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how to properly design an ilul insurance policy in this episode I'm going to talk about a a a situation a phenomenon some uh financial advisers call it that where you can maximum fund an insurance policy and take the least amount of insurance you can get away with under IRS rules and it turns into a tax-free Cash Cow and many financial advisers do not understand what I'm going to teach you in this episode so get ready I'm going to Enlighten you on how to properly design an ilul to be used as a living benefit more than the death benefit I'm Doug Andrew and I've been doing this for five decades helping people prepare for long-term goals such as Retirement uh maybe saving money towards College funding for their kids or grandkids uh maybe using money as working capital for their business or for Real Estate Management emergency funds maximizing their pension if they're a school teacher police officer or firefighter uh sometimes getting money out of irisin 401ks into a properly designed IL which will knock the socks off of leaving it in an IRA 401K invested in the market once people come to a realization wow uh this is like the dream solution for many long-term financial goals now I would Define long-term as any Financial goal 5 years or longer down the road okay so once you want to look at doing this it's imperative that you go to a licensed individual and I would recommend a certified IL specialist that understands how to do it correctly unfortunately I have discovered that probably 99.9% of iul policies sold in America are not designed correctly to do what I'm going to show you here to be used primarily for living benefits so let's go through this uh and give you some epiphanies some aha moments as I explained the history behind these and how you design one correctly now I have taught this for now five decades uh universal life uh started in 1980 so let's go to when I began uh I started actually in 1974 and uh I had a series one Securities license and also an insurance license back then and I was a big bu term insurance invest the difference into mutual fund type of proponent and uh that's because when people actually bought term insurance and actually invested the difference with a a pretty good chunk of their money and the product that I was using back in 1974 sort of forced them to do that see whole life forces you to uh overpay for the insurance uh especially during the early years and it builds up that cash value but I knew that if uh my clients were disciplined that I could have them uh have at least 2third of their dollars go into uh a mutual fund or mutual funds of their choice and by diversifying and using dollar cost averaging if they could earn you know 8 9 10 11 12% uh they could far outperform whole life insurance uh the key was is making sure they could earn that rate of return now dalbar says that uh over any 20-year period since the Great Depression if you buy and hold stocks or mutual fund shares you'll probably average about 99.14% before tax you'll net six that outperformed whole life with their average dividend rates and so forth now what we were trying to do is earn 12% but even if you earned 12% uh if you have to pay tax on that at the end of the day you earn 12 and in a 33% tax break pet which most of my clients were in uh 12% isn't all your money if you had a million dollar Nest Egg you're earning 12% theoretically you ought to be able to pull out 120,000 A Year Without depleting The Nest Egg okay but you pull out 120,000 you pay 40,000 in taxes between federal and state taxes 41 out of 50 States has a state income tax you're only netting 80,000 to buy gas and groceries and many asset managers charge another 1% on that million dollars they're managing so you only netting seven you're earning 12 but you're only netting seven see the reason why um EF Hutton who is the brainchild behind the Emergen of universal life came out with it they said hey we could just earn 11 and Net 10 because back in 1980 when a universal life was introduced interest rates were high and so from 1980 clear into the 1990s uh I never got credited less than 11 and 3/4% on my universal life and as high as 15 1.5% let's just use 11 I'll use I'll use even less than the 11 and 3/4 but I could earn 11 and Net 10 meaning the the 1% difference was not tax it was the cost of the insurance that the IRS said had to be there in order for it to be tax-free and then when interest rates started to come down in the 1990s index universal life was introduced so that you could still earn rates of Return of 11 and netting 10 which I have done uh ever since 1980 I've averaged 11.17 and I've netted over 10% cash onh rate of return on my index Universal Life by rebalancing and uh by diversifying okay indexing allowed that to continue to happen even when interest rates came down down down to the four and 5% range on the Investments that a lot of insurance companies have their money into okay so what happened is when efon came out with it in 19 1980 uh I had over 3,000 clients in 13 Western States that had money in the market in mutual funds and they were never happier than when I got their money out of the market because of that volatility okay now in a nutshell what EF Hutton realized that for um now it's been over 110 years in the Internal Revenue code money inside of a permanent life insurance policy a cash value policy accumulates tax-free under section 72e of the Internal Revenue code because people who would do this were taking pressure off of the government uh to provide for them uh if they died and they left behind a widow and orphans that they weren't going to be dependent on the government and Welfare so it was actually helping the government it was saving them money and so they said we're going to let these be tax-free well when uh EF Hutton said why don't we use it primarily for living benefits not just the death benefit uh let's have people take ownership and put into these to use it for taxfree income that's also taking pressure off of the government to uh have to provide for people who did not save for their retirement and so they're rewarding those that do because they don't have to um rely on welfare or charity or their children for support and so under the three sections of the code that have been around in one form or another now for over a century money accumulates taxfree under Section 72e whether it's interest or dividends or whatever uh money and Insight of an insurance policy a permanent insurance policy is tax-free as it grows section 7702 talks about how you can access money while you're alive you don't have to die to get the money taxfree uh when you die it's taxfree under Section 101a life insurance is always income taxfree that's section 101a section 772 uh dictates how you can access the money that's in there uh while you're alive and use it for tax-free income so that if you're doing what EF Hutton uh came up with the the idea that you could accumulate money and you could put in uh you know 500 a month for 30 years and end up with a million dollars or you could sock away a h 100,000 a year for five years that's a total of 500,000 many of my clients have done that clear back in the 1980s and when they put in uh 500,000 it doubled in 7 and A2 years to to a million in another 7 and a half years it was wor 2 million it doubled again then it doubled again to 4 million doubled again to 8 million so in the 30th year they had they had $8 million tax-free uh and they started out with 500,000 they didn't add any more money it just grew okay because they were earning an average return of at least 99.6% 9.6 into the rule of 72 your money's going to double every 7 and a half years and they were netting at least a 9.6 and so that's section 7702 this is what what happens when you die whatever you leave behind blossoms increases in value and transfers taxfree nothing else does this in the Internal Revenue code I've taught Advance continuing education to CPAs and tax attorneys now for years and I've always challenged them show me any other Financial instrument that does that and they've yet to show me any now uh if you've watched very many of my educational videos when this was first introduced in 1980 uh the IRS went to EF Hutton and said we think you're overstepping the back pounds of tax-free accumulation inside of life insurance under these section of the code uh you're trying to use it for living benefits and and uh why are are your clients putting in you know this much money into a dinky little life insurance policy and they say it's because they're using it for living benefits they took them to court EF Hutton won they weren't doing anything wrong but then the IRS went to Congress and uh they convinced them to to redefine it or change some tax definition s so these are called teer de and Tamra these are acronyms teer is the tax Equity fiscal responsibility Act of 1982 and uh they didn't know qu quite what they were doing they had to redefine it again two years later 1984 under the deficit reduction act basically the te defra tax citations have to do with that this is an insurance policy that is taxfree and what you're doing is you are putting in uh a a lot of money into it and as you put the money in then the death benefit uh that's at risk to the insurance compan is going down because your cash is growing inside of it the insurance is actually getting cheaper as you're getting older it's called your self-insuring and I'll explain this graphically here in just a moment a lot of Agents don't understand this and so te and defra would dictate at the beginning of the account the minimum amount of life insurance death benefit that would be required based upon the amount of money that person wanted to reposition over you know one payment or five payments or 30 years worth of payments and so you have to calculate how much money do you want to be grandfathered to put in there and so te and defra uh calculates what the amount of money would be during the first 11 years even if you don't take 11 years to get it in there don't worry about 11 years but the point is this uh the amount of insurance is dictated based upon the person's age gender okay and health but te and deer gives it parity and a lot of Agents don't understand this parity means equality which means if you're setting up an IL to perform uh to grow taxfree at the best net internal rate of return So at the end of the day if you averaged 11 you'll Net 10 if you earn nine you net eight or whatever uh you want the insurance to become cheaper as you get older then teer and deer says the older you are when you start it the less in the the you you are required to have less insurance than if you were younger what does that mean okay it means that if you wanted to reposition $500,000 in one Fell Swoop or over five years or over 30 years and you are a 22y old uh female uh the amount of insurance under te and Deford required might be five or six million bucks uh if you're a 60 year old and you wanted to put in 500,000 the amount of insurance is only $1 million you get away with less insurance if you're like a friend of my family who came uh to us in 1980 he was 78 but he had a life expectancy of an 83 year old because he had uh three blocked arteries adult onset diabetes uh uh prostate cancer episode six sisters pred Dees him and three brothers and so he uh was raided table D okay he had to pay twice as much for the insurance so he wanted to reposition 500,000 which he did and we just squeezed down the death benefit down to about 700,000 he wasn't interested in 700,000 of insurance he was interested in his 500,000 generating 50,000 a year of tax-free income a 10% payout taxfree which he realized right off the bat and so uh he got the same rate of return he earned 11 and Net 10 even though he was technically like a 83 year old uh because he got away with less insurance than the 20 20-year-old had to have in order to accommodate 500,000 now there's a lot of agents that don't understand that and so the actual Insurance required is less and it gets cheaper as you get older when you maximum fund it okay and so that comes under te and Def Tamar basically dictates how fast you can put it in there so Tamara was not passed until 1988 so let me explain this with a metaphor of a bucket when you design an IL it's like a bucket and you're trying to design it to a accommodate the amount of money you want to put into there so let's keep it simple it could be 500 a month that a 35-year-old wants to put in for 30 years okay uh it or like I I I work with people that are maybe 60 years old and they want to get in 500,000 as soon as possible and they want to fill it up as soon as Tiff for different Tam allow so we're wanting them to become self-insured so watch how this works if I have a 60-year-old male and and um he's in decent health and he wants to reposition $500,000 as fast as he can uh he can't put it in all at once in order to have it be taxfree when he goes to access money because if he did put it in all at once he violates Tamar and would create a Mech a modified indam contract and so he wants it for living tax-free income he wants to be able to you know pull out let's say 50,000 a year taxfree a 10% payout now the minimum death benefit under te and defra for a 60-year-old now is only about a million bucks my Heavens he could buy way more life insurance than that that's not his objective he wants the least amount of insurance so you design it to accommodate the 500,000 by taking the least amount there's a lot of agents that that put way more life insurance on an ilul than is required if the person wants to have it grow tax free at the best net internal rate of return okay and so now if he starts to fund it he can only maybe put in 100 to 125,000 a year but if we get real technical let's say it's 100,000 he could put in 100,000 the first day of the first year he could put in another 100,000 the first day of the second year that's that's uh that's one year in one day he can put in the second 100,000 now he's got 200,000 in there 300,000 400,000 in four years and one day he's he's got his 500,000 in there now let's take a snapshot in time right now he's got 500,000 in there and it took four years in one day the fastest to do it that's say now if you structure this primarily for living benefits you use the level death benefit okay that means that anytime when he had cash in there if he happened to die even though that's not the primary reason he used this uh but if he happened to die all of the cash that's in there and the interest on that that's tax-free uh is is part of the million doll death benefit if he dies he just leave behind a million and some people go well why don't why don't you have his cash be added on top of the death benefit well then the spicet on the bucket which is the cost of the insurance is going to keep getting more expensive as you get older because he's going to have to keep paying for five uh for for a million dollars of life insurance that's not the objective so when you use the level death benefit the 500,000 now is part of the million I'm just super simplifying here so that means the net amount at risk the insurance company pays out the same million but 500,000 of it is your own money so they only were on the hook for the remaining 500,000 they're only charging you for that remaining 500,000 at risk is this making sense so even though you're four years older the insurance now is costing uh half as much as it did because half of it your money now as that 500,000 in 7 and A2 years at 99.6% return doubles to a million now you're cash equals the death benefit many of my clients by the 11th year their cash inside of their IL has grown to equal and exceed the death benefit now if they die they leave behind a million they had a million in there they self-insured it's tax-free because they took ownership of the policy uh there is no cost of insurance okay uh this is like uh buy buying termin investing the difference on steroid your s insured within 11 or 12 years well technically speaking under te and defra if this person dies uh when their cash value equals the death benefit if they die then the insurance company pays out 5% more okay A milon 50,000 but the insurance company's only charging you down here on the spet only charging you for 50,000 of coverage the interest you're earning on a million bucks in there is way more than the cost of 50,000 of death benefit let's go another uh 7 and A2 years the million doubles to two million in another seven and a half years now if you die they leave the insurance company pays out 2.1 million but they're only charging you for 100,000 not 2.1 million because 2 million of the 2.1 million is your own money the insurance gets cheaper as you get older which means this if in the 20th year uh you were to earn um 11% you might net 10.9 in that year but retroactive back to Year One if you earn 11 you'll probably net around 10 because we have to uh go through these Tam Hoops it takes 5 years to get the money in there so you have to be patient this is the long-term strategy so to understand uh Tamara in my book which I I want you to stay with me to the end and I'll gift you a a copy of my 300 Page book the laser fund I I we compare it to a five-story office building let's say the IRS said well listen if you build a five-story building and you want to rent that out uh listen if you just rent out the first floor uh the first year just 20% of the building the first year and leave the rest vacant you go why would I do that well the the first day of the second year you can fill it up uh another floor and then another floor in the fourth year but four years and one day into it now it's full and if you'll do that if you'll spread out filling up the the building to four years in one day in this example all of your rental income you get from that building forever ever after is taxfree if you do the math it would be worth doing it that way that is a maxf funded ilul when you fund it properly and you do it the way the IRS says it turns into a tax-free Cash Cow and nothing else comes close to it when it is designed properly so the key is you take the least amount of insurance you can get away with and put in the most money the IRS allows there's a lot of agents that do not understand how to do that right and then you fund it correctly because what normally happens is uh an IL agent will talk to somebody and they'll say well we want to start socking away 500 a month and uh but we have a lump sum of 20,000 up front we want to drop in can we do that yes but then what they do is instead of calculating the least amount of insurance to accommodate that they go oh we're going to have to accommodate 20,000 in a lump sum and so uh Tamra says oh they got they have to have this much more insurance and they they end up putting way more Insurance than is required just to accommodate that that upfront extra 20,000 that 20,000 ought to be divided by five you should only put in 4,000 of that 20,000 a year for the first five years and then you calculate the minimum death benefit it makes all the difference in the world what's the difference when you do it correctly you can earn 11 and Net 10 if you do it incorrectly and you take more Insurance than is required then if you earn 11 you might only net seven would you rather earn 11 and Net 10 cash on cash so that every million can generate a 100,000 a year of income down the road or do you want to earn 11 and only net seven to where you can only get 70,000 a year of income you're giving up a huge amount of growth and income when it's not designed properly so uh this is critical I've gone through it quick if you want to learn more uh this book has been flying off of our warehouse shelves uh the laser fund is in its ninth uh Printing and it retails for 20 bucks on Amazon or more uh if you buy it on Amazon thank you but I'll gift you a copy free it's 300 Pages actually two books in one this side is about 200 pages with 14 chapters all kinds of charts and graphs and explanations for the left brain learner if you're more of a right brain learner you're you learn more by stories and examples you just flip it over to this one and this book about 100 Pages 12 chapters with 62 Chicken Soup for the financial Soul stories so uh left brain right brain if you want to use your whole brain read the whole book you simply go to laser fund.com click on the link below and you cont tribute a nominal amount towards the shipping and handling I'll cover the rest of that I'll pay for the book I will fire out a hard copy to you via priority mail but while you're in there claiming your free copy if you like to listen and learn or watch and learn there's audio and video formats available there's even an 18-hour master class uh that you can di dive very deep and we have many many people who are serious about their finances that do that this is why we have many multi multi-millionaires and billionaires uh who who design ilul they read my book three and four times and that the affluent uh do this in order to have liquidity safety and ear predictable rates of return and while you're in there uh we have educational webinars they're free we teach them on a regular basis but you can even schedule an appointment to talk to a certified ilul specialist that can help you know how to do it correctly so that you don't have to worry about uh does does this agent uh know what they're doing uh we can point you to agents who know what they're doing because they become certified so this is uh to you and and your brighter future a [Music]