Most investments are subject to tax penalties and market volatility. In this episode,
I'm going to address, why life insurance is not an investment. It's way better than that.
So, I'm Doug Andrew and I've actually been licensed to sell life insurance since 1974
until 2005 which time I became a consumer advocate to start writing books. I started a
national radio show. I have this Youtube channel. I am very passionate about teaching people like you
and financial advisors about the merits of max funded indexed universal life insurance. But when
I started back in 1974 indexed universal life had not been created yet. So, let me give you a little
bit of history so you understand how a universal life was first a thought about by EF Hutton who
was not an insurance company and then why it is not an investment and it should not be purchased
as an investment and I'm okay with that and you will be too once you understand what I'm about to
teach you. So, back in 1974, I actually from 1974 to 1980 ended up being responsible for over 3,000
clients in 13 western states and I had licensed and trained over a thousand insurance agents and
we were basically selling term insurance and having clients invest the difference automatically
where every dollar they put into this plan one-third would go towards a term insurance
policy. The other two-thirds would go into an annuity that would save money for them back then
between seven and a half and eight and a half percent interest which sounds pretty good right
now at the recording of this episode. But most of our clients would assign those annuity values out
every 90 days to a mutual fund of their choice. So, buy term invest the difference and it was sort of
forcing them to invest the difference. We ended up with over 3,000 clients but in the meantime,
EF Hutton who is not an insurance company they sold stocks and bonds and mutual funds.
They began to realize, wait a minute, even if we are able to in mutual funds earn 12 percent
which is what people were trying to average in reality if you buy and hold Dalbar who studies
investor behavior says, "The average investor in the market really only earns about nine point
one four percent before tax." When you pay tax on it you're netting about six. But let's say that you
could average twelve percent on the market and you accumulate a nice million-dollar nest egg
and you're gonna retire and let's say you're earning 12%? Well, that's 120,000 a year that
you could withdraw without depleting principle. The problem was you pull out 120,000 a year you
have to pay tax on that every single year between federal and state tax most Americans pay at least
a third. So, you pull out 120,000 you pay 40,000 in taxes, you're netting 80,000. Many financial
advisors and asset managers charge another one percent management fee on the million. So, that's
another 10 grand. So, if you're earning 12 you're really only netting seven or seventy thousand a
year and so EF Hutton said, what are we thinking? The market goes through all kinds of gyrations
and most people aren't really averaging 12 because they panic when the market goes down and they
sell. In fact, Dalbar says the average retiree with money in the market is only averaging three and a
half percent because they're buying and selling at the wrong times. But EF Hutton said, "Hey, in the
internal revenue code for decades", this was back in 1980. But for decades there is only one financial
repository or vehicle that allows people in America to accumulate their money totally tax-free
and that's under section 72(E) of the internal revenue code where any interest or dividends
accumulates without paying tax and then allows them to access money totally
tax-free while they're alive under section 7702 and then when they ultimately die anything left
in that account blossoms increases in value and transfers income tax free under section
101a the internal revenue code. What was that financial instrument? Life insurance. But see, I was
a big proponent of buy term invest the difference and ultimately when you have enough money you
can get rid of the term insurance. Well, Hutton said, "Wait a minute, let's rethink our thinking."
Let's take the least amount of insurance the IRS will let us get away with and put in the most
premium the IRS allows and this thing can turn into a tax-free cash cow. Well, that's what they did.
So, on this very channel in other episodes there are videos that explain this in more depth.
In a nutshell, this was introduced in 1980 and I'm not kidding. It was a huge aha, I got it.
This was like buy term invest the difference on steroids. Most people came to me wanting a place
to put their money to increase liquidity safety and earn predictable rates of return tax-free
to be able to have living benefits. Hence life insurance was used for life not for death. So,
EF Hutton introduced that. My clients were never happier than when I got those 3,000 clients out of
the market into universal life and so they would put in the most money they could and back then you
could put in like a whole lump sum of $500,000. Many of these companies were crediting between eleven
and three quarters and fifteen and a half percent. I never earned less than 11 and three quarters
on my universal life policies from 1980 to 1990. By doing that, if you earned let's say 11 we'll
take the lowest there. You earn 11 you're actually netting 10 if you had 500,000 in there you could
pull out 50 grand a year and it's tax-free because you're earning 11 but you're netting 10%
cash on cash and you were allowed to put in all 500,000 at once. This was incredible and it was tax-free.
The IRS went to Hutton and said, "What are you doing? We think you're abusing those sections
of the code that you're moving over to another section investments that will be taxable sooner
or later. We think you're sort of abusing this tax-free nature." So they went to court basically,
EF Hutton won and then the IRS went to congress and said, "We've got to change the definition
of tax-free insurance because if you violate these tax citations it's going to move over to another
section of the code taxable investments", well most investments are also subject to market volatility.
So, we were fine with that. In 1982 under the tax equity fiscal responsibility act that's called
TEFRA and the IRS didn't quite get it right in congress and so two years later they redefined
it under the deficit reduction that's called DEFRA under the TEFRA, DEFRA tax citations. It required
the minimum amount of insurance that had to be attached or come along for the ride on a universal
life policy so that it did not violate TEFRA and DEFRA and move over to investment definition in
the code thereby being taxed sooner or later and also a market volatility. We were fine with that.
We don't want it to be deemed an investment it's life insurance because life insurance is
tax-free under section 72(E), 7702, and 101a. So, TEFRA and DEFRA required the minimum amount of insurance
which usually only used about maybe one percentage point. So, if you earned 11 you would
net 10. In order to net 10 out of a mutual fund or a tax deferred IRA or 401k you'd have to earn 15
or 16 to net 10 because of the taxes and the fees. So, that's why there was a massive exodus of money
that left the banks the brokerage firms over into these. They were safer. They paid higher interest.
They were tax-free and they blossomed when you died and so the banks and brokerage firms were
hurting back in the 1984-1988 ERA. They lobbied congress and says, "Don't ruin these. Don't
take these away because this is where we put some of our money." Yeah, banks borrow our money at one
percent and put it in these and earn at least five. That's five times what they pay you. So, they
didn't want to kill it but they wanted to slow the flow. So, June 21st, 1988 under the technical and
miscellaneous revenue act which spells the acronym TAMRA. If you wanted to put in a lump sum and you
wanted to preserve tax-free access and avoid what is called a MEC, a modified endowment contract.
You had to spread out the funding over four payments three years and one day into the fourth
year or maybe five payments if you're over age fifty-four years in one day. So if you wanted to
reposition let's say 500,000 dollars the most you could put in would be maybe about a
100,000 a year the first year second year and then the first day of the fifth year
which is actually four years and one day after you opened the account or started the UL policy.
You would have your 500,000 in there and now you can access the money tax-free forever after
if you do it the smart way. Now, that is adhering to DEFRA, DEFRA, and TAMRA, tax citations. Why?
So that you can accumulate your money tax-free but be able to access the money tax-free.
That way it stays under the definition of tax-free insurance in the internal revenue code section 72(E)
7702 and 101a. If you violate those sections TEFRA, DEFRA, TAMRA, text citations, and those sections
of the code, your money is no longer defined as tax-free insurance. It moves over and becomes
a taxable investment and usually investments are also subject to market volatility. So, I don't want
my money to be deemed an investment if that's what investments usually are taxable sooner
or later like tax-deferred accounts IRA's and 401ks. Is this making sense? Now, if this is giving you all
kinds of ah-has, I invite you to subscribe to this channel. Why? I have over 700 videos that are
educational just like this and it's free when you subscribe and when you do, I'd recommend you click
that little bell so you'll be notified every time I post a new episode which I do almost on a daily
basis. But folks, post a comment, click like, and share with somebody who could really
learn from this episode. But stay with me just another few moments because I want to gift you
a copy of my most recent best-selling book it's called The Laser Fund which is what I name an
IUL policy. Let's talk about IUL compared to just universal life. So, as I mentioned from 1980 to
1990 I never got credited less than 11 and three quarters percent. But what happened in the 90s
and then going into the turn of the century? Interest rates started to come down and so
that's when they came out with indexed universal life in 1997. When I saw that I go, "Okay, I'm in.
I could understand this and I have been one of the biggest proponents of indexed universal life since
1997. I think the advisors that I've trained are responsible for repositioning more money billions
into these for living benefits." So, when we talk about the difference between a taxable investment
usually subject to market volatility and an indexed universal life that means your money
in the policy is safe earning the general account portfolio rate maybe four or five percent. But if
you understand indexing and if you don't I have other episodes on this channel that explain this.
Your money is not at risk in the market. You're not subject to that market volatility.
You can link to an index any year you want and you're telling the insurance company keep my
money safe. Let's say you have a million dollars of cash value in there, keep that safe earning
the general account portfolio rate let's say of four. That's four percent 40,000.
You can take the 40,000 tax-free credited to your policy if you want that year or you can tell the
insurance company link it to an index like the S&P 500 or the Dow Jones or the Russell 2000
whatever. You can diversify between many but you are not authorizing the insurance company to take
one dime of your money your million and invest it at risk in the market. You're relinquishing
the interest on that, that 40,000 and you're allowing the insurance company to use that money
that interest 40,000 in this example to buy upside options in the index that you chose.
The S&P, the Dow Jones, or whatever. So if the market goes up that gives the insurance company the
wherewithal to pay you 8-12%. This year that I'm recording this of 2021 we've had clients that got
credited as high as 61.33 percent. The insurance company can afford to do that because they buy
options with the interest on that money. But if the market crashes those options expire worthless but
you don't lose the million you started with. You simply gave up the for sure four percent that year.
When you use indexing you're not subject to market volatility. In summary, I don't want
my IUL or my universal life policy to ever be considered or be deemed an investment.
Insurance policies are not investments and you should never purchase them as an investment.
It's way better than most investments because it's not subject to the market volatility
and number two, they're totally tax-free and you don't want to bugger that up by violating
the internal revenue definition of tax-free insurance by moving it over to a different
section of the code and then being hammered with taxes and also being exposed to market volatility.
If this is making sense you want to learn more. I'm going to show you how you can read and study more
about this. So, I want to gift you a free copy of my most recent 300-page bestselling book called
The Laser Fund. You simply click on the link below or go to laserfund.com. You contribute a
nominal amount towards the shipping and handling. I'll cover the rest of that cost and I'll pay for
the book and fire out a copy to you. It's actually two books in one. This site is 200 pages with all
the charts and graphs and explanations for the left-brain thinker. If you're a right-brain learner
you learn by stories you flip over and read this one this is 100 pages 12 chapters with 62 actual
client stories. You can read both books if you want to use both your right brain and left brain.
But here's the point, when you read this you'll gain insights into opportunities you never knew
existed before and why a max-funded IUL is like a financial swiss army knife. You can use it for all
kinds of goals not just retirement even though it knocks the socks off of IRA's and 401ks. But folks,
when you're in there, there's also options there to listen and learn and watch and learn. But check out
retire by design we do live events. Those are six day educational events and we do virtual
ones usually on a monthly basis. All kinds of ways to learn. So, here is to your brighter future.