April 23, 2024 • 32 mins
Unlock the secrets of financial stability and legacy building as Jon and I debunk the myths surrounding 'banking like the Rockefellers.' In a world where social media gurus tout life insurance as the ultimate investment hack, we cut through the noise to reveal the truth about 7702 plans and indexed universal life policies. If the idea of 'becoming your own bank' has ever piqued your curiosity, our discussion will equip you with the knowledge to discern fact from fiction. By dissecting various life insurance options and their role in a rock-solid financial plan, we ensure you're armed with the information needed to craft a stable and enduring legacy.
This episode isn't just a deep dive—it's a strategic exploration into the elaborate web of life insurance and investment strategies. As we compare the nuances of term, whole, and indexed universal life policies, we shed light on their tax benefits and potential pitfalls, ensuring you're fully informed. But it doesn't stop there; we put Indexed Universal Life (IUL) policies toe-to-toe with Roth IRAs, examining how interest rate changes can reshape your financial future. Join us as we navigate the complexities of financial planning, and discover why diversifying with both a Roth IRA and an IUL could be your wisest move toward achieving financial peace of mind.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome to the Balanced Blueprints podcast,
where we discuss the optimaltechniques for finances and
health and then break it down tocreate an individualized and
balanced plan.
I'm your host, Justin Gaines,here with my co-host, Jon Prober
.
In this episode, Jon and Idiscuss the popular TikTok
trends of banking like theRockefellers, the difference
between a Roth and a 7702 plan,as well as how you can use life
(00:23):
insurance to invest.
Thank you for listening.
We hope you enjoy.
Yeah, this will be one whereit's going to be very
conversational because it'sgoing to be very education-heavy
up front and then it's going tobe okay.
Let's talk this through, let'smake sense of it, because
there's a lot of conversationaround this topic and there's a
lot of misinformation orsalesmanship, depending on how
(00:46):
you view those through socialmedia.
You know people put out thecatches and the hooks, but do
you really?
Do you really know what you'retalking about, or do they really
know what they're talking about?
And that's what we're going tokind of break down yeah, it's a
grab.
Speaker 2 (01:00):
it's a grabby topic, like I've seen some posts on it.
So when you were telling me alittle about it, I I'll let you
get into it.
But it's one of those thingsthat when you're scrolling
through the gram and you see it,you're like man, that's
interesting and I want to dothat, but it's clearly way more
involved we're going to talkabout is the reason why it's so
(01:25):
catchy and there's so manypeople doing it and the reason
why you see a lot of thesevideos.
Speaker 1 (01:27):
It looks like somebody's recording a video of
them on a screen, like in acloset, like everything's dark
in the background.
You can tell there's definitelyclutter going on, that they're
trying to like hide it's not aprofessional environment and
then they're talking about allthese things and showing you an
illustration and trying toexplain what they know about it.
Some, some of their points aregood.
Some of their points, I think,are they got told what to say
(01:49):
and they don't understand whatactually goes into it and so you
don't have the backgroundeducation on it.
You can't make sure that it'sbulletproof, and I think that's
the key component of this isit's part of financial planning,
it's part of retirementplanning, and so you want it to
be bulletproof so that when youbecome into your retirement ages
(02:09):
, you can distribute properlyand have a legacy and not have
to be stressed in retirement forfinances.
Speaker 2 (02:18):
All right.
Well, you're killing me, sowhat is it?
Let's get into it.
Yeah, so we're going to talkabout on social media.
Speaker 1 (02:23):
The buzzwords are universal banking, become your
own bank.
You had brought up earlier theRockefeller concept.
Speaker 2 (02:31):
That's where I've seen it.
Speaker 1 (02:33):
All of these things revolve around the topic of life
insurance and the main productthat you're going to be using in
a universal banking strategy orbecome your own bank strategy
not necessarily the Rockefellerstrategy we can touch on that
but it can be that one can bedone multiple ways.
But if you're trying to becomeyour own bank and grow the cash
(02:55):
value properly and withsignificant growth, you're going
to be using what's called anindexed universal life policy or
a universal life policy.
So universal life is similar towhole life, but with some very
(03:16):
key differences.
Give a quick overview of lifeinsurance for anybody who
doesn't know the basics.
There's really two majorcategories of life insurance,
potentially three if you breakoff universal life.
So the first, and probably themost commonly used one and most
well-known one, is terminsurance.
It's very straightforwardthere's a set period of time,
(03:37):
which is the term, that you havea death benefit that doesn't
change, and so if you pass awayduring that time period, the
death benefit pays out.
As long as you pay yourpremiums, premium doesn't change
over the period of the term andthe death benefit does not
change, and so that's option one.
It's generally the cheapest onethat you're going to use and it
(03:58):
has the least bells andwhistles.
It's very straightforward Ifyou die, this gets paid out.
That's that Whole lifeinsurance is similar to term
insurance in that there's adeath benefit that stays the
same and your payment stays thesame over the life.
Start the contract to age 95,121, depending on what you know
(04:27):
to age the company's using, sothat can be adjusted in order to
impact premiums.
But basically what ends uphappening is the cash value in
that policy.
If this is your death benefitand we're starting here, you
know, picture a chart here.
We're starting here and this isyour death benefit.
This is the day we start thepolicy your cash value will grow
in value to the same value asyour death benefit at whatever
(04:51):
that two age of the contract is.
So because life expectanciesare expanding, most of those two
ages are to age 121.
So you pay into the whole lifeinsurance contract If you pass
away before age 121, dependingon how it's structured,
depending on what your deathbenefit is, you get the death
benefit, not the cash value.
(05:11):
Now there is a death benefitoption where you can get the
original death benefit youstarted plus your cash value and
get both of them back.
There's just a higher insurancecost to that.
But that is an option.
But that is an option.
But ultimately what will end uphappening is at age 121.
If you live to 121 on your121st birthday, the contract has
(05:32):
gone up.
You've completely outlived thecontract.
So what happened is theinsurance company would write
you a check for the deathbenefit or the total cash value
amount, because at that pointthey're the same.
They'd write you a check forthat.
The whole life insurance goesaway.
You have your cash and you'reable to do whatever you want
with it.
Speaker 2 (05:50):
at age 121, I'm not sure how physically fit you're
going to be and how mobileyou're going to be, so I'm not
sure what you're going to do atthat point?
Speaker 1 (05:57):
it's probably probably a legacy plan for you
and you're going to pass it downto your heirs.
But maybe you have debts, maybeyou have, you know, maybe you
haven't prepaid your funeral yet.
So you go, you prepaid funeral,you plan out all those things,
pay for those or just set itaside and let the next
generation plan all those thingsout for you.
But those are those are optionson the whole life.
Now the next step.
Speaker 2 (06:19):
Yeah, yeah, got a question real quick so just to
make sure I'm understandingthese right before we get into
the ones we really get intotoday.
So the first one term I'veheard is like kind of referred
to as almost renting.
So you're not really gettinganything out of it.
You're just putting a littlemoney in monthly and, like you
said, you get your, your deathbenefit at the end.
But the next one you describedthe whole life, whole life.
(06:47):
So it seemed similar.
So I think I must have got lostalong the way because it seemed
similar.
Unless you outlive the contract, so then you'll get an extra
boost of money.
Is that really the onlydifference?
Speaker 1 (06:54):
The difference between the term and the whole
life.
So the reason why term could bereferred to as renting is
because typically when you rent.
That's not your forever home,right?
You're not going to stay thereforever.
You're not going to have accessto that forever.
You only have it for the periodof time in which you live there
.
Say, it's five years, so term?
In that sense, yes, you'rerenting, so you're paying
(07:15):
significantly less for thepolicy.
That's because you don't have alot of the living benefits that
whole life has.
So whole life has a cash valuecomponent where you can borrow
against that.
You can take loans out againstit.
You can take it out completely.
I wouldn't recommend thatbecause it's not tax advantage,
but you could take the cash outcompletely and not have a loan
there.
You have living benefits to itas well.
(07:37):
A lot of these will haveendorsements on them that you
can add that will have.
It'll be similar to likelong-term care.
You can have early payouts ofyour death benefit if you have a
chronic or terminal illness,and those are two separate
endorsements, chronic illnessbeing if you can't do two out of
your six activities of dailyliving.
For time purposes I won't gointo what those are, just Google
(07:59):
it.
And for terminal illness, it'sif you get a diagnosis that
you'll pass away in the next 12months and if you get that
diagnosis then you're able totake an early distribution of
the life insurance and that'sthere's a percentage.
So you're not going to get 100of that death benefit.
It's a percentage becauseyou're taking an early
distribution of it.
But those are.
Those are additional benefits.
Some of those riders you canget on term insurance as well.
(08:23):
But the main difference is goingto be that cash value
accumulation and the fact thatit's going to last for your
entire life, not a set term.
Because, generally speaking, Imean I have companies that I
work with that I can go up to a40-year term, but even then, if
you start with somebody who's intheir working years and I'm not
saying that you shouldn't getterm insurance Like all of my
clients generally use acombination of both, if not all
(08:45):
three of these, depending onwhat their specific needs are.
But we start that conversationwith term because, if you want,
terms could match up to a termin your life.
So if you have a mortgage thatshould be taught, paying that
off should be tied to a termpolicy, because your mortgage is
going to be 15, 30 years, youshould have a 15 or 30 your
mortgage or a term insurance,not a whole life policy, for the
entirety of your mortgage isgoing to be 15, 30 years.
You should have a 15 or 30-yearterm insurance, not a whole
(09:06):
life policy for the entirety ofyour mortgage, because you're
not going to have that debt yourentire life.
Speaker 2 (09:11):
Right, so there is a cash value that you can take out
, but obviously there's somedrawbacks.
Like you said, it might not betax-free or the whole percentage
.
Speaker 1 (09:23):
So that's the difference between and we'll get
into this when we talk aboutthe IUL taking a distribution
versus taking a loan.
So, distribution being thatit's similar to a bank account,
You're just taking money out,versus taking a loan, which
means you have to repay it.
One is tax advantage and one isnot, so one you'll have to pay
taxes on the gains that occurredwithin the policy.
Speaker 2 (09:48):
The other one you will not have to pay taxes on
the gains that occurred withinthe policy?
Speaker 1 (09:51):
The other one.
You will not have to pay taxeson the gains.
Wait, which one's which?
Speaker 2 (09:53):
So when you take a loan, you don't pay taxes?
Okay, and what policy does that?
What policy lets you take aloan?
Speaker 1 (09:59):
Whole life and indexed universal life.
Speaker 2 (10:01):
Both of those.
Speaker 1 (10:05):
Both of those will allow you life, not so much, so
it kind of it plays.
It's very tricky, you know.
Speaker 2 (10:11):
I know that's why I'm gonna probably i'm- gonna cut
you and ask a lot of thingsbecause it is yeah, and that's
fine, because we can break thisup into into more if we need to
so so so I'll pull back in.
Speaker 1 (10:23):
So those are your main two ones your term and your
whole life, basic structures ofthose.
Now, if you were lining theseup technically speaking,
universal life, just universallife or UL, would fall between
term and whole.
Because universal life,generally speaking, will be a
(10:44):
little bit less expensive thanwhole life.
And that's because withuniversal life, typically what
you have is you don't have thecash value component except for
at very specific times in thecontract.
So it's typically 5, 10, 15,every five years depending on
the company it's going to alter,but every five years.
(11:04):
Every five years, depending onthe company it's going to alter,
but every five years, startingat year five and going to year
25.
And then after year 25, youdon't have access to it ever
again, but at those years it'scalled a return of premium
endorsement.
So what you would do is at thatcontract anniversary you have
(11:24):
30 days to enact that rider andwhat you'll do is, if you enact
it, you're getting rid of thelife insurance and you're
getting a return of 100% of thepremiums that you paid in, no
interest, no gains, just whatyou paid in you get back.
I don't use a ton of universallife, but where I do use it is
if we're funding a buy-sellagreement for a business another
topic for another day.
But if we're funding a buy-sellagreement for a business, on
(11:46):
other topics, for another day.
But if we're funding somethingor we need term insurance for 5,
10, 15 years and we can affordthe universal life premium, even
though it's more than the terminsurance, universal life
effectively works like term, butwith a refund.
If you don't use it, so it'smore expensive, so it's going to
cost you more.
But if you don't end up usingit, you don't use it, so it's
(12:06):
more expensive, so it's going tocost you more.
But if you don't end up usingit, you don't pass away.
In the 10 years, 15 years, 20years, you get a return of 100%
of your premium.
So you're not growing yourmoney but you are getting that
money back.
And in some situations thatmight make sense.
It makes sense in businesssituations.
It could make sense for anindividual to sit down and
really look at it to determinewhat makes the most sense and
then also what makes the clientfeel, feel the best.
(12:28):
As far as optimizing it.
It's very specific tosomebody's, somebody's financial
plan and fitting that in.
So then the next step.
So one is term.
Universal life is kind of thatbridge between term and whole
life.
Whole life and then indexeduniversal life is your next step
(12:49):
, which is effectively wholelife.
But the difference is that thecash value is now tied to an
index.
So what that means is take anindex such as the S&P 500.
So instead of your cash valuegetting a set guaranteed fixed
interest rate, which your wholelife is going to have, that it's
(13:10):
going to have a guaranteedinterest rate, guaranteed growth
, very secure product.
In that sense, the indexuniversal life is going to have
some guarantees, but they're notgoing to be as level or as
balanced.
So what you're going to have isin the index universal life, if
it's tied to an index,typically you'll have a 0% floor
(13:31):
and then you'll have a cap atwhat you can make.
So currently the main companythat I work with, their cap is
at 8.5%.
So what that means is that ifthe S&P 500, if we look at where
the S, if I had a contract thatI put in place on January 18th
of 2023, they would look that onJanuary 18th of 2024, from
(13:57):
those two points, from openingto opening of those two days,
did the stock market go up ordown.
And it went up.
It went up, probably 20%.
So what that means is you'renot going to get credited the
interest for 20%, you're onlygoing to get 8.5% because it was
more than 20%.
But let's take the inverse.
What if the market went down20%?
(14:18):
In that situation, you're onlygoing to get 0%, so you have a
guaranteed 0% floor.
Cash value is not going to godown.
It can't be going down fromcrediting.
It'll get credited interest ifthe market goes up.
And if the market goes upbetween 0% and 8.5%, then you
get whatever that percentage is.
Now that's one of fivedifferent strategies that you
(14:38):
can use for the indexing.
Now, that's one of fivedifferent strategies that you
can use for the indexing.
And the indexing can get muchmore complex, much more robust
and have greater returns if youoptimize that.
However, optimizing thosestrategies is ancillary to all
the other components that we'regoing to talk about today.
That if you don't focus on thesethings and if your agent
doesn't understand theseelements, I don't care what
(15:02):
indexing strategy you're in.
The policy is going to begarbage, absolute trash not
worth having.
And it's why life insurancegets a bad rap is because these
whole life index universal lifepolicies are sold to the wrong
people, the wrong scenarios, notstructured properly, not taking
care of properly, and when youdo that, the reason why it's
garbage is you're selling.
(15:23):
You know the person who went tothe car dealership and is
looking for the family van andit's the say, it's the husband
who went to buy it and he comeshome with a trot rocket
motorcycle.
That trot rocket motorcycle istrash.
It could be the best trotrocket motorcycle on the market
and it's trash compared to whatyou're trying to do with it,
(15:43):
which is transport the family ina safe way.
We need to walk before we run.
So before we get into whatstrategies we should use, I need
to talk about the questions youshould be asking advisors, the
topics that they should be ableto explain back to you with very
good detail and clarity, andI'm going to touch on, like the
basics, so that way somebody cantouch it, because I mean two of
(16:06):
the biggest things thatdirectly drive index universal
life is and why it's a goodstrategy is.
You'll hear it referred to as a7702 plan, which is commonly
what I refer to it as is a 7702plan plan, which is commonly
what I refer to it as is a 7702plan.
(16:26):
The reason we refer to it as a7702 plan is because that's the
IRS tax code that gives it allof its tax advantage benefits,
and so a 7702 plan works verysimilar to a Roth IRA.
However, it has all of the samebenefits that a Roth IRA has
and all the same tax treatments,with additional benefits as
(16:48):
well.
The additional benefits are youcan't access the cash in your
Roth IRA until you're over 59and a half years old at the time
of this recording.
Speaker 2 (16:58):
That number could fluctuate If it fluctuates,
it'll increase.
Speaker 1 (17:02):
It's never going to come down, it'll go up, it'll be
later in life.
So there's five exceptions tothat rule, but, generally
speaking, you can't access themajority of that funds until 59
and a half.
That's not true with a 7702 oran IUL plan.
You can access the funds, ifstructured properly, day one,
(17:25):
and you have tax-freedistribution, which is the same
as a Roth.
Tax-free accumulation, that'sthe same as a Roth.
You have the legacy component,though, and that's something
that a Roth doesn't have.
Speaker 2 (17:35):
So in retirement you're going to distribute out
of your Roth.
Speaker 1 (17:37):
You're going to take your income and that's going to
decrease the value of your RothIRA.
With an IUL you'll takedistributions via a loan which
we'll get into, and then thatloan will be paid back by your
death benefit.
But because of certainregulations that make life
insurance life insurance, yourdeath benefit is always going to
be in excess of the cash valuethat's in there, which means
(17:59):
it'll be in excess of the loansthat you're taking out.
So when the loan gets paid off,there's going to be extra life
insurance there that can then bepaid to your beneficiaries at
your death, which allows for alegacy component.
Now you can choose where thatdeath benefit goes.
That death benefit could go to anonprofit, it could go to your
church, it could go to your kids, your grandkids, it can go to
(18:20):
anybody, whoever you choose.
It can go to your company.
You can choose who that is.
And that's the key componentthere is that you have all the
benefits of Roth the two othermajor advantages of the fact
that you have the legacycomponent or it blooms at your
death, which is what we say.
It blooms at your death, givingyou the fourth stage of
retirement planning.
Speaker 2 (18:45):
It blooms at your death, giving you the fourth
stage of retirement, planningthe legacy, and you have access
to it day one, if structuredproperly.
All right.
So this is great stuff so far.
Two quick questions before wemove on, then.
So to go back a little, I knowyou said the IUL.
Usually, either, whether it'syour company or most companies,
they're going to cap you atabout 8.5%, connected to the
index, correct it's going to be?
Speaker 1 (19:02):
connected to an index .
The cap is going to move overtime.
So the cap is generally, if youlook at where interest rates
are, that typically is going toimpact where the cap is.
But there's a three-year lagtypically and that's because,
ultimately, when you're buying alife insurance contract,
(19:27):
especially one of these indexuniversal life, what they're
doing is they're taking aportion of your premiums that
are going into the cash valuecomponent and they're going and
they're buying options on themarket and on the index and with
those options they're able toget a certain rate of return.
Another portion of that wholeof that cash that's going into
there is also purchasing morefixed income assets that have
(19:49):
set interest rates.
Those are tied to what thecurrent interest rate is and
what the current Fed rate is.
Now the reason why there's athree-year lag is once interest
rates go up they can't just jumpthe cap up.
They have to know that they'remaking money so that they can
pay off when people pass awayand be able to pay out those
death benefits.
And so, generally speaking,it's a two to a three year lag
(20:13):
for most companies to see thatcap come back up.
So you know, my prediction isthat we're at nine and a half
now.
It'll go up over the next twoto three years.
You'll see that cap increasebecause interest rates have
increased.
Now if interest rates come wayback down, they're slowly going
to tick back down.
But if they come way back down,then you'll start to see in
another three years from thatpoint, the cap start to come
(20:35):
back down.
The floor is guaranteed at 0%,but that cap will fluctuate.
Is guaranteed at 0%, but thatcap will fluctuate.
Speaker 2 (20:40):
So what is that then?
If that's 8.5%, my question,because I know we talked you get
some back with a whole life, sousually what percentage?
Speaker 1 (20:50):
do you get back with whole life?
Whole life is it's going to bea fixed, guaranteed interest
rate.
Speaker 2 (20:54):
Right.
Speaker 1 (20:55):
Right now it's like 3.5%.
Speaker 2 (20:57):
Okay, so there's.
I was wondering that kind ofdifference there of like what
makes it much better?
And obviously five and a halfdoes.
And then the other quickquestion I had too.
Oh well, it seems likeobviously an IUL or 7702 plan is
pretty nice compared to a Roth.
So why would I do my Roth firstand not just jump into this
(21:18):
7702?
Speaker 1 (21:20):
Generally speaking.
So I've run the numbers and ifyou put money into, if you put
monthly premiums into an IUL andyou put monthly premiums into a
Roth, I ran it out over a30-year contribution phase.
So basically saying that ifyou're retiring at 65 and you
started contributions at 35 andyou contributed for 30 years the
(21:41):
same amount, maxing it out at 6500 a year, the difference in
growth in the cash value on theindex universal life and the
value of the account is going tobe roughly a quarter of a
million dollars.
And that's if you're fullyfunding the roth ira.
You're looking at a differenceof $250,000.
Speaker 2 (21:59):
So the Roth You'll get more in the Roth.
Speaker 1 (22:01):
The Roth will be $250,000 more.
Speaker 2 (22:04):
Okay.
Speaker 1 (22:05):
So you're going to grow.
Generally speaking, you'regoing to grow quicker in the
Roth than the IUL.
Now, if you look at the graph,it's really only in those like
last 10 years that they start toseparate, and the reason for
that is that IULs use the powerof zero where you're getting 0%.
(22:26):
So if the market goes down 15%,you're getting 0%.
And then typically, if themarket's going down 15%, you're
going to have the market go up agood percentage the next year,
maybe the same amount, maybemore, but it's going to go up
generally.
Generally speaking, if you havea large decrease one year,
you're going to have an equaland opposite return the next
year and so you're starting atzero.
(22:49):
So if you have $100,000 and themarket went down 15%, you're now
at 85% in the Roth, but you'reat $100,000 in the IUL.
And then, if the market thengoes up 15% the next year, or
just say 10% for easy numbers,10% the next year you're now at
now we have an 8.5% cap on theIUL.
So now you're at 108.5%, butyou're only at 93.5 in the Roth
(23:19):
because you're at 85,000 plus10%, plus 8,500.
So you're only at 83.5.
So now what happens is thatover time, those years when
there's take this past yearwhere 2023, the index was up
roughly 24%, you would have beencapped at 8.5%.
That would have gone up 24%.
So now with that you're able tooffset some of those downs and
(23:44):
then ultimately the cash valuestays pretty close together for
the first 20, 25 years, and thenthe last 5 to 10 years is when
the real gap starts to occur.
But they generally stay prettyclose and in the beginning years
the IUL will outperform the.
Roth if there's down marketyears in those first five to 10
(24:05):
years, because it's going to dipand you're going to have to get
back above that.
So I don't recommendindividuals to not use a Roth.
A Roth still has tons offinancial benefits and should be
part of your plan.
In my opinion.
It's part of my plan and mostclients.
I'm telling them to do acombination of these and that's
so.
In distribution we're able tocombat those down markets and
(24:30):
use the power of zero.
Because what I want to do indistribution is if you have a
down market year, I don't wantyou to tap into the principle
that's in your Roth or in yourother investment accounts and
pull a 10% down market.
Say you're taking 4%distributions, you're now down
14% that year versus if I keepyou at 10 and I take the
distributions out of the IUL,now when you have that up year,
(24:52):
you're able to counteract thatand you're able to get the
principal back up to where itwas or close to where it was if
you allow it to stay in there.
So having both of these is akey component of your strategy,
but I'm not telling you to dumpall of your money into a 7702
plan If somebody is run.
Having all of your retirementassets in one vehicle, generally
(25:15):
speaking, is a bad idea so it's, yeah, generally better to.
If you had 500 a month to putaway, it's actually better to
put 250 in each than 501 Iactually just had a client that
was in that situation and welooked at the numbers and we
actually he was putting he wasgoing to be putting 300 into the
Roth, 200 into the IUL, andthat was just because those were
(25:38):
the numbers that made sense andover time we were going to get
him to a maxing out of his Roth,which is roughly, and they're
probably going to increase thelimits in 2024.
But in 2023, it was 6,500.
So $543 a month was what youcan contribute.
Speaker 2 (26:00):
And so if he's at 300 , he's still got $243 more that
he can contribute.
Speaker 1 (26:03):
So as his income goes up, we're going to max out that
Roth and then, when he getsinto a position where his income
goes up even more and he needsanother investment vehicle, we
can stack IUL so we can havemultiple 7702 plans.
You can't have multiple Roths,but you can have multiple 7702
plans so that we can do anotherpolicy, because that segues us
(26:24):
into the optimization piece.
We can't the benefit to anindexed universal life policy is
that you're able to adjust thelife insurance, so the death
benefit options, and you're ableto adjust your premium, so
there's a range that you can payin on these policies.
In my opinion, if you'reoptimizing them and properly
(26:46):
structuring them, when you'repaying into these policies,
there's really only one correctoption for how you're paying
into these and that's themaximum amount, because anywhere
from so you have a minimumamount, a target amount, which
is what the insurance companyputs in there.
It's a target.
That's what they really theywant to at least get this much.
And then there's a max Betweenminimum and target.
(27:09):
That's what the agent gets paidon.
The agent gets paid on betweenminimum and target and those
commission rates can rangeanywhere from, depending on your
state, anywhere from 50 up to110 of that first year premium
that they'll get paid.
Minimum, the target they getpaid, depending on your state,
again, anywhere from zero to.
(27:30):
I think the highest I've seenin any state is four percent
from the target to the max, andthat is where you're actually
going to make your cashaccumulation in this IUL policy.
Work is when you increase abovetarget and you get to the max.
Speaker 2 (27:47):
Now how are these numbers?
Speaker 1 (27:49):
calculated?
Is it just an arbitrary numbertaken out of thin air?
No, and this is where we'regoing to get into the tax
conversation and the informationthat most agents are completely
clueless on.
So there's two pieces oflegislation that make life
insurance so tax-advantaged andso beneficial for an investment
(28:09):
strategy, and that's TAMRA andDEFRA, so T-A-M-R-A and
D-E-F-R-A.
Now, what these two pieces oflegislation together do is one
of the pieces of legislation andto not get nuanced, I'm not
going to keep pulling those backin but it's Tamar and Defra.
One of the pieces oflegislation stipulate, at each
(28:31):
age bracket so however old youare, the difference that has to
exist in order to get the taxedbenefits between the death
benefit and the cash valueamount.
So when we're talking aboutwhole life, how it's going to at
the point of the contract age121, it's going to equal the
same number.
That's going to be on a J curve.
(28:52):
So there's going to be a gapbetween and that's our window
that has to exist in order forit to be life insurance.
So that's that's componentnumber one that's and that's
true of whole life index,universal life.
Now, if you, if we break thatbarrier, it becomes what's
called a mech or a modifiedendowment contract.
(29:13):
A modified endowment contract,if you're trying to build a 7702
plan, is garbage, because whata MEC does, what a modified
endowment contract does, is iteliminates all of the tax
benefits that you get from theIRS tax code.
So it's no longer a 7702 planbecause it doesn't meet the
definitions of life insurance.
Speaker 2 (29:35):
So by breaking you mean you're pulling money out
too early.
Speaker 1 (29:38):
No, so by breaking it means that you're contributing
too much or the cash value isgrowing too quickly.
Speaker 2 (29:45):
Okay.
Speaker 1 (29:45):
Now the life insurance company should have in
their system an option whereyou click that says prevent
modified endowment contract andthat'll manage that.
Okay, prevent modifiedendowment contract and that'll
manage that okay.
So that one, if your agent isn'tas aware of that piece of it,
it's less concerning as long asthey're aware of modified
endowment contracts and canexplain that a modified
(30:07):
endowment contract turns lifeinsurance from life insurance
and being tax advantaged tobeing a modified endowment
contract Because the Rockefellerconcept, the reason that works,
is they have different types oflife insurance bought by a
trust that then, when theindividuals pass away the death
benefit goes back into the trusttax-free so that life insurance
(30:30):
money is never taxed.
If it's a modified endowmentcontract, that life insurance
money is taxed so you lose allthe tax benefits.
Rockefellers would never buy aMEC, not for this purpose.
They may buy a MEC for anotherpurpose, but for this purpose
the MEC doesn't make sense.
Speaker 2 (30:47):
All right.
So what I'm hearing is kind ofthe first mistake could be,
because this is something youthink would be good If I dump as
much as high as I can go, itcould actually have a negative
effect by losing those taxbenefits.
Speaker 1 (31:02):
Correct and you're kind of leading into the other
piece of the legislation.
Speaker 2 (31:06):
The other piece of the legislation.
Speaker 1 (31:09):
Most agents might not know it by its name of DEFRA,
but they might know it more as7P, and what that means is the
legislation dictates how muchpremium you can pay into the
policy in order to maintainthose tax benefits, the seven
pay.
The way the seven pay strategyworks is if it looks at how much
(31:29):
money if this were a whole lifepolicy, how much money over the
course of seven payments couldyou pay in to completely buy out
this contract at the initialdeath benefit you can put in up
to that number but you cannotexceed it.
So if to buy the whole contractwe'll use easy small numbers
here If the whole contract was$1,000 a year for seven years,
(31:53):
$7,000 would buy out the entirecontract and have it completely
paid up if it were whole life.
If that were the case and youput $7,001 into this policy in
the first seven years, then itbecomes in violation of this and
it becomes a modified endowmentcontract.
Now a 7-Pay also looks at itevery year.
So you can only put in in thatanalogy.
(32:14):
You can only put in $1,000 yearone.
You can only put in in thatanalogy.
You can only put in $1,000 yearone.
You can only put in up to $2,000cumulatively between year one
and year two, and so on up toyear seven.
Now why that number isimportant and in my opinion this
is probably the most importantone is because that is what
(32:35):
defines our maximum contributionlimit.
That is, the number thatdefines that maximum
contribution limit.
We want to be as close to thatseven-pay number as we possibly
can be without exceeding it.
Speaker 2 (32:49):
Thanks for listening to our podcast.
Speaker 1 (32:51):
We hope this helps you on your balance freedom
journey.
Speaker 2 (32:53):
Please share your thoughts in the comments section
below.
Speaker 1 (32:56):
Until next time, stay balanced.
Welcome to the Balanced Blueprints podcast,
where we discuss the optimaltechniques for finances and
health and then break it down tocreate an individualized and
balanced plan.
I'm your host, Justin Gaines,here with my co-host, Jon Prober
.
In this episode, Jon and Idiscuss the popular TikTok
trends of banking like theRockefellers, the difference
between a Roth and a 7702 plan,as well as how you can use life
(00:23):
insurance to invest.
Thank you for listening.
We hope you enjoy.
Yeah, this will be one whereit's going to be very
conversational because it'sgoing to be very education-heavy
up front and then it's going tobe okay.
Let's talk this through, let'smake sense of it, because
there's a lot of conversationaround this topic and there's a
lot of misinformation orsalesmanship, depending on how
(00:46):
you view those through socialmedia.
You know people put out thecatches and the hooks, but do
you really?
Do you really know what you'retalking about, or do they really
know what they're talking about?
And that's what we're going tokind of break down yeah, it's a
grab.
Speaker 2 (01:00):
it's a grabby topic, like I've seen some posts on it.
So when you were telling me alittle about it, I I'll let you
get into it.
But it's one of those thingsthat when you're scrolling
through the gram and you see it,you're like man, that's
interesting and I want to dothat, but it's clearly way more
involved we're going to talkabout is the reason why it's so
(01:25):
catchy and there's so manypeople doing it and the reason
why you see a lot of thesevideos.
Speaker 1 (01:27):
It looks like somebody's recording a video of
them on a screen, like in acloset, like everything's dark
in the background.
You can tell there's definitelyclutter going on, that they're
trying to like hide it's not aprofessional environment and
then they're talking about allthese things and showing you an
illustration and trying toexplain what they know about it.
Some, some of their points aregood.
Some of their points, I think,are they got told what to say
(01:49):
and they don't understand whatactually goes into it and so you
don't have the backgroundeducation on it.
You can't make sure that it'sbulletproof, and I think that's
the key component of this isit's part of financial planning,
it's part of retirementplanning, and so you want it to
be bulletproof so that when youbecome into your retirement ages
(02:09):
, you can distribute properlyand have a legacy and not have
to be stressed in retirement forfinances.
Speaker 2 (02:18):
All right.
Well, you're killing me, sowhat is it?
Let's get into it.
Yeah, so we're going to talkabout on social media.
Speaker 1 (02:23):
The buzzwords are universal banking, become your
own bank.
You had brought up earlier theRockefeller concept.
Speaker 2 (02:31):
That's where I've seen it.
Speaker 1 (02:33):
All of these things revolve around the topic of life
insurance and the main productthat you're going to be using in
a universal banking strategy orbecome your own bank strategy
not necessarily the Rockefellerstrategy we can touch on that
but it can be that one can bedone multiple ways.
But if you're trying to becomeyour own bank and grow the cash
(02:55):
value properly and withsignificant growth, you're going
to be using what's called anindexed universal life policy or
a universal life policy.
So universal life is similar towhole life, but with some very
(03:16):
key differences.
Give a quick overview of lifeinsurance for anybody who
doesn't know the basics.
There's really two majorcategories of life insurance,
potentially three if you breakoff universal life.
So the first, and probably themost commonly used one and most
well-known one, is terminsurance.
It's very straightforwardthere's a set period of time,
(03:37):
which is the term, that you havea death benefit that doesn't
change, and so if you pass awayduring that time period, the
death benefit pays out.
As long as you pay yourpremiums, premium doesn't change
over the period of the term andthe death benefit does not
change, and so that's option one.
It's generally the cheapest onethat you're going to use and it
(03:58):
has the least bells andwhistles.
It's very straightforward Ifyou die, this gets paid out.
That's that Whole lifeinsurance is similar to term
insurance in that there's adeath benefit that stays the
same and your payment stays thesame over the life.
Start the contract to age 95,121, depending on what you know
(04:27):
to age the company's using, sothat can be adjusted in order to
impact premiums.
But basically what ends uphappening is the cash value in
that policy.
If this is your death benefitand we're starting here, you
know, picture a chart here.
We're starting here and this isyour death benefit.
This is the day we start thepolicy your cash value will grow
in value to the same value asyour death benefit at whatever
(04:51):
that two age of the contract is.
So because life expectanciesare expanding, most of those two
ages are to age 121.
So you pay into the whole lifeinsurance contract If you pass
away before age 121, dependingon how it's structured,
depending on what your deathbenefit is, you get the death
benefit, not the cash value.
(05:11):
Now there is a death benefitoption where you can get the
original death benefit youstarted plus your cash value and
get both of them back.
There's just a higher insurancecost to that.
But that is an option.
But that is an option.
But ultimately what will end uphappening is at age 121.
If you live to 121 on your121st birthday, the contract has
(05:32):
gone up.
You've completely outlived thecontract.
So what happened is theinsurance company would write
you a check for the deathbenefit or the total cash value
amount, because at that pointthey're the same.
They'd write you a check forthat.
The whole life insurance goesaway.
You have your cash and you'reable to do whatever you want
with it.
Speaker 2 (05:50):
at age 121, I'm not sure how physically fit you're
going to be and how mobileyou're going to be, so I'm not
sure what you're going to do atthat point?
Speaker 1 (05:57):
it's probably probably a legacy plan for you
and you're going to pass it downto your heirs.
But maybe you have debts, maybeyou have, you know, maybe you
haven't prepaid your funeral yet.
So you go, you prepaid funeral,you plan out all those things,
pay for those or just set itaside and let the next
generation plan all those thingsout for you.
But those are those are optionson the whole life.
Now the next step.
Speaker 2 (06:19):
Yeah, yeah, got a question real quick so just to
make sure I'm understandingthese right before we get into
the ones we really get intotoday.
So the first one term I'veheard is like kind of referred
to as almost renting.
So you're not really gettinganything out of it.
You're just putting a littlemoney in monthly and, like you
said, you get your, your deathbenefit at the end.
But the next one you describedthe whole life, whole life.
(06:47):
So it seemed similar.
So I think I must have got lostalong the way because it seemed
similar.
Unless you outlive the contract, so then you'll get an extra
boost of money.
Is that really the onlydifference?
Speaker 1 (06:54):
The difference between the term and the whole
life.
So the reason why term could bereferred to as renting is
because typically when you rent.
That's not your forever home,right?
You're not going to stay thereforever.
You're not going to have accessto that forever.
You only have it for the periodof time in which you live there
.
Say, it's five years, so term?
In that sense, yes, you'rerenting, so you're paying
(07:15):
significantly less for thepolicy.
That's because you don't have alot of the living benefits that
whole life has.
So whole life has a cash valuecomponent where you can borrow
against that.
You can take loans out againstit.
You can take it out completely.
I wouldn't recommend thatbecause it's not tax advantage,
but you could take the cash outcompletely and not have a loan
there.
You have living benefits to itas well.
(07:37):
A lot of these will haveendorsements on them that you
can add that will have.
It'll be similar to likelong-term care.
You can have early payouts ofyour death benefit if you have a
chronic or terminal illness,and those are two separate
endorsements, chronic illnessbeing if you can't do two out of
your six activities of dailyliving.
For time purposes I won't gointo what those are, just Google
(07:59):
it.
And for terminal illness, it'sif you get a diagnosis that
you'll pass away in the next 12months and if you get that
diagnosis then you're able totake an early distribution of
the life insurance and that'sthere's a percentage.
So you're not going to get 100of that death benefit.
It's a percentage becauseyou're taking an early
distribution of it.
But those are.
Those are additional benefits.
Some of those riders you canget on term insurance as well.
(08:23):
But the main difference is goingto be that cash value
accumulation and the fact thatit's going to last for your
entire life, not a set term.
Because, generally speaking, Imean I have companies that I
work with that I can go up to a40-year term, but even then, if
you start with somebody who's intheir working years and I'm not
saying that you shouldn't getterm insurance Like all of my
clients generally use acombination of both, if not all
(08:45):
three of these, depending onwhat their specific needs are.
But we start that conversationwith term because, if you want,
terms could match up to a termin your life.
So if you have a mortgage thatshould be taught, paying that
off should be tied to a termpolicy, because your mortgage is
going to be 15, 30 years, youshould have a 15 or 30 your
mortgage or a term insurance,not a whole life policy, for the
entirety of your mortgage isgoing to be 15, 30 years.
You should have a 15 or 30-yearterm insurance, not a whole
(09:06):
life policy for the entirety ofyour mortgage, because you're
not going to have that debt yourentire life.
Speaker 2 (09:11):
Right, so there is a cash value that you can take out
, but obviously there's somedrawbacks.
Like you said, it might not betax-free or the whole percentage
.
Speaker 1 (09:23):
So that's the difference between and we'll get
into this when we talk aboutthe IUL taking a distribution
versus taking a loan.
So, distribution being thatit's similar to a bank account,
You're just taking money out,versus taking a loan, which
means you have to repay it.
One is tax advantage and one isnot, so one you'll have to pay
taxes on the gains that occurredwithin the policy.
Speaker 2 (09:48):
The other one you will not have to pay taxes on
the gains that occurred withinthe policy?
Speaker 1 (09:51):
The other one.
You will not have to pay taxeson the gains.
Wait, which one's which?
Speaker 2 (09:53):
So when you take a loan, you don't pay taxes?
Okay, and what policy does that?
What policy lets you take aloan?
Speaker 1 (09:59):
Whole life and indexed universal life.
Speaker 2 (10:01):
Both of those.
Speaker 1 (10:05):
Both of those will allow you life, not so much, so
it kind of it plays.
It's very tricky, you know.
Speaker 2 (10:11):
I know that's why I'm gonna probably i'm- gonna cut
you and ask a lot of thingsbecause it is yeah, and that's
fine, because we can break thisup into into more if we need to
so so so I'll pull back in.
Speaker 1 (10:23):
So those are your main two ones your term and your
whole life, basic structures ofthose.
Now, if you were lining theseup technically speaking,
universal life, just universallife or UL, would fall between
term and whole.
Because universal life,generally speaking, will be a
(10:44):
little bit less expensive thanwhole life.
And that's because withuniversal life, typically what
you have is you don't have thecash value component except for
at very specific times in thecontract.
So it's typically 5, 10, 15,every five years depending on
the company it's going to alter,but every five years.
(11:04):
Every five years, depending onthe company it's going to alter,
but every five years, startingat year five and going to year
25.
And then after year 25, youdon't have access to it ever
again, but at those years it'scalled a return of premium
endorsement.
So what you would do is at thatcontract anniversary you have
(11:24):
30 days to enact that rider andwhat you'll do is, if you enact
it, you're getting rid of thelife insurance and you're
getting a return of 100% of thepremiums that you paid in, no
interest, no gains, just whatyou paid in you get back.
I don't use a ton of universallife, but where I do use it is
if we're funding a buy-sellagreement for a business another
topic for another day.
But if we're funding a buy-sellagreement for a business, on
(11:46):
other topics, for another day.
But if we're funding somethingor we need term insurance for 5,
10, 15 years and we can affordthe universal life premium, even
though it's more than the terminsurance, universal life
effectively works like term, butwith a refund.
If you don't use it, so it'smore expensive, so it's going to
cost you more.
But if you don't end up usingit, you don't use it, so it's
(12:06):
more expensive, so it's going tocost you more.
But if you don't end up usingit, you don't pass away.
In the 10 years, 15 years, 20years, you get a return of 100%
of your premium.
So you're not growing yourmoney but you are getting that
money back.
And in some situations thatmight make sense.
It makes sense in businesssituations.
It could make sense for anindividual to sit down and
really look at it to determinewhat makes the most sense and
then also what makes the clientfeel, feel the best.
(12:28):
As far as optimizing it.
It's very specific tosomebody's, somebody's financial
plan and fitting that in.
So then the next step.
So one is term.
Universal life is kind of thatbridge between term and whole
life.
Whole life and then indexeduniversal life is your next step
(12:49):
, which is effectively wholelife.
But the difference is that thecash value is now tied to an
index.
So what that means is take anindex such as the S&P 500.
So instead of your cash valuegetting a set guaranteed fixed
interest rate, which your wholelife is going to have, that it's
(13:10):
going to have a guaranteedinterest rate, guaranteed growth
, very secure product.
In that sense, the indexuniversal life is going to have
some guarantees, but they're notgoing to be as level or as
balanced.
So what you're going to have isin the index universal life, if
it's tied to an index,typically you'll have a 0% floor
(13:31):
and then you'll have a cap atwhat you can make.
So currently the main companythat I work with, their cap is
at 8.5%.
So what that means is that ifthe S&P 500, if we look at where
the S, if I had a contract thatI put in place on January 18th
of 2023, they would look that onJanuary 18th of 2024, from
(13:57):
those two points, from openingto opening of those two days,
did the stock market go up ordown.
And it went up.
It went up, probably 20%.
So what that means is you'renot going to get credited the
interest for 20%, you're onlygoing to get 8.5% because it was
more than 20%.
But let's take the inverse.
What if the market went down20%?
(14:18):
In that situation, you're onlygoing to get 0%, so you have a
guaranteed 0% floor.
Cash value is not going to godown.
It can't be going down fromcrediting.
It'll get credited interest ifthe market goes up.
And if the market goes upbetween 0% and 8.5%, then you
get whatever that percentage is.
Now that's one of fivedifferent strategies that you
(14:38):
can use for the indexing.
Now, that's one of fivedifferent strategies that you
can use for the indexing.
And the indexing can get muchmore complex, much more robust
and have greater returns if youoptimize that.
However, optimizing thosestrategies is ancillary to all
the other components that we'regoing to talk about today.
That if you don't focus on thesethings and if your agent
doesn't understand theseelements, I don't care what
(15:02):
indexing strategy you're in.
The policy is going to begarbage, absolute trash not
worth having.
And it's why life insurancegets a bad rap is because these
whole life index universal lifepolicies are sold to the wrong
people, the wrong scenarios, notstructured properly, not taking
care of properly, and when youdo that, the reason why it's
garbage is you're selling.
(15:23):
You know the person who went tothe car dealership and is
looking for the family van andit's the say, it's the husband
who went to buy it and he comeshome with a trot rocket
motorcycle.
That trot rocket motorcycle istrash.
It could be the best trotrocket motorcycle on the market
and it's trash compared to whatyou're trying to do with it,
(15:43):
which is transport the family ina safe way.
We need to walk before we run.
So before we get into whatstrategies we should use, I need
to talk about the questions youshould be asking advisors, the
topics that they should be ableto explain back to you with very
good detail and clarity, andI'm going to touch on, like the
basics, so that way somebody cantouch it, because I mean two of
(16:06):
the biggest things thatdirectly drive index universal
life is and why it's a goodstrategy is.
You'll hear it referred to as a7702 plan, which is commonly
what I refer to it as is a 7702plan plan, which is commonly
what I refer to it as is a 7702plan.
(16:26):
The reason we refer to it as a7702 plan is because that's the
IRS tax code that gives it allof its tax advantage benefits,
and so a 7702 plan works verysimilar to a Roth IRA.
However, it has all of the samebenefits that a Roth IRA has
and all the same tax treatments,with additional benefits as
(16:48):
well.
The additional benefits are youcan't access the cash in your
Roth IRA until you're over 59and a half years old at the time
of this recording.
Speaker 2 (16:58):
That number could fluctuate If it fluctuates,
it'll increase.
Speaker 1 (17:02):
It's never going to come down, it'll go up, it'll be
later in life.
So there's five exceptions tothat rule, but, generally
speaking, you can't access themajority of that funds until 59
and a half.
That's not true with a 7702 oran IUL plan.
You can access the funds, ifstructured properly, day one,
(17:25):
and you have tax-freedistribution, which is the same
as a Roth.
Tax-free accumulation, that'sthe same as a Roth.
You have the legacy component,though, and that's something
that a Roth doesn't have.
Speaker 2 (17:35):
So in retirement you're going to distribute out
of your Roth.
Speaker 1 (17:37):
You're going to take your income and that's going to
decrease the value of your RothIRA.
With an IUL you'll takedistributions via a loan which
we'll get into, and then thatloan will be paid back by your
death benefit.
But because of certainregulations that make life
insurance life insurance, yourdeath benefit is always going to
be in excess of the cash valuethat's in there, which means
(17:59):
it'll be in excess of the loansthat you're taking out.
So when the loan gets paid off,there's going to be extra life
insurance there that can then bepaid to your beneficiaries at
your death, which allows for alegacy component.
Now you can choose where thatdeath benefit goes.
That death benefit could go to anonprofit, it could go to your
church, it could go to your kids, your grandkids, it can go to
(18:20):
anybody, whoever you choose.
It can go to your company.
You can choose who that is.
And that's the key componentthere is that you have all the
benefits of Roth the two othermajor advantages of the fact
that you have the legacycomponent or it blooms at your
death, which is what we say.
It blooms at your death, givingyou the fourth stage of
retirement planning.
Speaker 2 (18:45):
It blooms at your death, giving you the fourth
stage of retirement, planningthe legacy, and you have access
to it day one, if structuredproperly.
All right.
So this is great stuff so far.
Two quick questions before wemove on, then.
So to go back a little, I knowyou said the IUL.
Usually, either, whether it'syour company or most companies,
they're going to cap you atabout 8.5%, connected to the
index, correct it's going to be?
Speaker 1 (19:02):
connected to an index .
The cap is going to move overtime.
So the cap is generally, if youlook at where interest rates
are, that typically is going toimpact where the cap is.
But there's a three-year lagtypically and that's because,
ultimately, when you're buying alife insurance contract,
(19:27):
especially one of these indexuniversal life, what they're
doing is they're taking aportion of your premiums that
are going into the cash valuecomponent and they're going and
they're buying options on themarket and on the index and with
those options they're able toget a certain rate of return.
Another portion of that wholeof that cash that's going into
there is also purchasing morefixed income assets that have
(19:49):
set interest rates.
Those are tied to what thecurrent interest rate is and
what the current Fed rate is.
Now the reason why there's athree-year lag is once interest
rates go up they can't just jumpthe cap up.
They have to know that they'remaking money so that they can
pay off when people pass awayand be able to pay out those
death benefits.
And so, generally speaking,it's a two to a three year lag
(20:13):
for most companies to see thatcap come back up.
So you know, my prediction isthat we're at nine and a half
now.
It'll go up over the next twoto three years.
You'll see that cap increasebecause interest rates have
increased.
Now if interest rates come wayback down, they're slowly going
to tick back down.
But if they come way back down,then you'll start to see in
another three years from thatpoint, the cap start to come
(20:35):
back down.
The floor is guaranteed at 0%,but that cap will fluctuate.
Is guaranteed at 0%, but thatcap will fluctuate.
Speaker 2 (20:40):
So what is that then?
If that's 8.5%, my question,because I know we talked you get
some back with a whole life, sousually what percentage?
Speaker 1 (20:50):
do you get back with whole life?
Whole life is it's going to bea fixed, guaranteed interest
rate.
Speaker 2 (20:54):
Right.
Speaker 1 (20:55):
Right now it's like 3.5%.
Speaker 2 (20:57):
Okay, so there's.
I was wondering that kind ofdifference there of like what
makes it much better?
And obviously five and a halfdoes.
And then the other quickquestion I had too.
Oh well, it seems likeobviously an IUL or 7702 plan is
pretty nice compared to a Roth.
So why would I do my Roth firstand not just jump into this
(21:18):
7702?
Speaker 1 (21:20):
Generally speaking.
So I've run the numbers and ifyou put money into, if you put
monthly premiums into an IUL andyou put monthly premiums into a
Roth, I ran it out over a30-year contribution phase.
So basically saying that ifyou're retiring at 65 and you
started contributions at 35 andyou contributed for 30 years the
(21:41):
same amount, maxing it out at 6500 a year, the difference in
growth in the cash value on theindex universal life and the
value of the account is going tobe roughly a quarter of a
million dollars.
And that's if you're fullyfunding the roth ira.
You're looking at a differenceof $250,000.
Speaker 2 (21:59):
So the Roth You'll get more in the Roth.
Speaker 1 (22:01):
The Roth will be $250,000 more.
Speaker 2 (22:04):
Okay.
Speaker 1 (22:05):
So you're going to grow.
Generally speaking, you'regoing to grow quicker in the
Roth than the IUL.
Now, if you look at the graph,it's really only in those like
last 10 years that they start toseparate, and the reason for
that is that IULs use the powerof zero where you're getting 0%.
(22:26):
So if the market goes down 15%,you're getting 0%.
And then typically, if themarket's going down 15%, you're
going to have the market go up agood percentage the next year,
maybe the same amount, maybemore, but it's going to go up
generally.
Generally speaking, if you havea large decrease one year,
you're going to have an equaland opposite return the next
year and so you're starting atzero.
(22:49):
So if you have $100,000 and themarket went down 15%, you're now
at 85% in the Roth, but you'reat $100,000 in the IUL.
And then, if the market thengoes up 15% the next year, or
just say 10% for easy numbers,10% the next year you're now at
now we have an 8.5% cap on theIUL.
So now you're at 108.5%, butyou're only at 93.5 in the Roth
(23:19):
because you're at 85,000 plus10%, plus 8,500.
So you're only at 83.5.
So now what happens is thatover time, those years when
there's take this past yearwhere 2023, the index was up
roughly 24%, you would have beencapped at 8.5%.
That would have gone up 24%.
So now with that you're able tooffset some of those downs and
(23:44):
then ultimately the cash valuestays pretty close together for
the first 20, 25 years, and thenthe last 5 to 10 years is when
the real gap starts to occur.
But they generally stay prettyclose and in the beginning years
the IUL will outperform the.
Roth if there's down marketyears in those first five to 10
(24:05):
years, because it's going to dipand you're going to have to get
back above that.
So I don't recommendindividuals to not use a Roth.
A Roth still has tons offinancial benefits and should be
part of your plan.
In my opinion.
It's part of my plan and mostclients.
I'm telling them to do acombination of these and that's
so.
In distribution we're able tocombat those down markets and
(24:30):
use the power of zero.
Because what I want to do indistribution is if you have a
down market year, I don't wantyou to tap into the principle
that's in your Roth or in yourother investment accounts and
pull a 10% down market.
Say you're taking 4%distributions, you're now down
14% that year versus if I keepyou at 10 and I take the
distributions out of the IUL,now when you have that up year,
(24:52):
you're able to counteract thatand you're able to get the
principal back up to where itwas or close to where it was if
you allow it to stay in there.
So having both of these is akey component of your strategy,
but I'm not telling you to dumpall of your money into a 7702
plan If somebody is run.
Having all of your retirementassets in one vehicle, generally
(25:15):
speaking, is a bad idea so it's, yeah, generally better to.
If you had 500 a month to putaway, it's actually better to
put 250 in each than 501 Iactually just had a client that
was in that situation and welooked at the numbers and we
actually he was putting he wasgoing to be putting 300 into the
Roth, 200 into the IUL, andthat was just because those were
(25:38):
the numbers that made sense andover time we were going to get
him to a maxing out of his Roth,which is roughly, and they're
probably going to increase thelimits in 2024.
But in 2023, it was 6,500.
So $543 a month was what youcan contribute.
Speaker 2 (26:00):
And so if he's at 300 , he's still got $243 more that
he can contribute.
Speaker 1 (26:03):
So as his income goes up, we're going to max out that
Roth and then, when he getsinto a position where his income
goes up even more and he needsanother investment vehicle, we
can stack IUL so we can havemultiple 7702 plans.
You can't have multiple Roths,but you can have multiple 7702
plans so that we can do anotherpolicy, because that segues us
(26:24):
into the optimization piece.
We can't the benefit to anindexed universal life policy is
that you're able to adjust thelife insurance, so the death
benefit options, and you're ableto adjust your premium, so
there's a range that you can payin on these policies.
In my opinion, if you'reoptimizing them and properly
(26:46):
structuring them, when you'repaying into these policies,
there's really only one correctoption for how you're paying
into these and that's themaximum amount, because anywhere
from so you have a minimumamount, a target amount, which
is what the insurance companyputs in there.
It's a target.
That's what they really theywant to at least get this much.
And then there's a max Betweenminimum and target.
(27:09):
That's what the agent gets paidon.
The agent gets paid on betweenminimum and target and those
commission rates can rangeanywhere from, depending on your
state, anywhere from 50 up to110 of that first year premium
that they'll get paid.
Minimum, the target they getpaid, depending on your state,
again, anywhere from zero to.
(27:30):
I think the highest I've seenin any state is four percent
from the target to the max, andthat is where you're actually
going to make your cashaccumulation in this IUL policy.
Work is when you increase abovetarget and you get to the max.
Speaker 2 (27:47):
Now how are these numbers?
Speaker 1 (27:49):
calculated?
Is it just an arbitrary numbertaken out of thin air?
No, and this is where we'regoing to get into the tax
conversation and the informationthat most agents are completely
clueless on.
So there's two pieces oflegislation that make life
insurance so tax-advantaged andso beneficial for an investment
(28:09):
strategy, and that's TAMRA andDEFRA, so T-A-M-R-A and
D-E-F-R-A.
Now, what these two pieces oflegislation together do is one
of the pieces of legislation andto not get nuanced, I'm not
going to keep pulling those backin but it's Tamar and Defra.
One of the pieces oflegislation stipulate, at each
(28:31):
age bracket so however old youare, the difference that has to
exist in order to get the taxedbenefits between the death
benefit and the cash valueamount.
So when we're talking aboutwhole life, how it's going to at
the point of the contract age121, it's going to equal the
same number.
That's going to be on a J curve.
(28:52):
So there's going to be a gapbetween and that's our window
that has to exist in order forit to be life insurance.
So that's that's componentnumber one that's and that's
true of whole life index,universal life.
Now, if you, if we break thatbarrier, it becomes what's
called a mech or a modifiedendowment contract.
(29:13):
A modified endowment contract,if you're trying to build a 7702
plan, is garbage, because whata MEC does, what a modified
endowment contract does, is iteliminates all of the tax
benefits that you get from theIRS tax code.
So it's no longer a 7702 planbecause it doesn't meet the
definitions of life insurance.
Speaker 2 (29:35):
So by breaking you mean you're pulling money out
too early.
Speaker 1 (29:38):
No, so by breaking it means that you're contributing
too much or the cash value isgrowing too quickly.
Speaker 2 (29:45):
Okay.
Speaker 1 (29:45):
Now the life insurance company should have in
their system an option whereyou click that says prevent
modified endowment contract andthat'll manage that.
Okay, prevent modifiedendowment contract and that'll
manage that okay.
So that one, if your agent isn'tas aware of that piece of it,
it's less concerning as long asthey're aware of modified
endowment contracts and canexplain that a modified
(30:07):
endowment contract turns lifeinsurance from life insurance
and being tax advantaged tobeing a modified endowment
contract Because the Rockefellerconcept, the reason that works,
is they have different types oflife insurance bought by a
trust that then, when theindividuals pass away the death
benefit goes back into the trusttax-free so that life insurance
(30:30):
money is never taxed.
If it's a modified endowmentcontract, that life insurance
money is taxed so you lose allthe tax benefits.
Rockefellers would never buy aMEC, not for this purpose.
They may buy a MEC for anotherpurpose, but for this purpose
the MEC doesn't make sense.
Speaker 2 (30:47):
All right.
So what I'm hearing is kind ofthe first mistake could be,
because this is something youthink would be good If I dump as
much as high as I can go, itcould actually have a negative
effect by losing those taxbenefits.
Speaker 1 (31:02):
Correct and you're kind of leading into the other
piece of the legislation.
Speaker 2 (31:06):
The other piece of the legislation.
Speaker 1 (31:09):
Most agents might not know it by its name of DEFRA,
but they might know it more as7P, and what that means is the
legislation dictates how muchpremium you can pay into the
policy in order to maintainthose tax benefits, the seven
pay.
The way the seven pay strategyworks is if it looks at how much
(31:29):
money if this were a whole lifepolicy, how much money over the
course of seven payments couldyou pay in to completely buy out
this contract at the initialdeath benefit you can put in up
to that number but you cannotexceed it.
So if to buy the whole contractwe'll use easy small numbers
here If the whole contract was$1,000 a year for seven years,
(31:53):
$7,000 would buy out the entirecontract and have it completely
paid up if it were whole life.
If that were the case and youput $7,001 into this policy in
the first seven years, then itbecomes in violation of this and
it becomes a modified endowmentcontract.
Now a 7-Pay also looks at itevery year.
So you can only put in in thatanalogy.
(32:14):
You can only put in $1,000 yearone.
You can only put in in thatanalogy.
You can only put in $1,000 yearone.
You can only put in up to $2,000cumulatively between year one
and year two, and so on up toyear seven.
Now why that number isimportant and in my opinion this
is probably the most importantone is because that is what
(32:35):
defines our maximum contributionlimit.
That is, the number thatdefines that maximum
contribution limit.
We want to be as close to thatseven-pay number as we possibly
can be without exceeding it.
Speaker 2 (32:49):
Thanks for listening to our podcast.
Speaker 1 (32:51):
We hope this helps you on your balance freedom
journey.
Speaker 2 (32:53):
Please share your thoughts in the comments section
below.
Speaker 1 (32:56):
Until next time, stay balanced.
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