Indexed loans allow you to earn money on what the market is doing but
only be charged a nominal interest rate on the actual money you're borrowing
from your policy. Now, in this episode, I'm going to answer
the question, "What is the difference between fixed and
indexed loans?" Get ready because you're going to
be blown away with what arbitrage can do for you.
Hi, I'm Doug Andrew and I've been helping people
optimize their assets for 46 years. One of my favorite
vehicles that I call the Dream Solution for retirement planning for real estate
management, for emergency funding, for business working capital.
But most people come to me wanting to accumulate their money on a tax-favored
basis and then be able to access their money tax free
down the road for whatever purposes they need. Most people came to me wanting to
save for retirement. When it comes to start income coming out of their indexed
universal life insurance policies, I tell them, "Well (And there's three ways if
you read in my book) to access money out of your insurance
policy. There's the the sad way, the dumb way and there's the smart way."
And they go, "Oh, really?" Well, what's the sad way? Well, it's one
heck of a return but I don't recommend that one.
That's by dying. But see, if I put in $500,000
at age 60 and in a brand new index universal life policy, this
simplify this. And I died the next day, I don't leave behind 500,000 like I
would in an ira 401K or a mutual fund. The 500,000 would blossom to
1,250 000 and transfer tax-free. The rate of return is incredible but
it's sad. Okay? Now, most of my clients
used universal life for living benefits. And so, when they go to access money even
before retirement but especially in retirement, there's a
dumb way to pull it out and there is the smart way.
So, let's cover the dumbway first and then I'll talk about the smart way by
using index loans. So, if I need to access money, I'm going
to simplify this. And let's say at the time that I'm going to retire, I
have a million dollars of cash value in my index universal life policy.
And you can extrapolate from this example. Now, I can take it
out and withdraw my interest, okay? Because a universal life is tax FIFO.
That means first in first out. In fact, it's one of the few
investments or places where you can put money that is
taxed FIFO instead of LIFO. See, if I were to put a million dollars, I had a million
dollars in an annuity, I we're earning 10% which most don't earn,
if i start pulling out $100,000 a year, that's my interest.
I'm pulling out my interest first and I have to pay tax from day one.
With universal life, if I start taking out $100,000 a year
and I put in a million, then the first
100,000 is deemed part of my basis the first money in that i invested
and that was after tax. And so, it would take 10 years under that
example to recover my basis. That would be tax-free.
But if i kept withdrawing money starting the 11th year in this example, that would
be dumb because the IRS says well now you're
you're withdrawing you're into your gain and you're going
to have to pay tax. And the IRS actually says, "Don't do that. That's dumb.
If you'll do it this way, just change the nomenclature.
Instead of calling it a withdrawal, call it a loan."
Now, critics who don't understand this, they go, "What!?
Borrow your own money? They're going to charge you interest. Why would you borrow
your own money?" Those people don't understand how
money really works. This is why it's smart: First of all, when
you borrow money for anything, you don't have
to pay income tax on loan proceeds. When you borrow money for your house or your
car, you don't have to pay tax on it. It's not
income. so, the IRS says, "Just change what you
call it. the nomenclature. Just call it a loan and it's taxed free." You simply say
i'm going to borrow the equivalent of my interest. So,
let's go back to that million dollar example.
If you're earning 10% to keep it simple, and because i have averaged 10.07%
for many, many years in my own universal life policies,
I'm earning $100,000 a year in interest. But instead of
withdrawing it, I'm saying, "You know what? Just leave it
there." And so my million now grows to 1,100,000. And then i
get compound interest on that. But it goes to a million, 2 million, 3
and so forth. And so, my actual cash balance is growing because I'm not
withdrawing money out of it. I'm not withdrawing. I'm
borrowing the equivalent of my interest. So, the very first year, I have a million
one of cash value now and I have $100,000
phantom loan. Now, I call it phantom because
the loan is never due and payable during my lifetime. I can pay it back if I want.
But no. It's paid off when I die because this
blossoms to the death benefit and transfers tax-free and it pays off all
alone. And so, I'm simply using the loan proceed
because it's tax free. So, a million one of cash value minus
$100,000 phantom loan equals the same million that I
would have had had I pulled it out the dumb way. And paid tax on that
100,000 maybe of 30 or 40 thousand dollars. Why do
that? The next year, now my cash has grown to let's say a
million two. I have 200,000 loan balance. A million two minus
200,000 is the same million that I would have had had I pulled out
the money the dumb way and paid a bunch of taxes.
I have had people who have taken out a hundred thousand a year let's say for 20
years. They have a 2 million dollar phantom
loan balance but they've got 4 million over here.
This minus this is always the same amount or greater than if they had
pulled it out the dumb way and paid a bunch of unnecessary tax.
Now, there are 2 options when you use the loan
provision when you start taking tax-free income out of an
IUL policy. Let me share them with you. So, the first option is the most
conservative and it's called the zero wash or zero
cost loan. Some companies charge you a little
tiny bit of a spread. But most of the companies where I have
universal life, it is called a zero-wash loan. So, if I
were to borrow my money, the insurance company is required by the iRS to charge
you on your ledger a a nominal interest rate
to construe it as a true loan. Otherwise it doesn't qualify.
So, they charge a nominal interest rate on
the loan balance that's phantom as I said. But over here on your cash that you
didn't withdraw, it's growing they credited you
the same exact interest rate as they charged you
on the amount of your cash value that collateralized the loan.
Had you pulled it out the dumb way in other words? So, if I have a million
and it goes to a million one a million 2,
the 100 or 200 thousand over here is being credited the same
interest rate as the loan is. So many times I borrowed at 4
and they credit me 4. I borrow at 2%, they credit me 2%.
It costs a net of zero and that's what qualifies
my $100,000 a year of income to be totally tax free.
It's not deemed to earn, passive or portfolio income.
If you have income and it's not one of those 3, it's tax free. It's
that cut and dried in the internal revenue code. So,
when we do a fixed or zero-cost loan it is the same interest rate or
almost the same interest rate and it's called a
zero-wash loan. Now, what do I do? Most of the time, I use index loans or
what are called participating loans. Now, if the economy is going down, down,
down, I might use a fixed loan because i can change
the way I call the loan every year. Did you know that? But I use an index loan if
i think the economy is going to continue to grow upward.
What's that? That's where the insurance company as your balance
grows from a million to a million one, million two, million three, million five,
2 million. That is being credited, the entire amount
is being credited with the index rate. Maybe you get
credited 7% one year, 15% percent another year, 20%
another year, 12 another year. Maybe zero a few years if
the economy is tanking. But the average is usually between 6
to 10%. So, that means I'm going to pay a higher
interest for an index loan because they have to
manage it a little bit differently. So, a lot of the companies I use may
charge you 4.5, 4.6 percent. Let's say 5%.
So, on one of mine, they charge 5% on the phantom loan balance.
But they credit me whatever the index does. There have been
many, many, years they have charged me 5 and they credited me
10. It wasn't a wash. They paid me twice as much they paid me 100%
more than the cost of calling it a loan. On a million
dollars, they charged me 50,000. If i borrowed a million
dollars, they charged me 50,000 but they
credited me 100,000 that year, 10%.
Do you know in 2017? We had many clients who borrowed
let's say a million dollars out of their universal life policies for business or
whatever. They were charged 5% but that
year, many of them got credited 16 or 160. So, they made 160,000
minus the 50. They netted 11% tax free on money that was no longer in
the policy that they were using for their business.
And they made money there and they kept making 11% tax free
on the balance over here because they used the smart way to pull it out.
We had some in 2017 that borrowed it 5 and earned
25. So, they earned a quarter of a million dollars on their million
that year here. They were charged 50,000. This minus this, they netted
20% percent. They made $200.000, tax free
on their million even though the million wasn't really there anymore. They had
borrowed it out to use it in their business.
This is incredible. That's called arbitrage. This is how money really works.
And so the difference between fixed and indexed loans is
fixed is usually a wash. They charge you 2,
they charge you 4. They credit you the same rate.
That's a zero wash. You may want to use that when the markets are
nose diving. But when the markets are growing which is usually 70% of
the time, I choose to use indexed or participating
loans where they charge me a lower rate and I
usually get credit at a higher rate If that spread is only a half of a
percent or 1 or 2 percent, it can allow you
to pull out 2% more out of your nest egg on a million
dollars instead of pulling out 70,000 or 80,000 a year.
I can pull out 100,000 a year and not deplete my principle because of
using index loans. How incredible
is that? And when people hear this, they go,
"Say what?" So, if this is intriguing you and you want to learn and actually see
examples of how this works, if you started tax-free income at age 65,
and you live to be 120, you would see this phantom loan balance
but you'd see the cash balanc,e this minus this and how you have
tax-free income for life. You can see this in our most
recent best-selling book The LASER Fund. It's a 300-page book
with all kinds of charts and graphs and explanations and 62 actual client
stories. The book retails for 20 bucks. I would
love to gift you free a copy of this book. I'll pay
for the book. If you go to laserfund.com, L-A-S-E-R, fund ".com"
and you contribute $5.95 towards the shipping and handling,
I will fire out a copy of this book for you. You can begin to learn
how you can dynamically increase your rate of return
by double, maybe triple over what money in the market would generate for you
under the financial services industry standard 4% rule.
And why the smart way to access money in my opinion
is to use the loan provision and probably 70% of the time,
the indexed loan provision or participating loan versus the zero-wash loan.