How Soon Can I Borrow From an IUL Policy And How Much Can I Borrow?

How soon can I borrow from an IUL policy? And how much can I borrow? In this episode, I'm going to go into a deep dive to help you understand that when you borrow money, which is the smart way, it's not the dumb way, it's not the sad way, it's the way I recommend that most savvy people access money because it's tax-free. But sometimes people have to get over a loan. This loan is like a phantom loan. It's not due and payable during your lifetime. I'm going to explain that in this episode. But, you know, it depends upon the company, the product, and the liquidity and factors here are incredible. But I'm going to explain something at the end of this episode that I guarantee you 99.9% of financial advisors and insurance agents do not understand, get ready to be blown away. So, I'm Doug Andrew. And, you know, what do I know? Well, I've been helping people optimize assets and minimize taxes now for 5 decades. And my favorite financial vehicle without question to help people accumulate their money tax-free under section 72E of the Internal Revenue Code and then be able to have access to their money, turn on tax-free income at average payouts of 10%, a million-dollar nest egg generating $100,000 a year. If you live to be 120, it is a property structure max-funded indexed universal life by diversifying and rebalancing. Yeah. You could have a 10% payout and not deplete principal if you retire at age 65 and live to be 120, okay? So, it's very crucial to understand this. So, let's go into a little bit of an explanation about borrowing. Why would you want to borrow your money when you could just withdraw it, okay? So, in other episodes on my channel, I talk about 3 ways to access money out of an insurance policy like an IUL. The sad way, the dumb way, the smart way. In a nutshell, the sad way is one heck of a return. But I don't recommend it. That's by dying, okay? It doesn't matter if I take the least amount of death benefit I can get away with in an IUL and I'm putting in 100 grand a year for 5 years. If I have 100,000 in there or I have my full 500,000 in there and I die, the insurance company is going to pay out a million tax-free. So, it's one heck of a return if you die. But it's the sad way. I don't recommend it. But the fact of the matter is sometimes people have untimely deaths, okay? Now, there's the dumb way. The dumb way would be because life insurance is treated with FIFO tax treatment, first in, first out. Let's say that I put in $500,000 into an IUL and it grew to a million. Well, the 500,000 is my basis. That's what I put into that. If that were an annuity or something, it's taxed LIFO. Last money in is the first money out. So, if my 500,000 in an annuity was earning 10% and I started pulling out 50 grand a year, that's all taxable because the last money I'm earning is the first money coming out. That's how most investments are taxed, LIFO. Insurance is one of the very few vehicles that's taxed FIFO. That you recover your basis first. In that example, if I started up started taking out $50,000 a year, it would take 10 years before I recovered my basis of 500,000. That's tax-free because it already was taxed. It was only after that that I would start paying tax. That would be dumb though because the IRS says you don't have to. It can be tax-free. Use the loan provision. Borrow from the insurance company. Immediately people say, why would I borrow my own money? They don't understand how money works. So, here we go. If I have a million dollars of cash value in my policy and if you understand how to rebalance and diversify, you will be able to earn average rates of return of 11% or more if you do that, okay? If not, you might earn only 8% and net 7%. But we've been able to earn over 11% and net 10%. Cash on cash. So, that only 1% of the money you're earning goes for the cost of the insurance. But the insurance can get cheaper as you get older if you do it right, okay? And so, when you go to access money and you have a million dollars of cash value in there, the insurance company, just like a bank, if you went to a bank and you had a million dollars deposited in CDs at the bank, you can either take it out. Now, you don't have your money there earning interest. Or you could borrow from the bank and pledge your million dollars of collateral. But the bank would probably charge you more interest than they're paying you on the CD. Not with an insurance company. The insurance company will loan you money based upon your collateral that's on deposit with them in the insurance policy. And they will credit you equal or greater interest than what you're paying if you borrow it out. So, why would you borrow? Because if you understand how many works, you're going to make money by using the loan provision. It's a phantom loan is what I like to call it. It's not doing payable during your lifetime, okay? So, when you borrow, when you ask, how soon? How much? Well, that depends on the IUL policy. Depends on the company and the product. If you're designing an IUL primarily to have tax-free access to your money sooner than later, you choose products that allow you to borrow in the second year. Some companies will let you borrow on what is called the zero wash loan the first 5 years or 10 years. And then you can use the indexed or alternative or participating loan where the insurance company is crediting you way more interest than they're charging you. So, we actually have a matrix depending upon what your objectives are, okay? So, some companies allow for loans and certain types of loans. My preferred is what is called an indexed loan or an alternative loan sooner than later. Those are the ones that many of our clients choose, okay? Now, and the fact of the matter is you can actually, you know, most people if they had a million dollars of cash value, they want to use it for tax-free income. And they say, Doug, how much can I pull out? And I say, well, if you wanted to take the maximum amount, if we keep meeting annually and we rebalance, you could pull out, you know, 7%, 8%, 9%, even 10% a year based on history and not deplete your principal. So, a million dollars, you could borrow 100 grand a year and your million would pretty much just sort of stay there, okay? If you live to be 120, that's pretty incredible. That's called a 10% payout. Now, if somebody says, well, I need as much of my million as possible. How much of my million of cash value can I access? Well, if you did it the dumb way, you could just withdraw the money, cancel the policy and take out a million. Why is that dumb? Because now you just triggered tax. If you put in 500,000 and it grew to a million, you would owe tax on the gain of 500,000. In a 40% tax bracket, you would owe 200,000 of tax. You pull out the dumb way, you pull out a million and you pay tax of 200,000, you only netted 800,000. That's dumb. Because you could borrow, the insurance company would loan you 92, 93% of that million. 920 grand, 930 grand, which is way better than 800,000 net after tax. They'll loan you 930,000 and it's tax-free. People say, well, when do I have to pay the loan back? Never. It's not doing payable during your lifetime. It's what I call a phantom loan. It just sits there on the ledger of the insurance company because the loan is accruing a nominal statutory interest rate or else it wouldn't be construed a true loan. But they're either crediting you on the cash value you left as collateral that you didn't withdraw. They're crediting you the same rate. If they're charging you 2%, they're crediting you 2%. It's a zero-wash loan. It's not costing you anything, okay? Now, that's okay. But most of our savvy clients use an index loan or a participating or alternate loan. That's where the insurance company says, oh, we'll charge you a little bit higher rate, maybe 4% or 5%. But we'll keep crediting you on that million, whatever the index rates are. And if you're averaging 10, you're getting credited 10, they're only charging you 5. On a million dollars, okay, if you borrowed a million and they charge you $50,000 but you're earning $100,000, $100,000 of interest that year minus the $50,000 they charge you, you're still netting 5% tax-free on your money even after the loan. If you withdrew it, you would not have that extra $50,000 of tax-free growth. Are you getting it? I had a client in 2017 that borrowed a million at 5%, $50,000 and they got credited 25% that year, $250,000 on their million. $250,000 minus $50,000 of loan interest. They netted 20% of $200,000 on their million while they were actually using the million to make 3 million in their business. See, savvy people, they use this. Is this making sense? So, let me just explain it this way. If I fund it correctly, okay, with a policy and I fund it in accordance with Tefra and Defra guide that I take the least amount of insurance I can get away with, okay? So, with IUL, if I was a 60-year-old and I wanted to reposition $500,000, I can get away with about a million dollars of death benefit. I could get way more life insurance of that but that's not my objective. I want the least amount. Whole life would require maybe a million, 2 million, 3 million, 5. It would be way more expensive. Tamra allows me to put in that $500,000 if I was a 6-year-old maybe $125,000 a year. I can get in most my money in 3 years in 1 day. In 4 years, I'm funded 4 years in 1 day. Whole life would take me 6 years in 1 day or 7 payments. I can get the money in faster. So, the cost of the insurance is actually getting smaller as you get older because the cash value qualifies as part of the death benefit. My cash value for many clients, their cash value grows to equal and exceed the death benefit within 11, 12 years, 15 years. Now, there is no technical cost because their cash value equals and exceeds the death benefit. Half a million doubles to a million. A million doubles to 2 million, okay? The cost of insurance is nothing. So, a lot of agents don't understand this. So, let's go back to the loan. If my half million I put in grows to a million and I start taking out loans, okay, for tax-free income, I told you a 10% payout is often very feasible. What's 10% of a million? 100 grand a year. I've had many, many clients who start taking out $100,000 a year in loans. So, let's simplify this. They start loans at age 65 or whatever. 100 grand a year, tax-free. It's tax-free. They do that for 20 years. 20 years times 100,000 is $2 million. There's this phantom loan on the ledger of 2 million plus interest, okay? Maybe the interest accrued is $500,000 or $600,000. Yeah, it's this $2.6 million loan balance. Is that due and payable during their lifetime? No. If they happen to die, the death benefit is growing ahead of the cash. If they happen to die, it'll pay out $3.6 million minus the $2.6 million loan balance is still netting a million dollars tax-free if they die. But see, it's not due and payable during your lifetime. Now, here's what a lot of agents forget. You don't have to pay it back. It doesn't mean you can't. Did you understand that? So, there's many times I've had clients who come into a windfall. They get an inheritance. They sell a piece of property. They downsize their home and they have this lump sum of money. Doug, I have a couple of million dollars here. What can I do? I'm too old now to get a new IUL policy and I'm not as good as hell. What's the next best place to put this 2 million? I'm going, just put it back in your grandfathered IUL. Yeah, they may have made some tax law changes but you're grandfathered. You're protected. What do you mean? Well, you have this $2.6 million phantom loan balance. You don't have to pay it back. It doesn't mean you can't. So, I could put in 2.6 million and one fell swoop into my existing grandfathered IUL. I don't have to comply with Tamra. No. You've already jumped through those hoops. You could put in up to 2.6 million in one fell swoop. The IRS just says, oh, they decided to pay back a loan. Didn't have to but they did. What does the insurance company think? You've got this million that's generating this hundred grand a year of tax-free income. The 2.6 million you drop in there that paid off the loan, it's just new money. Now, instead of having a million of cash value, you've got 3.6 million of cash value. You could start taking out 360,000 a year of tax-free income instantly at the same 10% payout. You don't have to wait 5 years, jump through Tefra and different Tamra hoops. You've already done that. Does that make sense? So, don't get hung up on it. It's a tremendous benefit. It's extremely flexible. If you want to learn more, yeah, you can go to laserfund.com. Just contribute a nominal amount towards the shipping and handling. I'll cover the rest of that. And I'll send out a hard copy of this 300 page book to you. But I would suggest if this is intriguing you, do a deeper dive. Check out this episode up here and learn a little bit different perspective. Okay? This is about you and your brighter future.