Why Life Insurance Is Not An Investment | It’s Way Better Than That

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 a 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 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 was 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% 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 9.14% before tax. When you pay tax on it you're netting about 6. But let's say that you could average 12% of the market and you accumulate a nice million-dollar nest egg and you're going to retire and let's say you're earning 12%. Well, that's 120,000 a year that you could withdraw without depleting principal. 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 1% management fee on the million. So, that's another 10 grand. So, if you're earning 12 you're really only netting 7 or 70,000 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's only one financial repository or vehicle that allows people in America to accumulate their money totally tax-free and that's under section 72e 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 of 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 11 and 3 quarters and 15 and a half percent. I never earned less than 11 and 3 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 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 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 act 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 72E, 7702, and 101A. So, TEFRA and DEFRA require 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 to 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 4 payments, 3 years and one day into the fourth year or maybe 5 payments if you're over age 50, 4 years and one day. So, if you wanted to reposition let's say $500,000, the most you could put in would be maybe about a hundred thousand a year the first year, second year, third 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 TEFRA, 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 72e, 7702, and 101a. If you violate those sections TEFRA, DEFRA, and TAMRA tax 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 are taxable sooner or later like tax-deferred accounts IRAs and 401ks. Is this making sense? Now, if this is giving you all kinds of ahas, 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 named 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 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%. 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 4% 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 best-selling 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 IRAs 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.