April 26, 2024 • 25 mins
Unlock the secrets to maximizing your Indexed Universal Life (IUL) policy's cash value with Jon and me as we dive into the nuances of premium management. Discover how back-paying premiums can dramatically enhance your policy's performance, and learn why it's crucial to be fully funded before even thinking about a second policy. We also pull back the curtain on the commission structures that could be influencing your investment choices, arming you with the knowledge to discuss IULs with your financial advisor from an informed position. Our candid conversation promises to give you the tools to navigate these often-overlooked aspects of life insurance investment.
Ever heard of '7702' but felt lost in the jargon? We're here to clarify the mystery surrounding this crucial section of the tax code. Understanding the advantages and potential pitfalls of these life insurance policies is key, from cash value accrual to retirement income options. We'll tackle the tricky topics of early withdrawals, max funding, and policy structuring head-on, ensuring you're equipped to make the most of the tax-free benefits. Plus, we expand the conversation to the broader search for balance and freedom in life, inviting you to add your voice to this community-driven exploration of personal growth. Join us for an episode that's as enriching as it is enlightening.
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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 Prover
.
In this episode, jon and I pickup where we left off on IUL,
part 1.
If you haven't listened to thatepisode, we strongly encourage
you to go back, listen to thatone and then jump back over to
here so that you're all up tospeed.
Speaker 2 (00:25):
We hope you enjoy.
Thank you for listening.
So then is this where youbrought up before If someone
does then have extra cash, doyou change the limit on that or
the top number on that plan, ordo you open up a second 7702?
Speaker 1 (00:38):
So, because of the seven pay limits.
Yes, you can alter the lifeinsurance component.
However, because of the sevenpay limits and maximizing,
you're not going to pull thatdown or increase that in order
to dump more money into it.
Just because you're notoptimizing.
What you end up doing is, ifyou do that, say you do that.
Year four, or even if you didit year eight, after you're
(00:58):
outside of the seven pay, youincrease the life insurance
amount in order to put it in,assuming the insurance company
allows you to do this.
What you've just done is you'vemade it so that years one
through seven are no longer maxfunded Because you now increase.
Where you are here Now you can.
The nice part with an IUL policyis you can kind of think of it
as a hotel, and each year you'rebuilding a new hotel and each
(01:24):
year you're building a new hotel, no-transcript.
So $12,000, $12,000.
Year three something came upand you didn't have all the
money, so you only put in$10,000.
Year three something came upand you didn't have all the
(01:44):
money, so you only put in$10,000.
So you have $2,000 of vacancythere in order to be max funded.
Year four you're back to normal.
You pay $12,000, $5,000,$12,000, $7,000, $12,000, $8,000
, $12,000.
Year nine you get an increasein pay or you get a bonus.
(02:12):
You get a $2,000 bonus.
You're like what am I?
Speaker 2 (02:14):
going to do with this .
Speaker 1 (02:15):
You can go back and pay into that $2,000 vacancy in
previous years to get it to themax contribution limit, so you
can back pay your premiums.
So what's the benefit of backpaying it Benefit of back paying
is in that situation you didn'toptimize it that year because
you had the $2,000 vacancy so itwasn't fully maxed out.
So instead of us saying, oh, wecan go buy another policy now
that you have this increase inincome, instead of buying
(02:35):
another policy, let's look andmake sure you max fund your
policy first and back pay anypremiums so that your policy is
fully maximized out and has asmuch cash value in it as
possible.
Speaker 2 (02:42):
Because if you buy, buy another policy.
Speaker 1 (02:43):
There are expenses in these policies.
There's a life insurance costand there's additional fees in
there.
A new policy increases yourfees, increases your expenses.
We want to make sure we'remaximizing the current one
before we go and take out asecond one and increase your
expenses okay, that makes sense.
Speaker 2 (03:01):
Um, and then?
Speaker 1 (03:02):
again that window between the target and the max.
That's where we're dumping thevast majority of the money into
the cash value, and so that'swhere we're going to really be
able to take advantage of thisindexing strategy.
Speaker 2 (03:14):
All right, so I'm following you pretty good so far
, but there's obviously a lothere and it's a lot of good
information.
When you're listening to apodcast but say I don't have
access to, I lucky at the momentand I do, but I wanted to take
this to someone else, adifferent financial advisor what
am I looking for around thistopic, like how do I even bring
it up with some stuff?
Speaker 1 (03:32):
so a lot of advisors will be aware of this and they
try to sell it, and that'sbecause the issue is is that
they try to sell it off thattarget premium and that's
because they're making like mycommission range in most of the
states that I operate in is 70%on that minimum to target
premium and then I'm only making2.8% on the target to max
(03:58):
premium.
But I'm still fully fundingeverybody on the max and
typically most of my clients,because I have a lot of this
conversation with them.
They'll be like so what's in itfor you, what are you making
and I'll point it out.
I'll write the numbers down,I'll explain the percentages and
I'll show them what I'm making.
And a lot of times they havecompeting quotes from other
companies and then I'll show andthey'll bring up the pros that
(04:21):
that person said to theirstrategy and I'll go okay, but
these, not this number will notlie.
Let me show you the difference.
If you take the same amount ofpremium, one's max funded ones,
if only funded to target, thereI have contracts where 80 of the
premium falls between targetand max.
(04:42):
So I mean one of the largercases that I've worked this year
, which we're only on the 18thof the year, so it's, you know,
not necessarily the largest caseI've worked, the largest case
I've worked this year they'regoing to be able to dump in
$4,000 a month into it.
Target premium on that is onlylike $9.50 a month and so if you
(05:05):
take the same so I'm getting,if you round that up to $1,000,
I'm going to make 700 bucks onthat plus roughly 3% of 3,000.
So almost $800 that I'm goingto make on this, versus if I did
it the way the competingstrategy was showing it, where
$4,000 was actually target, thenI'm able to show, I'm able to
(05:26):
know that, because of doing aseven pay calculation and
figuring out where, whereeverything falls, that agent was
going to be making, assumingthe same interest rate, assuming
the same payout rate, seventypercent of four thousand dollars
.
So they're gonna make thirtyfour hundred dollars where I was
making less than a thousand.
So why are?
Speaker 2 (05:46):
they.
So what's the difference forthe client then?
Speaker 1 (05:50):
The difference for the client is that there's at
Target.
If you're putting $4,000 atTarget versus $4,000 at Max, the
death benefit is going to beway higher, which means your
life insurance cost is muchhigher.
The cash value is going to growat a much smaller rate.
It's not going to be as robust,it's not going to have full
(06:12):
occupancy in that hotel analogyand so you're not optimizing the
money At that point.
You're buying really expensivelife insurance.
Is what you're buying.
You're not buying lifeinsurance for the legacy
component and then also havingthese tax advantage distribution
qualities to it.
Speaker 2 (06:27):
So that's where I assume the bad rep's coming from
, and it's the only reasonthey're doing $4,000, as the
target is to benefit them.
Speaker 1 (06:35):
It's the only thing that I can see.
In a policy, like everythingthat I know about the tax code
and everything that operates,the only benefit that I see is
to the agent.
There's no benefit to theclient, it's all to the agent.
There's no benefit to theclient, it's all to the agent.
And the agent is just makingthree times as much money on it.
And the reason why they do thatand I explained this to a
client just yesterday the reasonwhy they do that is they don't
(06:57):
care if you find out in a year,because after a year they've
made their first yearcommissions and where I have to
work with three times as manypeople in order to make the same
amount of money on this, theydon't.
So they can rip off one personfor every three people that I
help and they're making the sameamount of money that I'm making
.
Yeah, they don't care.
Yeah, they don't care, becauseif they write one or two of
(07:19):
those a month and and assumingthat they're selling other
products as well but if theysell two of those a month,
they're making $72,000 a year.
Speaker 2 (07:28):
Yeah, and we're not being pessimistic or negative.
There's people like this inevery industry health industry,
financial industry.
Speaker 1 (07:35):
It's just.
Speaker 2 (07:35):
life insurance is full of them yeah and that's why
life insurance gets a bad repmainly.
Speaker 1 (07:41):
Yeah, there's tons of them in here, because it's an
industry where you can.
If you're a sleazy salesman, youcould still sell all these
benefits, you could talk aboutall the benefits that I talk
about, and if the client doesn'tknow that they're not
optimizing because they don'tknow what they don't know and
they don't know there's a betteroption, then they're not going
to see it.
The number one way you can tellif your policy is being max
funded because I don't expectyou to do a seven pay
calculation, I don't expect youto go and research camera, defra
(08:03):
you have so much other stuffgoing on.
You just really hope thatyou're a really good financial
advisor.
If your IUL policy is maxfunded or is close to being max
funded.
If you look at the illustration,every illustration by law is
going to have to show you eachyear how much you're paying in,
what the growth looks like onthat In year one.
(08:25):
The cash value should not bezero.
There should be a dollar amountthere in year one and that
means that you're above targetand headed towards or at max
premium.
Now in the illustration, if youreally want to test it out in
the illustration, there shouldbe a seven-pay calculation
(08:46):
number.
It should say further up inyour illustration seven-pay
calculation and the dollaramount and then technically you
could calculate off of that whatthat is.
However, that's a little bitmore nuanced and a little bit
more intense If you want an easy, quick one spot to check.
Look at year one of thecontract.
What's the cash value in thecontract?
Speaker 2 (09:08):
If it's zero.
Speaker 1 (09:09):
you're being taken advantage of.
It's not properly structuredfor index universal life.
Now, if you buy a whole lifepolicy and we're not trying to
7702, we're not trying to do allthese things If you buy a whole
life policy, you can't dump inall these other numbers.
The premium's fixed.
That'll be zero.
So we're specifically talkingindex universal life here.
(09:32):
So that's just a good technique,that if you're already working
with someone and you're unsure,if you have an iul, they can
present that graph to you andthen you can check there they're
right, or they have to presentthat graph too yeah, legally,
some of the southern states Imight not know if it's a law,
but the vast majority of thesouthern states I might not know
if it's a law, but the vastmajority of the states, if not
all of them require you to showan illustration and that
(09:53):
illustration is going to showyou how much you're paying in
each year, what the projectionsare on the cash value growth,
and it should give you differentoptions.
Like in New York, we have togive you three different graphs
or charts of accumulation,different graphs or charts of
accumulation.
The first column is a New Yorkstate regulation.
In my opinion it's bogusbecause the first column, the
(10:14):
first column, assumes allguarantees, so it insures and
assumes the highest insurancecost that the contract allows
for the insurance company tocharge and it assumes the lowest
interest rate, which, with a 0%floor, is 0% and with an
indexing strategy that meansthat the market would have to go
down every year for the life ofthe contract.
(10:34):
So if that happens, I meanwe're in an apocalypse.
It's just never going to happenand if it does, our life
insurance contract is the lastthing we're worried about.
And our money at that pointlegitimately is completely
worthless.
So you know if you're tying itto an index in the US economy
and it's going down every yearyour US dollars are junk.
(10:57):
So it completely throwseverything off.
But New York State requires it,so you have to have it there.
And then the next column is aconservative number.
And then the third column is Iwould say the middle column is
like an ultra conservativenumber.
And then the third column is Iwould say the middle column is
like an ultra conservativenumber and the right column is a
conservative, conservative tomoderately conservative number.
It actually illustrates that 50basis points below what the
(11:19):
20-year average was for thatstrategy.
So even if you take the 20-yearaverage for the strategy, it's
still 30 or 50, 30 to 50 basispoints below that.
So it allows you, but the keycomponent there is looking at
what's the cash value in thatfirst year.
Is it zero or is there a numberthere?
Speaker 2 (11:38):
Because if it's zero, then you're not max funded.
Speaker 1 (11:40):
I guarantee you that If it's zero, you're not max
funded.
Speaker 2 (11:44):
Awesome.
So that's a good tip for IULs.
And always remember, don't mixit up.
If you have a hole, it's goingto be zero and that's okay.
Sweet Right, Right.
So then I mean we've talkedabout a lot.
We talked about what you'redoing if you're going to do it
with an advisor.
Was there anything else there?
Because I know we're kind of onthe topic of if you're meeting
(12:05):
with an advisor.
So is there anything we missedthere, or is that pretty much
wraps that up.
Speaker 1 (12:13):
I would talk to them about modified endowment
contracts and just and Ihonestly I would play ignorant
go in and say you know, I knownothing about modified endowment
contracts.
Can you tell me about them?
Can you tell me how I can avoidthat?
Ask them if they know aboutTamara Defra.
Ask them if they can explainwhat a 7702 plan is, you know.
Ask them to really point thesethings out, Because at this
point 7702 is kind of caught onas like a sales tactic and
(12:38):
people just say it because theydon't want to say life insurance
, so they say 7702.
They don't even realize that7702 is the tax code.
They just know that it's a termthat they can use and it's
catchy, and people don't hearlife insurance and they're not
immediately turned off, which isa benefit to using 7702, but if
you don't know what that, is Ifit's not structured properly.
Speaker 2 (13:01):
what's the difference ?
Speaker 1 (13:02):
Well, if you're just saying four numbers for the sake
of saying four numbers, so youdon't have to say life insurance
, what are you?
What are you doing?
Like that's a tax code, whatmakes it have all the tax
advantages of cashredistribution while you're
alive, tax redistribution,retirement, access to it, death
(13:23):
free or tax free death benefit?
You know all these components.
Access to it before 59 and ahalf.
If you don't know all thesethings, then why are you
referring to it?
As far as referencing the taxcode, yeah yeah.
The other part that I want tobring up, though, is because
we've talked, we've sprinkled insome of the cons to this yeah
(13:45):
and I want to really bring themup, and then I guess I'll open
it up for like your specificquestions about all this, and
then we'll dive deeper.
But nice you know what?
What?
What are the downsides to this?
So downsides are if it's notstructured properly, you're
basically throwing your moneyaway like if you're not max
funding this.
It's garbage.
I mean, I had a client in heretwo days ago and they knew they
(14:09):
wanted to do the plan.
They know that their financialposition is going to change in
six months because they'removing and their rent's going to
change and there's all thesefluctuations, but they don't
know what their rent's going tochange to.
And they had said, well, whydon't we just start this, put
the ceiling for the max at 200,and I'll put in 100, 150 now and
(14:30):
then change it down the road.
And I actually wouldn't, Iwouldn't sell the contract.
I said let's review this in sixmonths, when we actually know
what your budget is, becauseyou're moving, your income's
also not like.
Your income's going tofluctuate, your living expenses
are going to fluctuate, yourrent's going to fluctuate.
There's too many fluctuationshere for us to be able to
maximize it.
And so you want to know thatyou're going to be able to
maximize it, because, whileyou'll have access to it in year
(14:52):
one in order to properly growthis vehicle, you really don't
want to touch the money in thefirst 10 years.
Because another downside tothat the first 10 years and why
you don't want to touch it inthe first 10 years is if you're
taking loans against it, youwon't get hit with these
penalties.
But if you take distributionsfrom it which you don't want to
take, distributions because thatdoesn't have tax benefits, you
(15:14):
will be taxed on the interestearned on that money.
If you take the money out ofthe policy, if you take a loan
out, you won't be taxed on that.
So little nuance there.
Talk with your advisor to getspecifics on that which way to
do it.
But during the first 10 yearsthere's a surrender charge
period which just means thatyou're not going to have full
(15:35):
access to the cash value.
So again, if you look at thatillustration you'll look at
they'll have a cash value numberand it'll have a surrender
value number.
Surrender value will be less inthe first 10 years than cash
value and then after year 10,starting year 11, it'll be equal
.
Now each company can alter thatso it could be slightly
different.
(15:55):
Some companies have 15 years,Some companies have seven or
eight years.
It all fluctuates.
Ten is generally the average inthe industry standard and the
way that works.
It's similar to an annuity.
So an annuity has the samething where you have a 10 year
or 7 year or 15 year surrendercharge period where at year one,
if it's a 10 year charge, yearone you have a nine percent
(16:16):
charge, year two you have a ninepercent charge and then it goes
down one percent every year.
Eight years is eight percent,seven, six, five, all the way
down.
So it tapers off and you haveless of a charge the longer it's
in there.
And that's really there because,with the guarantees that
they're giving you, they need tobe able they, being the
insurance company, need to beable to go invest that money,
(16:38):
make back the returns in orderto pay you those cash
accumulations that they'regiving you, and giving you the
guarantees of the 0% floor, orin a whole life policy, because
the surrender charge exists in awhole life policy as well, and
so the reason it's there is, ifthey're going to guarantee you
3.4%, they need to be able tomake at least 3.5% in order for
(16:59):
them to be profitable on theventure.
And so they make you keep yourmoney tied up for at least 10
years in order to do that.
Speaker 2 (17:07):
Okay.
So in my easy terms, firstdownside really seems to be If
you take money out against it inthe first 10 years, they're
going to charge you a percentageversus after.
Speaker 1 (17:20):
You have access, but you have limited access in the
first 10 years.
After 10 years you have fullaccess.
Most advisors glance over that,don't talk about it.
Speaker 2 (17:30):
I guess what I'm confused there in terms of you
have limited access, as in youcan't take out all your money,
or you could take it out, butthey're going to charge you a
big fee or percentage.
Speaker 1 (17:40):
Correct, you could take it out.
You could surrender your policy.
Take out all the money that'sin there, but you're going to be
charged that fee Okay.
Okay, right, which ends upbeing similar to a Roth IRA for
a 7702 plan.
It ends up being similar to aRoth because before you age 59
and a half, there's a 10% taxpenalty.
So if the penalty on the 7702is 9%, ultimately that
(18:05):
distribution is less than that10% number.
So you're technically at anadvantage there.
Speaker 2 (18:10):
Now it's not a dollar for dollar, the amount of money
that you're putting and payingtowards the policy isn't all
going into the cash value.
Speaker 1 (18:19):
A portion of that's paying for the life insurance, a
portion that's paying for theexpense of the contract.
So there are components therethat you're buying and so you
know, in the first 10 years ofthe first year, first two years,
if you're at nine percent.
I've never actually calculatedwhich I, when we get off this
call I'm going to, is to seewhat that actual percentage
would be versus a 10% penaltyfrom the IRS for early
(18:44):
distributions from a Roth.
I wonder what that nominalpercentage would be and where
the breakeven point is on that.
So that's interesting I've neveractually looked at it that way,
but that's definitely adownside is that you have a
penalty in the first 10 years,but outside of those 10 years
you don't have that penalty.
So, downsides limited access.
I always call it limited accessbecause you do have access, but
there's a limit to how much youcan take out, because there's a
(19:05):
portion that's going to bepenalized.
The other piece is is, as weand then we've already talked
about these two which is, ifit's not max funded, then you're
paying for more life insurance.
You're paying, you're buyingmore options that you don't need
because you's not max funded.
Then you're paying for morelife insurance.
You're buying more options thatyou don't need because you're
not max funding it.
So you're not optimizing thestrategy.
And the other flip side of thatis, if you put too much in
(19:26):
because it's not structuredproperly, you get a modified
endowment contract.
You lose all the tax benefits.
It's actually garbage from whatwe're talking about, yeah, so
those I mean those three thingsin my opinion are the massive
downsides.
The other component is you haveto be able to get approved for
life insurance.
You can't have this plan if youcan't get approved for life
(19:47):
insurance and if you can't getapproved for life insurance in a
good class code.
So if you have, if you've hadcancer, you potentially still
could get.
Depending on what cancer youhad and how long you've been in
remission or how long you'vebeen recovered, you could
potentially still get lifeinsurance.
But what class are they goingto put you in?
Are they going to put you insubstandard?
(20:08):
How much are they going tocharge you for the life
insurance If you're not in agood class code?
Now your life insurance costgoes up and the optimization of
the strategy decreases becauseyou're paying more in fees.
Because there are guarantees,there are fees.
Nothing in this world is forfree.
You're not getting that 0%floor for free.
You're paying for that.
(20:30):
That allows you to have thatcomponent there.
But that's a downside is thatyou have to pay for it.
That is an expense that you'retaking on.
Speaker 2 (20:36):
Obviously, all that is if people maybe haven't even
gotten life insurance yet, whichI haven't, but I know about
that is basically, the youngerand healthier you are, the
better, better class you're in,right, so do you usually get a
better rate?
Speaker 1 (20:51):
correct.
The younger and healthier youare, the better your rate's
going to be.
Every year you get older, yourinsurance rate's going to go up.
The longer you wait, the moreit's going to cost.
And this is why we build in thebaseline level plan which, if
people go to my website,gainsgroupnet, they can actually
download my life insurancebuyer's guide, which is 10 pages
(21:13):
of explaining life insuranceand two pages of explaining how
we sell you life insurance fromthe get-go.
And so for that entry-levelplan that that policy talks
about, it doesn't even itexplains to you in the 10 pages.
It explains your universal lifeindex, universal life.
It does not talk about sellingyou it in the strategy, because
this is a very targeted sale.
This is for a very specificindividual, this is not for
(21:36):
everybody, and so we typically,when we're meeting with most
clients, we have a very smallportion of whole life and then
we use term for all of thedifferent age brackets.
You know, income replacementwhile you have kids, income
replacement during your workingyears, paying off debts,
(21:56):
mortgages.
We tie that all to a set term,but we know that you're going to
die at some point.
We know that that's somethingthat's guaranteed to happen.
So if we buy, you a small lifeinsurance contract based on what
a funeral would cost at yourretirement age or at your
expected age of death age or atyour expected age of death.
(22:21):
If we buy that at a young age,then we know that we don't have
to section off a piece of ourretirement accounts for
distribution.
We don't have to take a pieceof that to buy our funeral
expenses and do all that.
We can have a life insurancecontract in place if we buy it
when we're younger.
Generally speaking, theinternal rate of return looking
at the death benefitdistribution and what you pay in
is going to be somewherebetween depending on the
contract we're talking wholelife here, internal rate of
(22:41):
return is going to be somewherebetween 5% and 7%.
Not the 8% 9% that you can getin the stock market, but 5% or
7% for something that hasguarantees in it and covers an
expense and is conservativethat's a good option.
That's a good rate of returnfor something that's
conservative.
Speaker 2 (23:01):
People jump up and down for CDs right now because
they're 5% 5.5%.
Speaker 1 (23:06):
You can get the same thing on your funeral expenses
by buying a life insurancecontract and sectioning off that
piece of your retirement.
Which is why we do it, becausethe internal rate of return
plays to the case that this is agood part of the strategy.
And again we use the analogy ofa sports team no
championship-winning team has areally good offense and no
(23:29):
defense.
Life insurance is part of yourdefensive strategy.
Speaker 2 (23:32):
Yeah, I mean to me it sounds like a great plan and
really the cons of it are eitherbecause it's not structured
properly or you just want tomake sure you're learning about
it and starting at a young age.
So I mean that was that was oneof the better ones for me.
I followed pretty well.
I got to ask a lot of goodquestions.
(23:52):
The beginning was great wherewe kind of I saw because I
always, I I think, put them inthe wrong order of which one's
the best, which I know therereally is no best one.
They all have.
You know there are.
Speaker 1 (24:03):
You've said before, they're all used for specific
tools, but that was a goodoverview they're all the best
and the worst if they're used inthe right or wrong situation
right right you know, likethey're?
They're amazing or they'regarbage, depending on what
you're trying to use it for andwhat you're actually using it
for.
Speaker 2 (24:18):
Yeah, so I don't think I have any other questions
and we're probably at a goodpoint here.
Anything else you want to add?
Speaker 1 (24:26):
No, I think that overview is the top of it.
Like I said, we touched on thevery basics, so there's a lot of
stuff that I left out in orderto and I know it might not seem
like we just touched on thebasics, but we touched on the
basics of what you need to knowwithout going into the weeds on
a lot of this stuff.
More than happy to talk throughanything with anybody if they
want to reach out, but these arethe conversations you should be
having with your advisor, andjust don't get trapped or sucked
(24:48):
into those videos that show youan illustration or oh, you can
become your own bank and don'treally talk about this stuff
Like it's not.
You're not going to do thiswith a couple hundred dollars a
month typically a more expensivepolicy and it's not going to
happen overnight.
It's a long-term strategy,long-term play, and it needs to
be built appropriately for you.
Speaker 2 (25:09):
Health or finances, there's usually no magic quick
pill.
Speaker 1 (25:13):
No, there is no magic quick pill?
Speaker 2 (25:16):
Don't believe it.
I think even, too, we couldhave this conversation,
basically around the same topic,three other times.
Different stuff's going to bebrought up and it's just going
to even be more helpful.
So we'll go into, you know,definitely go into it more right
?
No, for sure sweet good stuff,good stuff thanks for listening
to our.
Speaker 1 (25:36):
We hope this helps you on your balance freedom
journey.
Speaker 2 (25:39):
Please share your thoughts in the comments section
below.
Speaker 1 (25:41):
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 Prover
.
In this episode, jon and I pickup where we left off on IUL,
part 1.
If you haven't listened to thatepisode, we strongly encourage
you to go back, listen to thatone and then jump back over to
here so that you're all up tospeed.
Speaker 2 (00:25):
We hope you enjoy.
Thank you for listening.
So then is this where youbrought up before If someone
does then have extra cash, doyou change the limit on that or
the top number on that plan, ordo you open up a second 7702?
Speaker 1 (00:38):
So, because of the seven pay limits.
Yes, you can alter the lifeinsurance component.
However, because of the sevenpay limits and maximizing,
you're not going to pull thatdown or increase that in order
to dump more money into it.
Just because you're notoptimizing.
What you end up doing is, ifyou do that, say you do that.
Year four, or even if you didit year eight, after you're
(00:58):
outside of the seven pay, youincrease the life insurance
amount in order to put it in,assuming the insurance company
allows you to do this.
What you've just done is you'vemade it so that years one
through seven are no longer maxfunded Because you now increase.
Where you are here Now you can.
The nice part with an IUL policyis you can kind of think of it
as a hotel, and each year you'rebuilding a new hotel and each
(01:24):
year you're building a new hotel, no-transcript.
So $12,000, $12,000.
Year three something came upand you didn't have all the
money, so you only put in$10,000.
Year three something came upand you didn't have all the
(01:44):
money, so you only put in$10,000.
So you have $2,000 of vacancythere in order to be max funded.
Year four you're back to normal.
You pay $12,000, $5,000,$12,000, $7,000, $12,000, $8,000
, $12,000.
Year nine you get an increasein pay or you get a bonus.
(02:12):
You get a $2,000 bonus.
You're like what am I?
Speaker 2 (02:14):
going to do with this .
Speaker 1 (02:15):
You can go back and pay into that $2,000 vacancy in
previous years to get it to themax contribution limit, so you
can back pay your premiums.
So what's the benefit of backpaying it Benefit of back paying
is in that situation you didn'toptimize it that year because
you had the $2,000 vacancy so itwasn't fully maxed out.
So instead of us saying, oh, wecan go buy another policy now
that you have this increase inincome, instead of buying
(02:35):
another policy, let's look andmake sure you max fund your
policy first and back pay anypremiums so that your policy is
fully maximized out and has asmuch cash value in it as
possible.
Speaker 2 (02:42):
Because if you buy, buy another policy.
Speaker 1 (02:43):
There are expenses in these policies.
There's a life insurance costand there's additional fees in
there.
A new policy increases yourfees, increases your expenses.
We want to make sure we'remaximizing the current one
before we go and take out asecond one and increase your
expenses okay, that makes sense.
Speaker 2 (03:01):
Um, and then?
Speaker 1 (03:02):
again that window between the target and the max.
That's where we're dumping thevast majority of the money into
the cash value, and so that'swhere we're going to really be
able to take advantage of thisindexing strategy.
Speaker 2 (03:14):
All right, so I'm following you pretty good so far
, but there's obviously a lothere and it's a lot of good
information.
When you're listening to apodcast but say I don't have
access to, I lucky at the momentand I do, but I wanted to take
this to someone else, adifferent financial advisor what
am I looking for around thistopic, like how do I even bring
it up with some stuff?
Speaker 1 (03:32):
so a lot of advisors will be aware of this and they
try to sell it, and that'sbecause the issue is is that
they try to sell it off thattarget premium and that's
because they're making like mycommission range in most of the
states that I operate in is 70%on that minimum to target
premium and then I'm only making2.8% on the target to max
(03:58):
premium.
But I'm still fully fundingeverybody on the max and
typically most of my clients,because I have a lot of this
conversation with them.
They'll be like so what's in itfor you, what are you making
and I'll point it out.
I'll write the numbers down,I'll explain the percentages and
I'll show them what I'm making.
And a lot of times they havecompeting quotes from other
companies and then I'll show andthey'll bring up the pros that
(04:21):
that person said to theirstrategy and I'll go okay, but
these, not this number will notlie.
Let me show you the difference.
If you take the same amount ofpremium, one's max funded ones,
if only funded to target, thereI have contracts where 80 of the
premium falls between targetand max.
(04:42):
So I mean one of the largercases that I've worked this year
, which we're only on the 18thof the year, so it's, you know,
not necessarily the largest caseI've worked, the largest case
I've worked this year they'regoing to be able to dump in
$4,000 a month into it.
Target premium on that is onlylike $9.50 a month and so if you
(05:05):
take the same so I'm getting,if you round that up to $1,000,
I'm going to make 700 bucks onthat plus roughly 3% of 3,000.
So almost $800 that I'm goingto make on this, versus if I did
it the way the competingstrategy was showing it, where
$4,000 was actually target, thenI'm able to show, I'm able to
(05:26):
know that, because of doing aseven pay calculation and
figuring out where, whereeverything falls, that agent was
going to be making, assumingthe same interest rate, assuming
the same payout rate, seventypercent of four thousand dollars
.
So they're gonna make thirtyfour hundred dollars where I was
making less than a thousand.
So why are?
Speaker 2 (05:46):
they.
So what's the difference forthe client then?
Speaker 1 (05:50):
The difference for the client is that there's at
Target.
If you're putting $4,000 atTarget versus $4,000 at Max, the
death benefit is going to beway higher, which means your
life insurance cost is muchhigher.
The cash value is going to growat a much smaller rate.
It's not going to be as robust,it's not going to have full
(06:12):
occupancy in that hotel analogyand so you're not optimizing the
money At that point.
You're buying really expensivelife insurance.
Is what you're buying.
You're not buying lifeinsurance for the legacy
component and then also havingthese tax advantage distribution
qualities to it.
Speaker 2 (06:27):
So that's where I assume the bad rep's coming from
, and it's the only reasonthey're doing $4,000, as the
target is to benefit them.
Speaker 1 (06:35):
It's the only thing that I can see.
In a policy, like everythingthat I know about the tax code
and everything that operates,the only benefit that I see is
to the agent.
There's no benefit to theclient, it's all to the agent.
There's no benefit to theclient, it's all to the agent.
And the agent is just makingthree times as much money on it.
And the reason why they do thatand I explained this to a
client just yesterday the reasonwhy they do that is they don't
(06:57):
care if you find out in a year,because after a year they've
made their first yearcommissions and where I have to
work with three times as manypeople in order to make the same
amount of money on this, theydon't.
So they can rip off one personfor every three people that I
help and they're making the sameamount of money that I'm making
.
Yeah, they don't care.
Yeah, they don't care, becauseif they write one or two of
(07:19):
those a month and and assumingthat they're selling other
products as well but if theysell two of those a month,
they're making $72,000 a year.
Speaker 2 (07:28):
Yeah, and we're not being pessimistic or negative.
There's people like this inevery industry health industry,
financial industry.
Speaker 1 (07:35):
It's just.
Speaker 2 (07:35):
life insurance is full of them yeah and that's why
life insurance gets a bad repmainly.
Speaker 1 (07:41):
Yeah, there's tons of them in here, because it's an
industry where you can.
If you're a sleazy salesman, youcould still sell all these
benefits, you could talk aboutall the benefits that I talk
about, and if the client doesn'tknow that they're not
optimizing because they don'tknow what they don't know and
they don't know there's a betteroption, then they're not going
to see it.
The number one way you can tellif your policy is being max
funded because I don't expectyou to do a seven pay
calculation, I don't expect youto go and research camera, defra
(08:03):
you have so much other stuffgoing on.
You just really hope thatyou're a really good financial
advisor.
If your IUL policy is maxfunded or is close to being max
funded.
If you look at the illustration,every illustration by law is
going to have to show you eachyear how much you're paying in,
what the growth looks like onthat In year one.
(08:25):
The cash value should not bezero.
There should be a dollar amountthere in year one and that
means that you're above targetand headed towards or at max
premium.
Now in the illustration, if youreally want to test it out in
the illustration, there shouldbe a seven-pay calculation
(08:46):
number.
It should say further up inyour illustration seven-pay
calculation and the dollaramount and then technically you
could calculate off of that whatthat is.
However, that's a little bitmore nuanced and a little bit
more intense If you want an easy, quick one spot to check.
Look at year one of thecontract.
What's the cash value in thecontract?
Speaker 2 (09:08):
If it's zero.
Speaker 1 (09:09):
you're being taken advantage of.
It's not properly structuredfor index universal life.
Now, if you buy a whole lifepolicy and we're not trying to
7702, we're not trying to do allthese things If you buy a whole
life policy, you can't dump inall these other numbers.
The premium's fixed.
That'll be zero.
So we're specifically talkingindex universal life here.
(09:32):
So that's just a good technique,that if you're already working
with someone and you're unsure,if you have an iul, they can
present that graph to you andthen you can check there they're
right, or they have to presentthat graph too yeah, legally,
some of the southern states Imight not know if it's a law,
but the vast majority of thesouthern states I might not know
if it's a law, but the vastmajority of the states, if not
all of them require you to showan illustration and that
(09:53):
illustration is going to showyou how much you're paying in
each year, what the projectionsare on the cash value growth,
and it should give you differentoptions.
Like in New York, we have togive you three different graphs
or charts of accumulation,different graphs or charts of
accumulation.
The first column is a New Yorkstate regulation.
In my opinion it's bogusbecause the first column, the
(10:14):
first column, assumes allguarantees, so it insures and
assumes the highest insurancecost that the contract allows
for the insurance company tocharge and it assumes the lowest
interest rate, which, with a 0%floor, is 0% and with an
indexing strategy that meansthat the market would have to go
down every year for the life ofthe contract.
(10:34):
So if that happens, I meanwe're in an apocalypse.
It's just never going to happenand if it does, our life
insurance contract is the lastthing we're worried about.
And our money at that pointlegitimately is completely
worthless.
So you know if you're tying itto an index in the US economy
and it's going down every yearyour US dollars are junk.
(10:57):
So it completely throwseverything off.
But New York State requires it,so you have to have it there.
And then the next column is aconservative number.
And then the third column is Iwould say the middle column is
like an ultra conservativenumber.
And then the third column is Iwould say the middle column is
like an ultra conservativenumber and the right column is a
conservative, conservative tomoderately conservative number.
It actually illustrates that 50basis points below what the
(11:19):
20-year average was for thatstrategy.
So even if you take the 20-yearaverage for the strategy, it's
still 30 or 50, 30 to 50 basispoints below that.
So it allows you, but the keycomponent there is looking at
what's the cash value in thatfirst year.
Is it zero or is there a numberthere?
Speaker 2 (11:38):
Because if it's zero, then you're not max funded.
Speaker 1 (11:40):
I guarantee you that If it's zero, you're not max
funded.
Speaker 2 (11:44):
Awesome.
So that's a good tip for IULs.
And always remember, don't mixit up.
If you have a hole, it's goingto be zero and that's okay.
Sweet Right, Right.
So then I mean we've talkedabout a lot.
We talked about what you'redoing if you're going to do it
with an advisor.
Was there anything else there?
Because I know we're kind of onthe topic of if you're meeting
(12:05):
with an advisor.
So is there anything we missedthere, or is that pretty much
wraps that up.
Speaker 1 (12:13):
I would talk to them about modified endowment
contracts and just and Ihonestly I would play ignorant
go in and say you know, I knownothing about modified endowment
contracts.
Can you tell me about them?
Can you tell me how I can avoidthat?
Ask them if they know aboutTamara Defra.
Ask them if they can explainwhat a 7702 plan is, you know.
Ask them to really point thesethings out, Because at this
point 7702 is kind of caught onas like a sales tactic and
(12:38):
people just say it because theydon't want to say life insurance
, so they say 7702.
They don't even realize that7702 is the tax code.
They just know that it's a termthat they can use and it's
catchy, and people don't hearlife insurance and they're not
immediately turned off, which isa benefit to using 7702, but if
you don't know what that, is Ifit's not structured properly.
Speaker 2 (13:01):
what's the difference ?
Speaker 1 (13:02):
Well, if you're just saying four numbers for the sake
of saying four numbers, so youdon't have to say life insurance
, what are you?
What are you doing?
Like that's a tax code, whatmakes it have all the tax
advantages of cashredistribution while you're
alive, tax redistribution,retirement, access to it, death
(13:23):
free or tax free death benefit?
You know all these components.
Access to it before 59 and ahalf.
If you don't know all thesethings, then why are you
referring to it?
As far as referencing the taxcode, yeah yeah.
The other part that I want tobring up, though, is because
we've talked, we've sprinkled insome of the cons to this yeah
(13:45):
and I want to really bring themup, and then I guess I'll open
it up for like your specificquestions about all this, and
then we'll dive deeper.
But nice you know what?
What?
What are the downsides to this?
So downsides are if it's notstructured properly, you're
basically throwing your moneyaway like if you're not max
funding this.
It's garbage.
I mean, I had a client in heretwo days ago and they knew they
(14:09):
wanted to do the plan.
They know that their financialposition is going to change in
six months because they'removing and their rent's going to
change and there's all thesefluctuations, but they don't
know what their rent's going tochange to.
And they had said, well, whydon't we just start this, put
the ceiling for the max at 200,and I'll put in 100, 150 now and
(14:30):
then change it down the road.
And I actually wouldn't, Iwouldn't sell the contract.
I said let's review this in sixmonths, when we actually know
what your budget is, becauseyou're moving, your income's
also not like.
Your income's going tofluctuate, your living expenses
are going to fluctuate, yourrent's going to fluctuate.
There's too many fluctuationshere for us to be able to
maximize it.
And so you want to know thatyou're going to be able to
maximize it, because, whileyou'll have access to it in year
(14:52):
one in order to properly growthis vehicle, you really don't
want to touch the money in thefirst 10 years.
Because another downside tothat the first 10 years and why
you don't want to touch it inthe first 10 years is if you're
taking loans against it, youwon't get hit with these
penalties.
But if you take distributionsfrom it which you don't want to
take, distributions because thatdoesn't have tax benefits, you
(15:14):
will be taxed on the interestearned on that money.
If you take the money out ofthe policy, if you take a loan
out, you won't be taxed on that.
So little nuance there.
Talk with your advisor to getspecifics on that which way to
do it.
But during the first 10 yearsthere's a surrender charge
period which just means thatyou're not going to have full
(15:35):
access to the cash value.
So again, if you look at thatillustration you'll look at
they'll have a cash value numberand it'll have a surrender
value number.
Surrender value will be less inthe first 10 years than cash
value and then after year 10,starting year 11, it'll be equal
.
Now each company can alter thatso it could be slightly
different.
(15:55):
Some companies have 15 years,Some companies have seven or
eight years.
It all fluctuates.
Ten is generally the average inthe industry standard and the
way that works.
It's similar to an annuity.
So an annuity has the samething where you have a 10 year
or 7 year or 15 year surrendercharge period where at year one,
if it's a 10 year charge, yearone you have a nine percent
(16:16):
charge, year two you have a ninepercent charge and then it goes
down one percent every year.
Eight years is eight percent,seven, six, five, all the way
down.
So it tapers off and you haveless of a charge the longer it's
in there.
And that's really there because,with the guarantees that
they're giving you, they need tobe able they, being the
insurance company, need to beable to go invest that money,
(16:38):
make back the returns in orderto pay you those cash
accumulations that they'regiving you, and giving you the
guarantees of the 0% floor, orin a whole life policy, because
the surrender charge exists in awhole life policy as well, and
so the reason it's there is, ifthey're going to guarantee you
3.4%, they need to be able tomake at least 3.5% in order for
(16:59):
them to be profitable on theventure.
And so they make you keep yourmoney tied up for at least 10
years in order to do that.
Speaker 2 (17:07):
Okay.
So in my easy terms, firstdownside really seems to be If
you take money out against it inthe first 10 years, they're
going to charge you a percentageversus after.
Speaker 1 (17:20):
You have access, but you have limited access in the
first 10 years.
After 10 years you have fullaccess.
Most advisors glance over that,don't talk about it.
Speaker 2 (17:30):
I guess what I'm confused there in terms of you
have limited access, as in youcan't take out all your money,
or you could take it out, butthey're going to charge you a
big fee or percentage.
Speaker 1 (17:40):
Correct, you could take it out.
You could surrender your policy.
Take out all the money that'sin there, but you're going to be
charged that fee Okay.
Okay, right, which ends upbeing similar to a Roth IRA for
a 7702 plan.
It ends up being similar to aRoth because before you age 59
and a half, there's a 10% taxpenalty.
So if the penalty on the 7702is 9%, ultimately that
(18:05):
distribution is less than that10% number.
So you're technically at anadvantage there.
Speaker 2 (18:10):
Now it's not a dollar for dollar, the amount of money
that you're putting and payingtowards the policy isn't all
going into the cash value.
Speaker 1 (18:19):
A portion of that's paying for the life insurance, a
portion that's paying for theexpense of the contract.
So there are components therethat you're buying and so you
know, in the first 10 years ofthe first year, first two years,
if you're at nine percent.
I've never actually calculatedwhich I, when we get off this
call I'm going to, is to seewhat that actual percentage
would be versus a 10% penaltyfrom the IRS for early
(18:44):
distributions from a Roth.
I wonder what that nominalpercentage would be and where
the breakeven point is on that.
So that's interesting I've neveractually looked at it that way,
but that's definitely adownside is that you have a
penalty in the first 10 years,but outside of those 10 years
you don't have that penalty.
So, downsides limited access.
I always call it limited accessbecause you do have access, but
there's a limit to how much youcan take out, because there's a
(19:05):
portion that's going to bepenalized.
The other piece is is, as weand then we've already talked
about these two which is, ifit's not max funded, then you're
paying for more life insurance.
You're paying, you're buyingmore options that you don't need
because you's not max funded.
Then you're paying for morelife insurance.
You're buying more options thatyou don't need because you're
not max funding it.
So you're not optimizing thestrategy.
And the other flip side of thatis, if you put too much in
(19:26):
because it's not structuredproperly, you get a modified
endowment contract.
You lose all the tax benefits.
It's actually garbage from whatwe're talking about, yeah, so
those I mean those three thingsin my opinion are the massive
downsides.
The other component is you haveto be able to get approved for
life insurance.
You can't have this plan if youcan't get approved for life
(19:47):
insurance and if you can't getapproved for life insurance in a
good class code.
So if you have, if you've hadcancer, you potentially still
could get.
Depending on what cancer youhad and how long you've been in
remission or how long you'vebeen recovered, you could
potentially still get lifeinsurance.
But what class are they goingto put you in?
Are they going to put you insubstandard?
(20:08):
How much are they going tocharge you for the life
insurance If you're not in agood class code?
Now your life insurance costgoes up and the optimization of
the strategy decreases becauseyou're paying more in fees.
Because there are guarantees,there are fees.
Nothing in this world is forfree.
You're not getting that 0%floor for free.
You're paying for that.
(20:30):
That allows you to have thatcomponent there.
But that's a downside is thatyou have to pay for it.
That is an expense that you'retaking on.
Speaker 2 (20:36):
Obviously, all that is if people maybe haven't even
gotten life insurance yet, whichI haven't, but I know about
that is basically, the youngerand healthier you are, the
better, better class you're in,right, so do you usually get a
better rate?
Speaker 1 (20:51):
correct.
The younger and healthier youare, the better your rate's
going to be.
Every year you get older, yourinsurance rate's going to go up.
The longer you wait, the moreit's going to cost.
And this is why we build in thebaseline level plan which, if
people go to my website,gainsgroupnet, they can actually
download my life insurancebuyer's guide, which is 10 pages
(21:13):
of explaining life insuranceand two pages of explaining how
we sell you life insurance fromthe get-go.
And so for that entry-levelplan that that policy talks
about, it doesn't even itexplains to you in the 10 pages.
It explains your universal lifeindex, universal life.
It does not talk about sellingyou it in the strategy, because
this is a very targeted sale.
This is for a very specificindividual, this is not for
(21:36):
everybody, and so we typically,when we're meeting with most
clients, we have a very smallportion of whole life and then
we use term for all of thedifferent age brackets.
You know, income replacementwhile you have kids, income
replacement during your workingyears, paying off debts,
(21:56):
mortgages.
We tie that all to a set term,but we know that you're going to
die at some point.
We know that that's somethingthat's guaranteed to happen.
So if we buy, you a small lifeinsurance contract based on what
a funeral would cost at yourretirement age or at your
expected age of death age or atyour expected age of death.
(22:21):
If we buy that at a young age,then we know that we don't have
to section off a piece of ourretirement accounts for
distribution.
We don't have to take a pieceof that to buy our funeral
expenses and do all that.
We can have a life insurancecontract in place if we buy it
when we're younger.
Generally speaking, theinternal rate of return looking
at the death benefitdistribution and what you pay in
is going to be somewherebetween depending on the
contract we're talking wholelife here, internal rate of
(22:41):
return is going to be somewherebetween 5% and 7%.
Not the 8% 9% that you can getin the stock market, but 5% or
7% for something that hasguarantees in it and covers an
expense and is conservativethat's a good option.
That's a good rate of returnfor something that's
conservative.
Speaker 2 (23:01):
People jump up and down for CDs right now because
they're 5% 5.5%.
Speaker 1 (23:06):
You can get the same thing on your funeral expenses
by buying a life insurancecontract and sectioning off that
piece of your retirement.
Which is why we do it, becausethe internal rate of return
plays to the case that this is agood part of the strategy.
And again we use the analogy ofa sports team no
championship-winning team has areally good offense and no
(23:29):
defense.
Life insurance is part of yourdefensive strategy.
Speaker 2 (23:32):
Yeah, I mean to me it sounds like a great plan and
really the cons of it are eitherbecause it's not structured
properly or you just want tomake sure you're learning about
it and starting at a young age.
So I mean that was that was oneof the better ones for me.
I followed pretty well.
I got to ask a lot of goodquestions.
(23:52):
The beginning was great wherewe kind of I saw because I
always, I I think, put them inthe wrong order of which one's
the best, which I know therereally is no best one.
They all have.
You know there are.
Speaker 1 (24:03):
You've said before, they're all used for specific
tools, but that was a goodoverview they're all the best
and the worst if they're used inthe right or wrong situation
right right you know, likethey're?
They're amazing or they'regarbage, depending on what
you're trying to use it for andwhat you're actually using it
for.
Speaker 2 (24:18):
Yeah, so I don't think I have any other questions
and we're probably at a goodpoint here.
Anything else you want to add?
Speaker 1 (24:26):
No, I think that overview is the top of it.
Like I said, we touched on thevery basics, so there's a lot of
stuff that I left out in orderto and I know it might not seem
like we just touched on thebasics, but we touched on the
basics of what you need to knowwithout going into the weeds on
a lot of this stuff.
More than happy to talk throughanything with anybody if they
want to reach out, but these arethe conversations you should be
having with your advisor, andjust don't get trapped or sucked
(24:48):
into those videos that show youan illustration or oh, you can
become your own bank and don'treally talk about this stuff
Like it's not.
You're not going to do thiswith a couple hundred dollars a
month typically a more expensivepolicy and it's not going to
happen overnight.
It's a long-term strategy,long-term play, and it needs to
be built appropriately for you.
Speaker 2 (25:09):
Health or finances, there's usually no magic quick
pill.
Speaker 1 (25:13):
No, there is no magic quick pill?
Speaker 2 (25:16):
Don't believe it.
I think even, too, we couldhave this conversation,
basically around the same topic,three other times.
Different stuff's going to bebrought up and it's just going
to even be more helpful.
So we'll go into, you know,definitely go into it more right
?
No, for sure sweet good stuff,good stuff thanks for listening
to our.
Speaker 1 (25:36):
We hope this helps you on your balance freedom
journey.
Speaker 2 (25:39):
Please share your thoughts in the comments section
below.
Speaker 1 (25:41):
Until next time, stay balanced.
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