000. They have to keep 20,000 on hand to
buy to make sure i have 20,000 or a
2% percent return if the economy loses. They only have the remaining
30,000 or 3% to buy upside options.
So, they lower the cap to 13%. The
higher the floor, the lower the cap. Using that one for 30 years, you
would have averaged 8.11%, okay?
Here's another one. I can take the floor back down to zero
and allow them to use the entire 50,000 to buy upside options.
But they'll keep me at a 13-percent cap on this. Well, you say, "Well, why would you
do that?" Because the insurance company on this
one will pay me 140% of whatever the S&P does.
If the S&P, if it's 5, they pay me 7.
If it's earning around 9, 10, i will cap out at 13.
And so, this is for the the volatile markets that just go
up and down in a general zoner area. People say, "Well, Doug, which one did you
use?" All of them. Here's why: I diversify.
So, I could allocate on this million 300,000 to this one. 300,000 to this one,
300,000 to this one. And the last 300,000 just leave
it in there earning 5. Many people do that. Some people
diversify and take 20 and assign it to 1 of 5
indices or maybe the last 20% is in the general account portfolio rate.
I'll show you one of those. But see by diversifying, I was able to
earn 9.62%. I can also rebalance which means i don't
have to sit there and earn zero 5 of the 10 years.
If the economy begins to go down because of a terrorist attack or the mortgage
meltdown of 2008, I just say, "You know what? Move me back
over and just pay me the 5-percent rate."
So, in actuality, I didn't earn zero for 5 of those 10 years. I only earned
zero 2 of the 10 years. The other 3
years that I would have earned zero had i not
rebalanced, I earned 5. And the others when the market turned
around, I went ahead and linked. That is how I've been able to tweak my
rates of return to 9.6, 10.07 and that's net cash on cash rates
of return for many of those time periods. So, when a client gets their annual
statement, this particular client had all of these
indices to choose from. These are the 5 and they diversified
their money. And look at this, on 20 of their money,
they got 13.65 that year. 11 that year. 9.5 that year.
On that one ,15 on that one. And they left 20%
of their money in the general account portfolio which
in that year was 4.4. The average of all of those
was over 10 rate of return. So, the whole message here is that you
can have your money linked to the market without your money
at risk. This has to stay safe in the insurance company earning
5. When you relinquish that and say, "You can
do whatever you need to do", they buy upside options. That's what
gives them the wherewithal. The insurance companies know what they're doing. They
can afford to do this because the options
will double and triple. But if the economy tanks,
the only thing that happens is the options expire worthless.
But you don't lose the principle you started with that year.
And every year you make money that is locked in
and reset, so you do not lose in future years the money you made in
previous years when you use indexing. If you want to
learn more about this, i would recommend that you get a copy of my most recent
bestselling book The LASER Fund. Let me show you how you can claim your
free copy. If you simply go to laser fund,
l-a-s-e-r, fund ".com", you contribute $5.95 towards the shipping
and handling. I'll pay for the book. It's 300 pages,
charts graphs explanations and actually on the other
side, is the right brain client stories showing you examples like
I've alluded to here of actual clients who have averaged
returns between six to 10% tax free
for 10 20 years ever since 1997 when index universal life was first
introduced. So, I invite you to learn and you'll have
options there to be able to listen and learn and watch and learn. Go
to laserfund.com.