How can an insurance company afford to pay you what an index like the S&P 500 gains
without having money actually invested in the S&P. How can they do that?
By the end of this video episode, you will understand why an IUL issuing insurance company
has the wherewithal to pay you more when the market goes up but protect you
from losing principle when the market has downturns. This is incredible
and unfortunately, a lot of financial advisors do not understand what you're about to learn.
So, I'm Doug Andrew and I've been helping people optimize assets and minimize taxes now for more
than 48 years. My favorite financial instrument is a max-funded IUL. Now, IUL stands for indexed
universal life and so in other episodes, you maybe have learned that an IUL policy is an insurance
contract where you're structuring it primarily for living benefits. You're taking the least amount of
insurance that the IRS will let you get away with so to speak and putting in the most money premiums
that the IRS allows as fast as they allow. Now, you're actually doing what I call a back door
approach. When people would come to me they wanted to set up a portfolio so to speak where they could
accumulate money for long-term goals such as retirement or college funding for their kids or
working capital for their business and they wanted to make sure their money was liquid
so they could access it anytime they needed it without penalties or taxes. They wanted it to be
safe especially when the stock market would go down or we had recessions. They wanted to earn
predictable rates of return that were far better than banks and credit unions. They wanted to earn
a rate of return that was at least five percent greater than the inflation rate at the time
which fortunately we've been able to do ever since 1980, okay. But the tax accumulation was
like icing on the cake. You mean, I'm earning money tax-free and when I take it out it's
still tax-free and when I die and I leave it behind it's still tax-free. I go, you got it?
So, that's the beauty behind max-funded insurance contracts. So, then people say, "Well okay, so if I use
indexed universal life", if you have watched any other episodes basically, you have the choice
every year if you want of linking to an index or indices on an IUL policy. So, many times I'll
use an example of let's say you have a million dollars of cash value in your IUL policy. Now,
it doesn't matter if you have a hundred thousand ten thousand or ten million you can extrapolate
from my example. If I have a million in there and I feel like the economy is going to go down.
I can just say pay me the interest you're earning on your general account portfolio, we're in a
low-interest environment as of the recording of this episode. So, maybe it's only four percent. The
insurance company is in business to make a profit so they maybe need one of those percentage points
for them but they'll pay me maybe three. So, three percent on a million is 30 grand and it's tax-free
which is better than having my money in a bank earning one percent and that's taxable, okay. But
if I feel like golly inflation now is seven or eight or nine or ten or like in the year
2021 it was actually over 15 percent. Gas went through the roof. Used cars everything.
You had to earn higher than 15%. Well, many of our clients locked in gains that year of 25%
61% because you can outpace inflation. I answer how we can do that in another episode. In this
one I'm answering the question. Well, how can the insurance company afford to pay you what the
S&P does if they're not investing your money in the S&P? Because they hear me say this, "Okay,
your million dollars has to stay in the insurance company safe earning four percent.
Well, then how can they afford to pay you eight or 12 or 61 percent? If they can't use your money in
the market I go okay. Let me explain it this way. Your million is safe in the insurance company you
are not authorizing them when you link to an index to take one dime of that million dollar principle
and invest it in the market. It's in the insurance company earning four and then people jump ahead
and say, "Well yeah, so how can they afford to pay 8 or 12 or 61% if they're only earning 4?
I'm going, hold on. If I link to an index I'm saying you're earning 4% that's 40,000.
Take that 40,000 and you don't have to keep it on hand to pay me that. I'm willing to get
zip if the market crashes. I can relinquish that four percent interest and you take that
four percent on a million dollars that's 40 grand and you can do whatever you need to do with that
to have the wherewithal to pay me whatever the index that I choose or indices does.
Well, they're big boys and girls. They wouldn't offer it if they didn't
know they could afford to do it. What do they do with the 40,000? They buy upside options
in the S&P or the Dow Jones or the Russell 2000 whatever indices I chose.
Now, you don't have to understand options to understand this. They know what they're doing
they're the number one purchaser of options in the world they buy them hourly. They used billions
and even trillions of dollars all the time doing this. So, they're buying upside options. Now,
based upon the price of options and what they're doing if the S&P went up eight percent that 40,000
worth of options doubles. They have 80,000 to pay you. Maybe if it tripled it would go up to 120,000.
But based upon the price of options maybe they they have to cap you. Well, we pay you up to
12 but if the S&P goes up 16 sorry we're only going to pay you 12, that's called a cap. What's
the trade-off if they cap you. Well, if the market loses like 40% like 2008 you don't lose because
your money was not in the market just the interest on your million was in options so they would have
the money if the market went up to pay you. But if the market goes down those options just expire
worthless at the end of that year but you didn't lose your million. That's why zero is your hero.
Now, what about years where they have paid 25 percent of 61 percent? Well, that's where we go
okay, we think from March of 2020 to March of 2021 because of the Covid19 pandemic
the market dropped 30 percent. Well, anybody in the financial services industry knows that if you
start down here. The chance of you making money from this point up to here is much greater
than starting here and so when the market goes down we tell our clients with IUL policies link
to a one-year point-to-point no cap. Now, the trade-off is with no cap they're gonna subtract
five percent off the top. So, March of 2020 to March 2021 the market went up 66.33 percent.
They take five percent off of that and our clients netted 61.33%. Now, those types of opportunities
don't happen all the time but often enough that when you have an IUL professional that understands
this how to rebalance your portfolio you don't have to worry about how can the insurance company
afford to pay me 61 percent. Yeah, we had a client that started out with over 800,000 in March of
2020 but made 535,000 in one year March of 2021 he had 1,387 000. He locked in that gain
even if the next year the market dropped he would not lose that half a million he made
the year before. That's called lock-in and reset which if you don't understand that watch other
episodes that explain that. But when people say how can the insurance company afford to do that?
It didn't cost them anything. They bought options based upon what you chose a one-year
point-to-point with no cap and so they know what they're doing and they had the wherewithal if the
market went up and they made their five percent off of the profit on the back end. But our clients
netted 61% but when people say, "How can they afford to do that when they're only earning four?".
It's because you're letting them take the four percent interest and buy upside options which
protects them if the market goes down they don't owe you four percent. But if the market goes up
they owe you more but they'll have the wherewithal to pay you more or else they
wouldn't offer it, it's that simple. So, if this is making a sense or you're going, "Wow, I need to
see some examples of this with actual history", and by the way, when you meet with an IUL professional
rather than just plugging in a hypothetical interest rate of six percent. Because they always
you know are told to show very conservative rates of return you want to under-promise and then over
deliver. Because even though they may only show yousix percent in actuality I have averaged 9.62%.
But there's some years I've made 16, 25% and higher. Other years I don't make anything but I don't lose.
And so, when you average it all out yeah you'll probably end up with somewhere between 6 to 10
percent tax-free rates of return which means your money will double probably every you know five to
ten years tax-free. But be sure you understand this by meeting with an IUL professional who
understands how to do this and choose the options and rebalance your portfolio. You'll understand
those terms and you can study them in this book. This is like the textbook. It's 300 pages. I have
co-authored this with my two sons it's called the laser fund. A laser fund is a property structured
maximum funded IUL policy. Having said that, I would say that 99% of IUL policies would not be
deemed a laser fund because they're not structured correctly or funded properly. So, you want to meet
with a professional that knows what they're doing and it passes liquidity safety rate of return test
with flying colors. These are like bars from one to ten and a properly structured IUL scores the
highest score ever compared to other typical places Americans have their money in the market
in IRAs and 401ks. These bars would be clear down here with most of those, okay. If you have
not claimed your free copy go to laserfund.com. You contribute a nominal amount towards the shipping
and handling. You can click on the link below and I'll fire out a copy to you. I'll pay for the book
you just contribute towards the shipping and handling. This side has 200 pages of charts
and graphs. This side has 62 actual stories of clients that use IUL policies for everything
from retirement planning, college funding for their kids, working capital for business, real estate
management, emergency funds, estate planning, pension maximization, all kinds of goals. You'll see why I
call it the dream solution the financial swiss army knife and it's my preferred vehicle by far.
So, when you're in there you have the opportunity to set up an appointment with an IUL professional
but be respective of their time watch some of these so they don't have to sort of spoon feed
you stuff that you could learn on your own. It would be far better for you to start out the
conversation at this level instead of down here at this level. If you don't understand some of the
basics that's the purpose of these educational videos. So, here's to your brighter future.