- When self insuring, you want the cash value
to actually reduce the cost of the insurance,
until your cash value equals
or exceeds the original death benefit.
In this educational episode
I am going to address a question I get asked quite often.
Does IUL, does my IUL actually transfer the cash value
in addition to the original death benefit,
or is it soaked within it?
(upbeat music)
So I'm Doug Andrew
and I've been helping people optimize assets
and minimize taxes now for nearly five decades.
I'm 70 years old, I'm an old geezer.
I I have an Apple watch today
but my first watch was a Sundial.
That's how old I am.
But I've been helping people accumulate money tax free
and then be able to access that money tax free
during their golden years for retirement
or maybe for college funding for their kids
or working capital for business.
And then at the end of the day
when they finally die, they want anything,
they leave behind to blossom
and transfer income tax free.
But their primary goal for over 95% of my clients
has been to use insurance for living benefits
not the death benefit, okay?
Very rarely would they come to me and say, Doug,
I want to buy as much insurance
as I can for this much money.
No. And what they wanted is to sock away
a set amount of money, a thousand dollars a month
or 10,000 a year, or a hundred thousand, or a million
and they wanted the best
net internal rate of return on that money
so that that million would double
to two million to four million to eight million in 22 years.
So it was a no-brainer.
I structured their insurance contract
their indexed universal life
to have the least amount of insurance.
The IRS will let us get away with
under two tax citations called TEFRA and DEFRA.
TEFRA is an acronym that stands
for the Tax Equity Fiscal Responsibility Act of 1982.
DEFRA stands for the Deficit Reduction Act of 1984.
That is two those are two tax citations
that sort of have a corridor,
that dictate the minimum amount of insurance,
not the maximum, the minimum amount of death benefit
that you must attach to the account
if your objective is to have the money
you're paying into it grow tax free
to generate tax free income later.
Does that make sense?
So it's the minimum amount.
That's TEFRA and DEFRA but it gives parity.
A lot of agents don't understand this.
So it doesn't matter if you're setting one up
and you're a 22 year old athletic marathon running female
or if you're a 60 year old,
or if you're like a 70 year, 80 year old
friend of our family who years ago
came in and wanted to put in 500 grand
and he wanted to have the best
net internal rate return on his 500,000.
He wanted to earn 11 and net 10, which we did.
He we did it right off the bat.
This is pre the TAMRA tax citation that was passed in 1988.
So he wanted to put in 500,000
and immediately start pulling out 50 grand a year
without depleting his principle.
So he had to earn 11 and net 10.
Now he was 78.
He had three blocked arteries,
adult onset diabetes and a prostate cancer episode.
He had six sisters pre him and three brothers.
You would think he had one foot in the grave.
We actually got him approved
by two different insurance companies, table D.
That means he was rated up a 100%.
His cost of insurance was double,
what a normal 78 year old would be.
He was rated a as if he was age 83, okay?
We were able to squeeze down
the death benefit under TEFRA and DEFRA
so that he could have the cost of insurance
be exactly the same as if he was a a 22 year old female.
People don't understand this
because they don't know how to squeeze
down the death benefit to be as small as possible.
He was able to earn 11 and net 10.
He was able to put in 500 grand
and pull out 50 grand a year tax free
just like a 20 year old would be able to do that.
And sometimes people don't understand this.
So when we're talking about does my IUL policy
transfer the cash value
on top of or within the death benefit?
Well, first of all
it depends upon which death benefit option.
There's two options.
One is called the increasing death benefit.
If you choose that, that means
the money you're paying in
that's growing with cash value
if you die is paid out on top
of the original death benefit.
So let's say you're a 60 year old
and you wanna reposition a half a million bucks
that would not be a good idea,
in my opinion if your goal
is to have a great rate of return on the half a million
like I've been talking about.
Because you put in $500,000 over a five year period
and that $500,000 is now
added on top of your million if you die.
But the insurance company,
the rest of your life is gonna keep charging you
for a million dollars of life insurance
and life insurance goes up every year you get older.
See, Dave Ramsey knows this.
That's called annual renewable term.
The cost of the insurance for a million bucks
is gonna keep going up as you get older.
That's an increasing death benefit.
The only time that I would recommend
an increasing death benefit
is if you're younger in your twenties or thirties
and you're socking away like 500 bucks a month.
Then you use the increasing death benefit
and you do that as long as you're funding the policy,
10, 20, 30 years.
But once you are through funding it
you've maximum funded it,
then you immediately switch over
to the level death benefit
in order to have the internal rate of return
be the greatest
and the cost of the insurance get cheaper as you get older.
You can't believe how many
ill-informed uneducated people out there.
"Oh, level is the devil."
Oh, wow what a nice little cliche.
No, it isn't.
If you're putting in the money
within five to 10 years level is the way to go.
So coming back to this example,
most of my clients they were 55 to 75 years old, even older.
They came to me to have
the best net internal rave return.
You want the cost of the insurance
to get cheaper as you get older.
You want to self insure.
You want your cash value to equal or exceed
the original death benefit as soon as possible.
If you, buy term and invest the difference
that takes 25, 30 years sometimes
before your money grows to equal
the amount of insurance you took out 30 years ago.
You can do that within 12 years with an IUL.
So this is what Dave Ramsey doesn't understand.
When you choose the level death benefit option with IUL,
okay, yes.
If I set up a policy
and I'm 60 years old
and I wanna reposition 500 grand
I can't do it all in one fell swoop.
It won't be tax free when I access it.
That's called the TAMRA Law.
the Technical Miscellaneous Revenue Act
that was passed in 1988.
So I have to spread it out over four or five payments.
The most I could put in
would be a hundred to 125 grand a year.
So it may take four years
but even if it took five payments,
it's not five years.
You put in the first a hundred of the 500,000,
the first day of the first year
and then the first day of the second year
another hundred, first day of the third year,
first day of the fourth,
by the first day of the fifth year.
That's actually four years and one day in,
I have my 500 grand in,
and now I'm grandfathered under TAMRA,
so that my income I take out
anytime down the road is totally tax free.
That is worth it.
So while I'm doing this,
my goal with a universal life
is to be able to have my money grow
with the best net internal rate of return
and have the cost of the insurance
get cheaper as I get older.
You do that by choosing the level of death benefit.
So if I put in the first a hundred grand
and the minimum amount of insurance was a million,
yeah I could have bought way more
insurance than that for 500,000,
than I'm gonna put in there
but that's not the objective.
The objective, what's the least amount
of insurance under TEFRA and DEFRA tax citations,
in order to make sure that I can put in
a half a million bucks
and have all of it be tax free forever after.
So it's a million dollars,
about twice as much as that 500.
Now, I could even squeeze it down
if that 60 year old is not in good health.
The point is this, I put in a hundred thousand
now if I die,
my a hundred thousand is part of the million.
The insurance company's only charging me
for the net amount of risk of 900 grand.
Let's move to the four years and one day into it.
I now have 500,000 in there
plus interest but let's just say 500 grand.
If I die the insurance company
still only pays out a million.
So my cash value becomes part of it.
I could have switched over to the other
but that's not what I wanna do
because the insurance company,
in five years it'd still be charging me
for the million and I'm five years older.
That's not helpful
and when you're trying to
earn the best net rate of return.
If I earn 11, I wanna net 10.
I don't wanna earn 11 in net seven or eight.
The increasing death benefit,
the cost of the insurance keep going up
with level death benefit they go down.
If you haven't seen an insurance policy
that gets cheaper as you get older,
you need to study this.
And I'll show you,
I'm gonna gift you a book at the end of this
if you wanna learn more about it.
So let's take that snapshot in four years and one day.
I have 500 grand in there,
but if I die, I've said it's okay,
my 500,000 as part of the million
but the insurance company only had to cough up,
500 grand the difference.
But they're only charging me for the net amount of risk
they're not charging me for a million of insurance.
They're only charging me
for the net amount of 500 grand.
So four years in, one day in the cost of insurance
is on half as much insurance as I started with.
Is this making sense?
The interest I am earning on a half a million now
is way more than the cost that has been now half
of what it was four years earlier.
Well, let's go down the road seven and a half years.
Why seven and a half?
Because I've earned an average
of 9.62% ever since 1980 on my universal life
and now indexed universal life.
Rounding that down to 9.6,
your money doubles in seven and a half years.
So if I have a half a million in
after four years and one day,
that half a million easily has doubled to a million
within the, by the 12th year.
So in the 12th year of this IUL policy
I now have a million of cash value.
What was the original death benefit?
A million.
I'm self-insured.
Okay that's the objective of
buy term invest the difference to be self-insured,
to get rid of your insurance
because you're, you now have enough money
that equals the original insurance
but it takes 25 or 30 years under their method.
I did it in 12 years.
This is like by term invest the difference on steroids.
So I have a million of cash value
and now what's the net amount at risk,
if the death benefits a million, zip zero.
But TEFRA and DEFRA says,
oh if you wanna make sure when you die
that the death benefit the transfer is tax free,
the insurance company must pay
out at death a little bit more than your cash value.
The answer is 5% more.
So when I have a million dollars
of cash value in there, yeah,
if I died they'd pay out 1,050,000.
But the insurance company's only charging me
for 50,000 of life insurance, the net amount of risk.
The cost on 50,000 of life insurance
when I have a million bucks in there,
the interest on a million
is probably gonna be a hundred grand that year, 10%.
The cost on 50,000 of life insurance
is like a 1,000 or 2000 bucks, it's minuscule.
Let's go another seven and a half years.
The million doubles to 2 million.
If I happen to die in that year
then the insurance company pays out 2.1 million
an extra a hundred thousand over and above my cash.
But they're only charging me for a hundred thousand.
But the interest on $2 million, which is 200 grand,
compared to the cost of a hundred thousand of insurance,
even though I'm now,
what about 20 years into it?
I'm 20 years older.
The cost for a hundred thousand,
that is so much smaller
than the cost on the original million, okay?
It's 1/10th
and so the interest I'm earning
is way more than the cost on a hundred thousand.
The cost of the insurance is getting cheaper
as you get older.
In actuality, if I earn 11% in the 20th year
I'm probably netting 10.8, 10.9 in that given year
retroactive back to day one,
I usually have earned a little over 11
and I've netted a little over 10.
Because the cost of the insurance
at the end of the day only used one percentage point.
So this is why I use the level death benefit option.
If you're trying to do it
for the best net internal rate of return.
Always use the level death benefit
unless you're starting out small monthly.
And then when you stop putting money in,
switch to the level if you wanna make sure
the internal rate of return is within 1%
of the gross rate of return at the end of the day.
Does that make sense?
So you just learned something that
I'm afraid 99.9% of agents
who sell IUL do not understand.
And they buy into these clever cliches.
Oh, level is the devil.
I just roll my eyes when I hear that
because it tells me instantly
that those people don't know what they don't know.
So if you wanna learn how to do this right
I would recommend you claim a free copy of this book.
It's my 11th book.
It retails on Amazon for 20 bucks
plus shipping and handling.
If you buy one on Amazon, thank you.
But I'll gift you a copy free.
But it's 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.
But if you're a right brain learner
you learn more by stories and examples
you flip over and read this book
about a hundred pages 12 chapters
with 62 actual client stories.
You can use your whole brain
and read both books, okay?
But if you go to LASERFund.com
or click on the link below,
you can claim your free copy
but I do require some skin in the game.
You contribute a nominal amount
towards the shipping and handling.
I'll cover the rest of that
and I'll fire out a hard copy to you
I'll pay for the book
and I'll do that priority mail.
But while you're in there checking it out
if you like to listen and learn to watch and learn
check out the audio and video video formats.
But also you may wanna register
for a free educational webinar.
We teach 'em weekly at no cost or obligation.
In fact, you can schedule an appointment
with an IUL specialist at no cost or obligation
to see how a properly
structured max funded IUL can be done right
and then you need to rebalance
and diversify on an annual basis.
Otherwise, you may only earn,
you know seven or eight and that only three or four,
because your IUL is structured wrong.
You did it the wrong way.
I want you to earn 11 and net 10
which is a huge difference at the end of the day.
That's why if an IUL specialist
that I've trained and the group that I trained
I've trained over 5,000, they're called IUL Insiders.
So I'd recommend that you have an IUL insider
structure this correctly
so that you don't make the mistake of doing it wrong
because then you'll kick yourself
seven or eight years down the road
and have to start over again.
Which I've seen too many people do that.
So this is not about me.
This is about you and your brighter future.
(upbeat music)