How can the insurance costs in an IUL become cheaper
as you get older? In this episode, you will understand how you can design it so it does that.
And by the end of this educational video, you will understand why a properly structured
maximum funded IUL allows you to self-insure so that the cost of the insurance becomes smaller.
A smaller portion of your annual earnings the longer you keep it and the older you get.
So, I'm doing Andrew, I've been a financial strategist and retirement planning specialist
now for more than 48 years and you wouldn't believe how many times I have asked this question
to audiences and sometimes I get a deer in the headlight look because I'll say, "Have you ever seen
an insurance policy that actually gets cheaper as you get older?", and I get nothing but crickets. Once
in a great while somebody savvy will go, "Yeah, I have". But most people they go, "Huh? Insurance costs
more the older you are. That's what I've always thought", I go, okay. Well, I'm going to change the
paradigm here. Because you haven't seen a properly structured maximum funded indexed universal life
insurance policy. So, you notice, I'm using the terms properly structured and maximum funded that is key.
Unfortunately, most financial advisors do not know how to do what I'm about to show you. Even a lot of
advisors that sell IUL. Sometimes in my educational videos you may hear me talk about how my own
IUL policies or many of our clients over the long term if they earn an average of 11 they net 10.
In some years, if they earn 16 they net 15 or like if they earned 61% they net 60 percent.
That 1% is the cost of the insurance that the IRS says has to be there in order for it to be
tax-free. That 1% is a round number during the life of the policy. In actuality, maybe during
the first four or five years while you're sort of adhering to IRS guidelines you're jumping
through these IRS hoops so to speak. So that at the end of the day you can access your money
totally tax-free. Your rate of return if you earn the first year you know 12 percent you may not
net 11 you may net 8 or 9. But see, so many policies are structured that if you did earn
let's say 12 you might only net 2 or 3 or if you earned 11 you would only net 7 or 8.
No, I take pride. If I'm going to earn an average of 10I want to net 9. If I earn an average of 7 I
want to knit 6. But in some years which you will experience you will have years while you earn 25%.
I want to net 24 when I earn 25. You do that by properly structuring it. To have the least
amount of insurance the IRS will let you get away with and put in the most money, the IRS allows as
fast as they allow and so that also has to do with how you fund it. So, I'm going to use some
examples here to help you understand it on a basic level and then when you meet with an IUL
professional they can create illustrations to show you the actual costs and how they go down.
Now, come on, the actual cost of life insurance protection goes up as you get older.
But if you maximum fund an IUL the amount of insurance that the insurance company is
at risk to payout if you die gets smaller as you get older. Did you understand what I just said?
So, if the cost of insurance because insurance is priced on a base you know what what is the cost
of insurance per thousand of death benefit. If you're a 30-year-old the cost per thousand is
back in the 1958 and then went down to a dollar 93 in the 1980
mortality tables. Which means, if you were 30 years old the cost for every thousand of life insurance
on an annual basis, it was a dollar ninety-three cents, okay. Because very few 30-year-olds die.
But the older you get then the more people die out of a group of 60-year-olds. Does that
make sense? So, the cost goes up as you get older. But if the amount of insurance you're actually
being charged for that you're paying for goes down even though the cost per thousand goes up
the amount of insurance you're paying for is 120th what it was when you started your IUL policy.
Now, if you're going huh? Stay with me here. So, remember I use this metaphor of a bucket.
I want you to be thinking of this as I go through and explain. So, when you set up an IUL policy.
You create it or you design it to accommodate the amount of money that you want to be grandfathered
to put into it. You don't have to put that much into it but it would behoove you to do so.
Sooner than later if you can afford it okay and so the examples I give ofttimes let's say in male age 60
wants to put in $500,000. Now, you don't have to put that in in the first five years but that's
about as fast as you can put it in because of the TEFRA, DEFRA, and TAMRA tax citations. So, if you
put in a hundred thousand the first year and then the next year, the next year, and the next year, okay.
And then in actually the fifth year which technically speaking if you put in a hundred
thousand the first day of the first year and you did that the first day of every year
the first day of the fifth year is four years in one day from the first day of the first
year. Does that make sense? But you put in five payments of 100,000 now you have
500,00 in there. Now, that 500,000 is going to now grow with
interest. There's no limit to what this grows to. We've had clients put in 500,000
and it doubles every seven and a half years to a million, two million, four million, eight million,
thirty years down the road and now they're taking out 800,000 a year of tax-free
income, it's tax-free. Because they adhered to TEFRA, DEFRA, and TAMRA they did not put in money any
faster than they were allowed but they did maximum fund it and they structured it correctly by taking
the minimum death benefit, okay. So, reason with me as we go through this. So, at the point in time,
where your cash value in the IUL policy is a million the net amount is only the difference
of 250,000. The insurance company is only going to charge you for the cost of insurance on
250,000 the net amount at risk not the original amount. So, even though the cost of insurance may
go up as you get older the amount of insurance you're being charged for goes down dramatically
okay and so let's take it one more doubling. Let's say the million in seven and a half years
doubles to two million which has been historically true for many of our clients. Whoa, wait a minute.
Now, you have 2 million of cash value in this and the original death benefit was a million 250?
Yeah, now TEFRA & DEFRA says in order for it to not violate those tax citations TEFRA and DEFRA.
The insurance now has to stay ahead of your cash usually by about five percentage points.
So, when I finally have two million in here the death benefit, if I happen to die, would be 2,100,000.
But the insurance company is only charging me for 100,000
of actual amount at risk. Because out of the two point one million two million of it is my own
money. Now, if you're connecting the dots they're charging you only for 100,000 of actual
amount at risk you've got two million dollars. If you've got two million dollars and you're earning
9.6 percent, okay. That amount of interest you're earning tax-free is way more than the actual cost
of the insurance on this spicket. Now, we just keep it general we say over the life of an IUL policy
retroactive back to day one. If you were to average 10 you would net 9. If you were average 11 you'd
net 10. If you averaged 8 you'd net 7 based on historical actual historical rates of return.
But if you understand what I just said, I've actually had IUL policies that 30 years
later they only cost 120th what they did when I was 30 years younger. Because the amount of
insurance is way down and the interest I'm earning is way higher, which means this. If I took the
snapshot in time in just the 30th year. If in the 30th year I earned 11 let's say that year in index,
I would probably net 10.8 or 10.9. The differential is only two-tenths of one percent not one percent
in that given year. But I always just average it retroactive back to day one and generally
speaking if you structure it correctly and fund it properly it's about one percent less sometimes a
little more sometimes a little bit less. But that's money that would otherwise go out the window in
unnecessary income tax. So, again, the metaphor that I like to use if this was a five-story building
and the IRS said, you know what you can build this building. But if you'll just rent out the first
floor if you just fill it up 20% of the way. The second-year another 20%, three, four, and now
you can rent it out totally. You can lease out the total building and all of your rental income will
be tax-free forever after. I would do that. Because the tax-free access to money will way outperform
having a tax-deferred IRA or 401k in the short run. Is this making some sense. So, I would recommend
that you understand this phenomenon about how you construct an IUL policy correctly. If it is not
structured correctly or funded properly or you don't adjust it then you may earn 11 and only net
6 or 7 or 8. That's always sad for me. That's why it's critical to meet with an IUL
professional that knows how to do this correctly. And so, you'll learn in this book the laser fund
300 pages of charts graphs and explanations how you can determine if your iul professional
knows what they're doing. So that you can have the highest net internal rate of return and the actual
insurance will cost less as a percentage of the money you're earning as you get older.