Welcome back. In this episode we are going to address the question, "What types of life insurance policies are the best?" We're going to go through different types, term, permanent, whole life, universal life. And I'm going to show you how you can more or less buy term and invest the difference on steroids.
Which is my favorite way to go. But I want you to understand the power behind accumulating your money tax-free, accessing it tax-free and then when you ultimately pass away it blossoms and transfers tax-free. How to use life insurance for living benefits more than just for the death benefit. My name is Doug Andrew.
And I started in the financial services industry clear back in 1974. And I was a big buy term and invest the difference proponent. From 1974 to 1980 I helped thousands of people in fact over 3,000 people in 13 western states learn how to set aside money in a term insurance policy and automatically invest the difference.
Because the biggest problem with buy term and invest the difference is getting people to invest the difference in a safe environment that passes liquidity safety and rate of return test. A lot of people don't even invest the difference. So, why did you do all of that? Well, as I would go out and show people the math behind it.
I could outperform at that time traditional whole life insurance because there was only a term or whole life insurance clear back in the 1970s. It was in 1980 when EF Hutton changed all of that. And they basically said, "Why don't we buy term and invest the difference under a tax-free umbrella.
" Now, some people still don't understand how this works. But they realized that life insurance policies were sort of a sacred cow in the Internal Revenue Code, allowing that any money that you put into the insurance policy that accumulated cash value would grow with interest or dividends tax-free.
Because why would they penalize somebody trying to protect their family, be responsible that if I happen to die and leave my wife with our 6 children. Why would they want to make it harder to create financial independence? if I happen to die. So, I'm insuring myself to make sure that if there was an economic loss incurred by me passing away sooner than later.
What we call an untimely death. That my wife would have the wherewithal to continue to educate my children, have music lessons, try out for football things like that. Well, that's why they allowed money inside a insurance policy to grow tax-free. Well, also there is a way that you can access that money tax-free.
And that's under Section 7702 of the Internal Revenue Code. And when you ultimately do die, it blossoms in value, okay. The premiums you paid usually increase and you leave behind a 100 thousand, a half a million, a million, 10 million whatever insurance you purchased. And that's totally tax-free because they want to take pressure off of the government not to have to use welfare programs to take care of widows and orphans and so forth.
And that's why it's a sacred cow. It's been that way for over a 100 years under Section 101a of the Internal Revenue Code. So, you have term insurance and that is where you're just paying the pure cost of your chance of dying in any given year. And that's based upon mortality costs.
For example when I first started, there were 4 30 year olds in the country, 2.13 deaths per thousand. Well, for every thousand of life insurance, the cost would be 2 dollar and 13 cents. So, if you have a thousand 30 year olds, we all put 2 dollars and 13 cents into a hat. And when 2.1, 3 of us died at age 30 that year, there is a thousand dollar death benefit 2.
3... One 3 widows, okay. That's the pure term insurance. Now, it's a little bit more complicated than that. But sometimes people didn't want to have to pay higher rates. Because term insurance goes up every year. Because more people died at age 31, 32 and when you get up to age 60, 65. By age 65 1/3 of American males have already passed away.
So, the cost of insurance goes up. Well, that's where they came out with permanent insurance, where instead of paying the pure cost... There is a term component in permanent insurance but instead of paying the pure cost your way way over paying the actual cost of insurance in the younger years. But later there's a crossover point and then you are under paying in the later years, because you've build up equity or what is called cash value in the permanent life insurance policy.
The problem was, up until 1980 that cash value is only being credited with maybe 2 and a half, 3 and a half percent. Some companies touted dividends in the 6, 7 and 8 percent range. Now, a dividend was tax-free because it's really just a refund of overcharged according to the IRS. If the insurance company is charging you this and your chance of dying was only that.
That overcharge building up that cushion for when you're older and you don't want to pay higher premiums. That was growing tax-free and so if you had a dividend or the insurance company was operating more profitably by not just insuring anybody on the street. They required physical exams and so forth.
That profit would be refunded back or you could use it to buy paid up insurance or whatever and that was tax-free. But it was really just a refund of overcharged. And so that was a refund, that was tax-free. Well, that's all there was. In 1980 EF Hutton came out with the idea, "Hmmm, why don't we use life insurance for the tax-free accumulation of money, more for living benefits instead of death benefits?" People want to use this to accumulate their money tax-free.
Be able to access income tax free. And then when they ultimately die yeah, it'll blossom in value and transfer tax-free. But you know what? Instead of trying to get this much insurance for the least premium. Let's flip it. Let's try to get the least amount of insurance the IRS will let us get away with and put in the most money and it turns into a cash cow.
And this is where I have earned average rates of return after the cost of insurance of 7, 8, 9, 10 percent average. Some years I've earned 25 and netted 24 So, the cost of the insurance is what the IRS requires for it to be classified as tax-free insurance in the Internal Revenue Code. If you violate those sections of the code, it's no longer tax free.
It becomes a taxable investment. So, when EF Hutton came out with this they called it universal life because you could use it for universal applications. If you wanted to use it for a cheap way to buy permanent insurance and the economy's doing well, you could do it. But on the other end of the spectrum if you wanted a maximum funded or living tax-free income benefits.
You could take the least amount of insurance and put in the most premium and it turns into a cash cow. That knocks the socks off of putting money in a tax-deferred IRA or 401k in the market. So, there's 3 types of universal life. I like universal life because it's more flexible. I can put in money and then I can skip several years and cost not a dime.
You can't do that with whole life. But in any given period especially at the end of the day. I've usually been able to earn at least 2 percent higher rates of return in universal life than whole life. Because I'm able to structure it under IRS guidelines to perform better with an internal rate of return.
In other words, some of the best whole life insurance policies out there if they weren't going to credit you as much as 8%, you're only netting 6%. And it takes you until you're age 90 to realize an internal rate of return within 2% of the growth rate of return. I can earn 9 and net 8. I can net 8 which is what most whole life policies at best gross.
So, I would rather have the universal life. But I can put in money, stop, coast, make up for the lost time or do whatever I want. We don't have that kind of flexibility in whole life. Because whole life was primarily designed for the death benefit. Universal life was originally designed for living benefits.
So, look at the 3 types I'm going to explain right now. Back in 1980 when EF Hutton came out with this idea. It was called Maximum Funded Tax Advantaged Life Insurance Contracts. And whole life, they tried to respond and they became more competitive. And instead of earning rates of return of 3 and a half or 4 percent.
They became more competitive with their products but still the flexibility isn't there. And I can usually earn a rate of return of 2 or 3 percent higher with the same amount of money in a universal life. And I can fund it in 4 years in one day. Most whole life takes at least 7 years or 7 pay to do that.
Because there were tax citations passed in 1982, 1984 and 1988. They spelled the acronyms TEFRA, DEFRA and TAMRA. And they allow a universal life policy because of the greater flexibility to be funded quicker and allow you to get a internal rate of return. So, I'm partial to universal life because of those reasons and there's three types of universal life.
When EF Hutton first came out with this idea, it was fixed. And that's where the insurance company is just paying you interest based upon their fixed general account portfolio of triple-a and double-a bonds. Maybe a few mortgages on shopping malls and skyscrapers. Maybe 15% of the money that an insurance company manages which is in the billions, might be on that.
If they were to put money into stocks they'd have to use very, very secure stocks. Most insurance companies only put about 5% of their general account portfolio in that. And so, generally speaking the fixed gives you whatever they're earning. And then indexed is my favorite. But in the 1990s variable came out.
Now, I prefer the indexed one but that didn't come around till 1997. Here's why I prefer it. Fixed and they'll guarantee you like maybe 3%, so that's the lowest you will earn. But see? I have usually on mine earned no less than 4 even though the guarantee is 3. But things could get bad enough, that's it.
But since the year 2000 I've only averaged about 6.3%. If I just say just pay me what interest you're earning minus about 1% for your cost and so forth. But you see the highest I earned was back in 1980 to 1990 was about 13 and 3 quarters percent on this one. And this is with a large company.
But see, over 25 years I've probably averaged about seven point five two. So, that's okay, tax-free. Well, variable came out of the 90s said, "Hey! Why don't we get money out in the market. And let's assign the money in our insurance policy to the market out there and with mutual funds.
Well, you just took away the guarantee." And so there are periods where people have lost 50% of the value in their insurance. And so they had to hurry and pay more money in their. Since the year 2000 sometimes this has been as low as one point eight one percent, pretty pathetic. there have been times that people have earned as high as 35.
But the average is about nine point one four. That's not bad now, you're not netting nine point one four on a variable. Because they're management intensive. See? Maybe only knitting 7. The reason why I like indexing is because 0 is the floor. I will not lose during a year that the market goes down.
During the downturns, during crashes I don't lose. Zero is the hero so to speak. When the market goes up I participate and I've earned as high as thirty-nine point two-two percent. Since 2000 I've averaged eight point four seven percent and that's not with the second strategy I teach rebalancing.
But look at this, the 25 year average has been ten point oh seven. You notice that's about 2 and a half percent higher than fixed. And so, I know that in any 10 year period, my chances of earning 2 and a half percent higher tax-free rate of return than fixed is very, very likely based upon 25 years of history.
So, this is my favorite. Some years if I feel like we're headed for a major recession or a terrorist attack happens. I can just switch back on indexed policies and just settle for the general account portfolio rate until the market turns around. And then I can switch back, that's called rebalancing.
And this is where people can tweak their rate of return even higher than 10%. Or use multipliers or performance factors. And that's explained in another episode where I invited my son Aaron to explain this. So, those are the three types of universal life. I prefer indexed but it must be structured correctly and funded properly in order for it to knock the socks off of the same amount of money being deposited into a tax-deferred IRA or 401k.
And people say, "How can that be? There's fees with this." No, the insurance cost is a minuscule portion that's being paid for with what most people will pay out in income tax sooner or later on other types of investments. I hoped that helped to understand the difference between term and permanent insurance, whole life insurance, the variable, the index and the fixed.
You can tell my favorite is an index to universal life. But it's critical that it's structured properly and funded correctly. That's what motivated us to write our 11th book. I call my Max Bennett insurance contract "The LASER Fund" because it passes the liquidity safety and rate of return tests with flying colors when it's structured right.
So, in this book we talk about how to tell if 1 that an advisor is proposing to you is structured correctly. And you'll tell real quick if they understand and get it. In fact, people who read this book know more than probably 99% of insurance agents or financial planners out there. I would love you to have a free copy you can go to laserfund.
com and you'll have a chance. I'll send it to you absolutely free. It's 300 pages of information and you just pay a nominal shipping and handling fee. And you'll also have some options if you want the audio version or the digital or some mini classes. But the first thing I want is for you to have a copy of this.
If this resonated with you and you want to dive deeper and understand, "Golly, how does this work and what are the historical rates of return?" Even and different than what I've shown you here. This is about you and your future, not about me. I've already done all this. It's from me learning the hard way that I want you to avoid the mistakes I made.
And you'll be way ahead of where I am and I'm not in too bad a shape because of these strategies. I want you to be in better shape.
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