Hello again. In this episode, we're going to address the question "Is life
insurance a good investment?" Oh, I wish I had a nickel for every time I've been
asked that question in my 45 year career. The short answer is absolutely not.
Because it's not an investment. The financial services industry says an
investment means your money is subject to volatility in the market. And it's
going to be taxable. I don't want to pay taxes on where I put my money. And I
don't want volatility. So, is it a superior place to put your serious cash?
Absolutely. Are you confused? I'm going to clear up that confusion right now.
I'm Doug Andrew and I've helped people optimize their financial assets and
minimize taxes for 45 years. And you know what? When I say, "Now, life
insurance should not be purchased as an investment." Because if you understand the
definition of investment based upon the financial services industry and all the
regulators, I don't want an investment. Because they say investments are usually
subject to market volatility and they are going to be taxable
sooner or later as in an IRA or 401K. I don't want to pay taxes on what I'm
earning and where I put my money. And I don't want to be subject to market
volatility. So, life insurance is it a good investment.
It's not even deemed an investment in the Internal Revenue Code. It has a
totally different section that allows you to accumulate access and transfer
your money totally income tax-free. Now, it's funny in this day and age where
people say, "Oh, your house is a good investment." Did you know that a financial
planner cannot call your house an investment legally? We say, "Oh, I invested
in my kids college education." No, you can't call that an investment. So, this is
why people get confused. That's why I let all my licenses go back in 2005 because
I'm fine. But it's because I needed to help
educate you --people all over America on the best way to save the financial
services industry does not allow me if I have a license to teach you in the
vernacular to help you understand. So, do I think life insurance is an excellent
place to accumulate money? Absolutely. Is it a good investment? Not under the
definition of investment. It actually is way better than that.
You know, in other episode talk about the history behind my favorite vehicle,
indexed universal life insurance. And with when EF Hutton came out with his
idea back in 1980. I used to use the metaphor of a bucket. I would help people
establish an insurance contract. And some of my clients ended up with 4, 5,
6, 7. I had one person had 17 of these. Because once you fill up one,
there's no limit to what a grows to. But you don't want to mess around with a
grandfathered bucket that is tax-free. This would be an insurance policy. And so,
if they had more money, new money and they would open another one and another
one and another one to diversify. Because why would you diversify into inferior
vehicles when this is superior to anything else? And you can learn why in
my various books and educational videos. But when I have a client that has a an
insurance contract Universal Life it's like a bucket, what happened is the IRS
said, "Well, under three sections of the code Section 72(E),
money you put into this insurance policy, this bucket. You're putting after-tax
dollars into it. But it will grow tax-free." If you want to access income
out of it, you can do that and you don't have to pay tax on any of the income. And
when you die, it blossoms and transfers tax-free.
But EF Hutton said, "Hey, let's take the minimum death benefit." Instead of trying
to get the most insurance for the least premium, you're trying to get the least
amount of death benefit, the IRS will let you get away with and put in the most
money as fast as the IRS allows." And these are tax citations TEFRA,
DEFRA and TAMRA. And they were passed back in 1982, 1984, 1988. So, TEFRA and
DEFRA dictates the minimum amount of insurance that you must have attached to
the insurance policy in order for it to not move from tax-free umbrella in the
Internal Revenue Code over to taxable investments. You cannot change the
definition from tax-free insurance to investments because now you've just
triggered tax. So, that's why you can't call it an investment. And so, you do that
but when AF Hutton designed this, the IRS allowed us to have parody. Now, that means
it doesn't matter if you're a 22-year old athletic marathon running female or
a 67-year-old geezer like me or an 83-year- old friend of our family who had
three blocked arteries adult onset diabetes and a prostate cancer episode.
As 6 sisters, presidium and 3 brothers. The cost of insurance which is
the spicket on this bucket is the same for all of us. Because the amount of
insurance required when you're structuring it to perform
as a living tax-free accumulation benefit and tax-free income, the amount
of insurance is less every year older you are and the more unhealthy you are
as long as you can still qualify, the cost of insurance is the same. So, in a
nutshell, for years, I have earned 9% and netted 8 on some of my universal
life policies. I've earned 11 and netted 10. That 1% is the cost of the
insurance, the spicket on that bucket that makes it tax-free. But I'm earning
11, I'm netting 10%. That 1% would be otherwise payable tax if I put it in a
vehicle like an IRA or 401K. So, it's really free insurance, not really. But
I'm not paying for it. But see, an 83-year old, if he earns 11 he nets 10, just like
the 22-year old because the amount of insurance required is less the older you
are and the more unhealthy you are. You cannot believe how many insurance agents
don't even understand what I just said. When you do that, then in 1988 they said,
"Okay, you have to spread out the funding. So, let's say you wanted to put $500,000
into this." We have many people who do that. Sometimes, when they're 50-55 years
old, sometimes we structure them to accommodate a million or 5 million,
you can't do that in an IRA or 401K. You can only fund it
usually in about 4 years and 1 day. The first year you can put in 100,000.
The next year, another 100. The next year another 100. And next
year, another 100. If this was on the first day of the first year, you put in
the first 100,000, in 4 years and 1 day into the fifth year, you can
finish filling up the bucket. And once you do that, you have now grandfathered
yourself to be able to have tax-free growth and tax-free access to all the
money in there, all the interest forever after. And that's called grandfathering.
So, it will knock the socks off of any other vehicle. This spicket, the cost of
the insurance is actually watering a money tree that will blossom when you
die. Because if I put in 500,000 and I die, it leaves behind
1,250,000 at age 60, let's say. Now, I can buy way more life insurance than
that with 500,000 but that's not the
objective when you're doing this. You're trying to take the least amount of
insurance and put in the most money. So, as I begin to put in the money, pretty
soon 500,000 of the million 250 death benefit is my own
money. So that spicket on the bucket is only draining out the difference for
750,000 of insurance because 500,000
is my own money. If this 500,000 doubles in
7 to 10 years like mine has done, well now, I have a million five
thousand doubles to a million. And now the only risk the insurance company has
is 250,000. The difference between the original
1,250,000. And the million that's now my own money. Do you know usually in less than
10 years, you're not having to pay for insurance anymore.
You've got a grandfather tax-free bucket because it's all your money now and it's
all tax-free. When you die, it just blossoms by about 5%. So, what
does that mean? TEFRA and DEFRA provides parity. Doesn't matter your age, gender or
health. The amount of insurance required can be squeezed down so that everybody
has the same rate of return. Parity means equality. The owner receives the
tax-free accumulation and income. I own some of these on my wife. My wife owns
on me. My kids own them on me. I own them on my kids.
The owner of the insurance contract is the one that gets all the tax-free
growth and income. I'm just using surrogates to put the insurance on. This
is why banks own insurance policies on people. They don't need the death benefit.
They want the tax-free income and growth on the insurance. And so, they just simply
put the insurance on somebody else and they let them have the difference if
they happen to die. But the bank owns the policy on somebody else. The insurance
component can become cheaper as you get older. Have you ever seen an insurance
policy get cheaper as you get older? You haven't seen one done like this? Every
year older, I have some that I've had for 30 years and they cost 120 it's what
they did when I was age 30. If you have not seen one structured to get cheaper
as you get older, you have not seen it done correctly. It's the best way to buy
term and invest the difference. So, let me show you in a glimpse the power behind
this. So, let me connect the dots for you. When you structure
an indexed universal life insurance contract the proper way under Section 72
E 7702 and 101(A) of the Internal Revenue Code,
it's an incredible capital accumulation tool. A place to put money where it grows
safely, tax-free and incredible predictable rates of return. You can
structure it to where you can throw in 500 grand. Or you could just structure it
to put in 500 bucks a month. But the minimum death benefit ,let's say if you
were 60 might be 1,250,000. If you're
older, it might only be 800,000. If you're 20-years old, it
might be 5 million. But that insurance costs the same regardless of whether
you're young or old under TEFRA and DEFRA. And those are the tax
citations that I talked about. The reason why I love this is because it gives me
tax deferred growth. It's tax-free accumulation and transfer. It gives me a
competitive internal rate of return. I've averaged 8.2% net for the last 45
years. It's creditor proof. If you happen to
pass away and they can't just come and grab this. It is protected from creditors
of a deceased person. It has guarantees in there. I can have a guarantee of I
will never lose when the market goes down or I can have a guaranteed floor of
3% if I want. Unlimited contribution. I'm not restricted like
IRAs or 401Ks. If I have a banner year, I can throw in 100 or 200 thousand. I can
skip and coast and not put any money in and then put in a whole lump sum later
and make up for the lost time. You can't do that in an IRA or 401K. You have a lot
of investment options when it comes to the actual indices or the index that you
choose. It can be a state tax-free if your advisor knows what they're doing.
You have liquidity, you have use, you have control, you have safety of principle and
you can use it as collateral. You can borrow your money out of the
policy at 2%. And they will continue to credit you 2%. So, you can take your money
out, there's no charge or you can borrow at maybe 5% and they'll keep crediting
you the indexed rate of 10%. Many clients do that. Or you can take your policy to a
bank. And if you have a half a million in there, they'll loan you a half a million
because this is rock-solid in an institution rank 6 not
higher and safety than the bank is. So, you can use it as collateral. So, the
takeaway is you want to structure it under TEFRA, DEFRA, TAMRA guidelines
so your money accumulates tax-free, you can access it tax-free. When you die, it
blossoms and transfers tax-free. But this is not an investment. In my opinion, it is
way better than that. But we always have to say life insurance
policies are not investments. And accordingly should not be purchased as
an investment. So, what is it? People say, "I've always thought insurance in general
was a poor investment." Actually we agree. Because most of the time, it's not an
investment. It's an insurance policy and unfortunately, most insurance policies
are not structured to do what I just explained to you. How unfortunate is that?
So, what can go wrong if it's not structured properly under tax guidelines?
if it's not funded correctly? If it's not designed in accordance with IRS
guidelines to be tax-free? If you don't comply with these sections of the code?
No, it's not going to be tax-free. It's going to move over to the investment section of
the code which are subject to taxes sooner or later. If you use the wrong
product or the wrong company, but even if people understand the
product and the company, if their advisor is not proficient, they will waste 5,
6, 7 years before they realize, "Ah, my nephew, my brother-in-law told me they
could help me. Why didn't my money double like Doug Andrew says on the radio?" I
look at it and in less than 60 seconds, I go who designed this for you? They had no
clue what they were doing. How unfortunate. You want to go to an advisor
that's proficient. If you want a checklist of how to know if your advisor
knows what they're doing, I would recommend you read this book. There's a
checklist in here but you'll be able to go on a deep dive. And that's why I write
books. This is free if you would like a copy. You just cover a nominal shipping
and handling fee, the Laser Fund. This is over 300 pages of charts, graphs, examples.
And also 62 actual client stories of how the laser fund is used not only for
retirement but college funding. It knocks the socks off
of a 529 plan for college funding for your kids or grandkids. Emergency funds,
real estate management. Business planning. Working capital and you'll see why this
is my favorite vehicle. Go to laserfund.com and get your free copy. I want to
fire one out to you. So, you can be empowered and not miss out on the
fortune so many people miss out on. Because they won't take the time to
learn and get educated.