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.
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.
Welcome to the Balanced Blueprints podcast, where we discuss the optimal techniques for finances and health and then break it down to create an individualized and balanced plan. I'm your host, Justin Gaines, here with my co-host, Jon Prober. In this episode, Jon and I discuss the popular TikTok trends of banking like the Rockefellers, the difference between a Roth and a 7702 plan, as well as how you can use life insurance to invest. Thank you for listening. We hope you enjoy. Yeah, this will be one where it's going to be very conversational because it's going to be very education-heavy up front and then it's going to be okay. Let's talk this through, let's make sense of it, because there's a lot of conversation around this topic and there's a lot of misinformation or salesmanship, depending on how you view those through social media. You know people put out the catches and the hooks, but do you really? Do you really know what you're talking about, or do they really know what they're talking about? And that's what we're going to kind of break down yeah, it's a grab.
Speaker 2:it's a grabby topic, like I've seen some posts on it. So when you were telling me a little about it, I I'll let you get into it. But it's one of those things that when you're scrolling through the gram and you see it, you're like man, that's interesting and I want to do that, but it's clearly way more involved we're going to talk about is the reason why it's so catchy and there's so many people doing it and the reason why you see a lot of these videos.
Speaker 1:It looks like somebody's recording a video of them on a screen, like in a closet, like everything's dark in the background. You can tell there's definitely clutter going on, that they're trying to like hide it's not a professional environment and then they're talking about all these things and showing you an illustration and trying to explain what they know about it. Some, some of their points are good. Some of their points, I think, are they got told what to say and they don't understand what actually goes into it and so you don't have the background education on it. You can't make sure that it's bulletproof, and I think that's the key component of this is it's part of financial planning, it's part of retirement planning, and so you want it to be bulletproof so that when you become into your retirement ages, you can distribute properly and have a legacy and not have to be stressed in retirement for finances.
Speaker 2:All right. Well, you're killing me, so what is it? Let's get into it. Yeah, so we're going to talk about on social media.
Speaker 1:The buzzwords are universal banking, become your own bank. You had brought up earlier the Rockefeller concept.
Speaker 2:That's where I've seen it.
Speaker 1:All of these things revolve around the topic of life insurance and the main product that you're going to be using in a universal banking strategy or become your own bank strategy not necessarily the Rockefeller strategy we can touch on that but it can be that one can be done multiple ways. But if you're trying to become your own bank and grow the cash value properly and with significant growth, you're going to be using what's called an indexed universal life policy or a universal life policy. So universal life is similar to whole life, but with some very key differences. Give a quick overview of life insurance for anybody who doesn't know the basics. There's really two major categories of life insurance, potentially three if you break off universal life. So the first, and probably the most commonly used one and most well-known one, is term insurance. It's very straightforward there's a set period of time, which is the term, that you have a death benefit that doesn't change, and so if you pass away during that time period, the death benefit pays out. As long as you pay your premiums, premium doesn't change over the period of the term and the death benefit does not change, and so that's option one. It's generally the cheapest one that you're going to use and it has the least bells and whistles. It's very straightforward If you die, this gets paid out. That's that Whole life insurance is similar to term insurance in that there's a death benefit that stays the same and your payment stays the same over the life.
Speaker 1:Start the contract to age 95, 121, depending on what you know to age the company's using, so that can be adjusted in order to impact premiums. But basically what ends up happening is the cash value in that policy. If this is your death benefit and we're starting here, you know, picture a chart here. We're starting here and this is your death benefit. This is the day we start the policy your cash value will grow in value to the same value as your death benefit at whatever that two age of the contract is. So because life expectancies are expanding, most of those two ages are to age 121. So you pay into the whole life insurance contract If you pass away before age 121, depending on how it's structured, depending on what your death benefit is, you get the death benefit, not the cash value.
Speaker 1:Now there is a death benefit option where you can get the original death benefit you started plus your cash value and get both of them back. There's just a higher insurance cost to that. But that is an option. But that is an option. But ultimately what will end up happening is at age 121. If you live to 121 on your 121st birthday, the contract has gone up. You've completely outlived the contract. So what happened is the insurance company would write you a check for the death benefit or the total cash value amount, because at that point they're the same. They'd write you a check for that. The whole life insurance goes away. You have your cash and you're able to do whatever you want with it.
Speaker 2:at age 121, I'm not sure how physically fit you're going to be and how mobile you're going to be, so I'm not sure what you're going to do at that point?
Speaker 1:it's probably probably a legacy plan for you and you're going to pass it down to your heirs. But maybe you have debts, maybe you 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 it aside and let the next generation plan all those things out for you. But those are those are options on the whole life. Now the next step.
Speaker 2:Yeah, yeah, got a question real quick so just to make sure I'm understanding these right before we get into the ones we really get into today. So the first one term I've heard is like kind of referred to as almost renting. So you're not really getting anything out of it. You're just putting a little money in monthly and, like you said, you get your, your death benefit at the end. But the next one you described the whole life, whole life. So it seemed similar. So I think I must have got lost along 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 only difference?
Speaker 1:The difference between the term and the whole life. So the reason why term could be referred to as renting is because typically when you rent. That's not your forever home, right? You're not going to stay there forever. You're not going to have access to that forever. You only have it for the period of time in which you live there. Say, it's five years, so term? In that sense, yes, you're renting, so you're paying significantly less for the policy. That's because you don't have a lot of the living benefits that whole life has.
Speaker 1:So whole life has a cash value component where you can borrow against that. You can take loans out against it. You can take it out completely. I wouldn't recommend that because it's not tax advantage, but you could take the cash out completely and not have a loan there. You have living benefits to it as well. A lot of these will have endorsements on them that you can add that will have. It'll be similar to like long-term care.
Speaker 1:You can have early payouts of your death benefit if you have a chronic or terminal illness, and those are two separate endorsements, chronic illness being if you can't do two out of your six activities of daily living. For time purposes I won't go into what those are, just Google it. And for terminal illness, it's if you get a diagnosis that you'll pass away in the next 12 months and if you get that diagnosis then you're able to take an early distribution of the life insurance and that's there's a percentage. So you're not going to get 100 of that death benefit. It's a percentage because you're taking an early distribution of it. But those are. Those are additional benefits. Some of those riders you can get on term insurance as well.
Speaker 1:But the main difference is going to be that cash value accumulation and the fact that it's going to last for your entire life, not a set term.
Speaker 1:Because, generally speaking, I mean I have companies that I work with that I can go up to a 40-year term, but even then, if you start with somebody who's in their working years and I'm not saying that you shouldn't get term insurance Like all of my clients generally use a combination of both, if not all three of these, depending on what their specific needs are. But we start that conversation with term because, if you want, terms could match up to a term in your life. So if you have a mortgage that should be taught, paying that off should be tied to a term policy, because your mortgage is going to be 15, 30 years, you should have a 15 or 30 your mortgage or a term insurance, not a whole life policy, for the entirety of your mortgage is going to be 15, 30 years. You should have a 15 or 30-year term insurance, not a whole life policy for the entirety of your mortgage, because you're not going to have that debt your entire life.
Speaker 2:Right, so there is a cash value that you can take out, but obviously there's some drawbacks. Like you said, it might not be tax-free or the whole percentage.
Speaker 1:So that's the difference between and we'll get into this when we talk about the IUL taking a distribution versus taking a loan. So, distribution being that it'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 is not, so one you'll have to pay taxes on the gains that occurred within the policy.
Speaker 2:The other one you will not have to pay taxes on the gains that occurred within the policy?
Speaker 1:The other one. You will not have to pay taxes on the gains. Wait, which one's which?
Speaker 2:So when you take a loan, you don't pay taxes? Okay, and what policy does that? What policy lets you take a loan?
Speaker 1:Whole life and indexed universal life.
Speaker 2:Both of those.
Speaker 1:Both of those will allow you life, not so much, so it kind of it plays. It's very tricky, you know.
Speaker 2:I know that's why I'm gonna probably i'm- gonna cut you and ask a lot of things because it is yeah, and that's fine, because we can break this up into into more if we need to so so so I'll pull back in.
Speaker 1:So those are your main two ones your term and your whole life, basic structures of those. Now, if you were lining these up technically speaking, universal life, just universal life or UL, would fall between term and whole. Because universal life, generally speaking, will be a little bit less expensive than whole life. And that's because with universal life, typically what you have is you don't have the cash value component except for at very specific times in the contract. So it's typically 5, 10, 15, every five years depending on the company it's going to alter, but every five years. Every five years, depending on the company it's going to alter, but every five years, starting at year five and going to year 25. And then after year 25, you don't have access to it ever again, but at those years it's called a return of premium endorsement. So what you would do is at that contract anniversary you have 30 days to enact that rider and what you'll do is, if you enact it, you're getting rid of the life insurance and you're getting a return of 100% of the premiums that you paid in, no interest, no gains, just what you paid in you get back.
Speaker 1:I don't use a ton of universal life, but where I do use it is if we're funding a buy-sell agreement for a business another topic for another day. But if we're funding a buy-sell agreement for a business, on other topics, for another day. But if we're funding something or we need term insurance for 5, 10, 15 years and we can afford the universal life premium, even though it's more than the term insurance, universal life effectively works like term, but with a refund. If you don't use it, so it's more expensive, so it's going to cost you more. But if you don't end up using it, you don't use it, so it's more expensive, so it's going to cost you more. But if you don't end up using it, you don't pass away. In the 10 years, 15 years, 20 years, you get a return of 100% of your premium. So you're not growing your money but you are getting that money back.
Speaker 1:And in some situations that might make sense. It makes sense in business situations. It could make sense for an individual to sit down and really look at it to determine what makes the most sense and then also what makes the client feel, feel the best. As far as optimizing it. It's very specific to somebody's, somebody's financial plan and fitting that in. So then the next step. So one is term.
Speaker 1:Universal life is kind of that bridge between term and whole life. Whole life and then indexed universal life is your next step, which is effectively whole life. But the difference is that the cash value is now tied to an index. So what that means is take an index such as the S&P 500. So instead of your cash value getting a set guaranteed fixed interest rate, which your whole life is going to have, that it's going to have a guaranteed interest rate, guaranteed growth, very secure product. In that sense, the index universal life is going to have some guarantees, but they're not going to be as level or as balanced. So what you're going to have is in the index universal life, if it's tied to an index, typically you'll have a 0% floor and then you'll have a cap at what you can make. So currently the main company that I work with, their cap is at 8.5%. So what that means is that if the S&P 500, if we look at where the S, if I had a contract that I put in place on January 18th of 2023, they would look that on January 18th of 2024, from those two points, from opening to opening of those two days, did the stock market go up or down.
Speaker 1:And it went up. It went up, probably 20%. So what that means is you're not going to get credited the interest for 20%, you're only going to get 8.5% because it was more than 20%. But let's take the inverse. What if the market went down 20%? In that situation, you're only going to get 0%, so you have a guaranteed 0% floor. Cash value is not going to go down. It can't be going down from crediting. It'll get credited interest if the market goes up. And if the market goes up between 0% and 8.5%, then you get whatever that percentage is. Now that's one of five different strategies that you can use for the indexing. Now, that's one of five different strategies that you can use for the indexing. And the indexing can get much more complex, much more robust and have greater returns if you optimize that. However, optimizing those strategies is ancillary to all the other components that we're going to talk about today.
Speaker 1:That if you don't focus on these things and if your agent doesn't understand these elements, I don't care what indexing strategy you're in. The policy is going to be garbage, absolute trash not worth having. And it's why life insurance gets a bad rap is because these whole life index universal life policies are sold to the wrong people, the wrong scenarios, not structured properly, not taking care of properly, and when you do that, the reason why it's garbage is you're selling. You know the person who went to the car dealership and is looking for the family van and it's the say, it's the husband who went to buy it and he comes home with a trot rocket motorcycle. That trot rocket motorcycle is trash. It could be the best trot rocket motorcycle on the market and it's trash compared to what you're trying to do with it, which is transport the family in a safe way. We need to walk before we run.
Speaker 1:So before we get into what strategies we should use, I need to talk about the questions you should be asking advisors, the topics that they should be able to explain back to you with very good detail and clarity, and I'm going to touch on, like the basics, so that way somebody can touch it, because I mean two of the biggest things that directly drive index universal life is and why it's a good strategy is.
Speaker 1:You'll hear it referred to as a 7702 plan, which is commonly what I refer to it as is a 7702 plan plan, which is commonly what I refer to it as is a 7702 plan. The reason we refer to it as a 7702 plan is because that's the IRS tax code that gives it all of its tax advantage benefits, and so a 7702 plan works very similar to a Roth IRA. However, it has all of the same benefits that a Roth IRA has and all the same tax treatments, with additional benefits as well. The additional benefits are you can't access the cash in your Roth IRA until you're over 59 and a half years old at the time of this recording.
Speaker 2:That number could fluctuate If it fluctuates, it'll increase.
Speaker 1:It's never going to come down, it'll go up, it'll be later in life. So there's five exceptions to that rule, but, generally speaking, you can't access the majority of that funds until 59 and a half. That's not true with a 7702 or an IUL plan. You can access the funds, if structured properly, day one, and you have tax-free distribution, which is the same as a Roth. Tax-free accumulation, that's the same as a Roth. You have the legacy component, though, and that's something that a Roth doesn't have.
Speaker 2:So in retirement you're going to distribute out of your Roth.
Speaker 1:You're going to take your income and that's going to decrease the value of your Roth IRA. With an IUL you'll take distributions via a loan which we'll get into, and then that loan will be paid back by your death benefit. But because of certain regulations that make life insurance life insurance, your death benefit is always going to be in excess of the cash value that's in there, which means it'll be in excess of the loans that you're taking out. So when the loan gets paid off, there's going to be extra life insurance there that can then be paid to your beneficiaries at your death, which allows for a legacy component. Now you can choose where that death benefit goes.
Speaker 1:That death benefit could go to a nonprofit, it could go to your church, it could go to your kids, your grandkids, it can go to anybody, whoever you choose. It can go to your company. You can choose who that is. And that's the key component there is that you have all the benefits of Roth the two other major advantages of the fact that you have the legacy component or it blooms at your death, which is what we say. It blooms at your death, giving you the fourth stage of retirement planning.
Speaker 2:It blooms at your death, giving you the fourth stage of retirement, planning the legacy, and you have access to it day one, if structured properly. All right. So this is great stuff so far. Two quick questions before we move on, then. So to go back a little, I know you said the IUL. Usually, either, whether it's your company or most companies, they're going to cap you at about 8.5%, connected to the index, correct it's going to be?
Speaker 1:connected to an index. The cap is going to move over time. So the cap is generally, if you look at where interest rates are, that typically is going to impact where the cap is. But there's a three-year lag typically and that's because, ultimately, when you're buying a life insurance contract, especially one of these index universal life, what they're doing is they're taking a portion of your premiums that are going into the cash value component and they're going and they're buying options on the market and on the index and with those options they're able to get a certain rate of return. Another portion of that whole of that cash that's going into there is also purchasing more fixed income assets that have set interest rates. Those are tied to what the current interest rate is and what the current Fed rate is.
Speaker 1:Now the reason why there's a three-year lag is once interest rates go up they can't just jump the cap up. They have to know that they're making money so that they can pay off when people pass away and be able to pay out those death benefits. And so, generally speaking, it's a two to a three year lag for most companies to see that cap come back up. So you know, my prediction is that we're at nine and a half now. It'll go up over the next two to three years. You'll see that cap increase because interest rates have increased. Now if interest rates come way back 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 that point, the cap start to come back down.
Speaker 1:The floor is guaranteed at 0%, but that cap will fluctuate. Is guaranteed at 0%, but that cap will fluctuate.
Speaker 2: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, so usually what percentage?
Speaker 1:do you get back with whole life? Whole life is it's going to be a fixed, guaranteed interest rate.
Speaker 2:Right.
Speaker 1:Right now it's like 3.5%.
Speaker 2:Okay, so there's. I was wondering that kind of difference there of like what makes it much better? And obviously five and a half does. And then the other quick question I had too. Oh well, it seems like obviously an IUL or 7702 plan is pretty nice compared to a Roth. So why would I do my Roth first and not just jump into this 7702?
Speaker 1:Generally speaking. So I've run the numbers and if you put money into, if you put monthly premiums into an IUL and you put monthly premiums into a Roth, I ran it out over a 30-year contribution phase. So basically saying that if you're retiring at 65 and you started contributions at 35 and you contributed for 30 years the same amount, maxing it out at 6 500 a year, the difference in growth in the cash value on the index universal life and the value of the account is going to be roughly a quarter of a million dollars. And that's if you're fully funding the roth ira. You're looking at a difference of $250,000.
Speaker 2:So the Roth You'll get more in the Roth.
Speaker 1:The Roth will be $250,000 more.
Speaker 2:Okay.
Speaker 1:So you're going to grow. Generally speaking, you're going 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 to separate, and the reason for that is that IULs use the power of zero where you're getting 0%. So if the market goes down 15%, you're getting 0%. And then typically, if the market's going down 15%, you're going to have the market go up a good percentage the next year, maybe the same amount, maybe more, but it's going to go up generally. Generally speaking, if you have a large decrease one year, you're going to have an equal and opposite return the next year and so you're starting at zero.
Speaker 1:So if you have $100,000 and the market went down 15%, you're now at 85% in the Roth, but you're at $100,000 in the IUL. And then, if the market then goes 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 the IUL. So now you're at 108.5%, but you're only at 93.5 in the Roth because you're at 85,000 plus 10%, plus 8,500. So you're only at 83.5. So now what happens is that over time, those years when there's take this past year where 2023, the index was up roughly 24%, you would have been capped at 8.5%. That would have gone up 24%. So now with that you're able to offset some of those downs and then ultimately the cash value stays pretty close together for the first 20, 25 years, and then the last 5 to 10 years is when the real gap starts to occur. But they generally stay pretty close and in the beginning years the IUL will outperform the.
Speaker 1:Roth if there's down market years in those first five to 10 years, because it's going to dip and you're going to have to get back above that. So I don't recommend individuals to not use a Roth. A Roth still has tons of financial benefits and should be part of your plan. In my opinion. It's part of my plan and most clients. I'm telling them to do a combination of these and that's so. In distribution we're able to combat those down markets and use the power of zero.
Speaker 1:Because what I want to do in distribution is if you have a down market year, I don't want you to tap into the principle that's in your Roth or in your other investment accounts and pull a 10% down market. Say you're taking 4% distributions, you're now down 14% that year versus if I keep you at 10 and I take the distributions out of the IUL, now when you have that up year, you're able to counteract that and you're able to get the principal back up to where it was or close to where it was if you allow it to stay in there. So having both of these is a key component of your strategy, but I'm not telling you to dump all of your money into a 7702 plan If somebody is run. Having all of your retirement assets in one vehicle, generally speaking, is a bad idea so it's, yeah, generally better to.
Speaker 1:If you had 500 a month to put away, it's actually better to put 250 in each than 501 I actually just had a client that was in that situation and we looked at the numbers and we actually he was putting he was going to be putting 300 into the Roth, 200 into the IUL, and that was just because those were the numbers that made sense and over time we were going to get him to a maxing out of his Roth, which is roughly, and they're probably going to increase the limits in 2024. But in 2023, it was 6,500. So $543 a month was what you can contribute.
Speaker 2:And so if he's at 300, he's still got $243 more that he can contribute.
Speaker 1:So as his income goes up, we're going to max out that Roth and then, when he gets into a position where his income goes up even more and he needs another investment vehicle, we can stack IUL so we can have multiple 7702 plans. You can't have multiple Roths, but you can have multiple 7702 plans so that we can do another policy, because that segues us into the optimization piece.
Speaker 1:We can't the benefit to an indexed universal life policy is that you're able to adjust the life insurance, so the death benefit options, and you're able to adjust your premium, so there's a range that you can pay in on these policies.
Speaker 1:In my opinion, if you're optimizing them and properly structuring them, when you're paying into these policies, there's really only one correct option for how you're paying into these and that's the maximum amount, because anywhere from so you have a minimum amount, a target amount, which is what the insurance company puts in there. It's a target. That's what they really they want to at least get this much. And then there's a max Between minimum and target. That's what the agent gets paid on. The agent gets paid on between minimum and target and those commission rates can range anywhere from, depending on your state, anywhere from 50 up to 110 of that first year premium that they'll get paid. Minimum, the target they get paid, depending on your state, again, anywhere from zero to. I think the highest I've seen in any state is four percent from the target to the max, and that is where you're actually going to make your cash accumulation in this IUL policy. Work is when you increase above target and you get to the max.
Speaker 2:Now how are these numbers?
Speaker 1:calculated? Is it just an arbitrary number taken out of thin air? No, and this is where we're going to get into the tax conversation and the information that most agents are completely clueless on. So there's two pieces of legislation that make life insurance so tax-advantaged and so beneficial for an investment strategy, and that's TAMRA and DEFRA, so T-A-M-R-A and D-E-F-R-A. Now, what these two pieces of legislation together do is one of the pieces of legislation and to not get nuanced, I'm not going to keep pulling those back in but it's Tamar and Defra. One of the pieces of legislation stipulate, at each age bracket so however old you are, the difference that has to exist in order to get the taxed benefits between the death benefit and the cash value amount. So when we're talking about whole life, how it's going to at the point of the contract age 121, it's going to equal the same number. That's going to be on a J curve. So there's going to be a gap between and that's our window that has to exist in order for it to be life insurance.
Speaker 1:So that's that's component number one that's and that's true of whole life index, universal life. Now, if you, if we break that barrier, it becomes what's called a mech or a modified endowment contract. A modified endowment contract, if you're trying to build a 7702 plan, is garbage, because what a MEC does, what a modified endowment contract does, is it eliminates all of the tax benefits that you get from the IRS tax code. So it's no longer a 7702 plan because it doesn't meet the definitions of life insurance.
Speaker 2:So by breaking you mean you're pulling money out too early.
Speaker 1:No, so by breaking it means that you're contributing too much or the cash value is growing too quickly.
Speaker 2:Okay.
Speaker 1:Now the life insurance company should have in their system an option where you click that says prevent modified endowment contract and that'll manage that. Okay, prevent modified endowment contract and that'll manage that okay.
Speaker 1:So that one, if your agent isn't as aware of that piece of it, it's less concerning as long as they're aware of modified endowment contracts and can explain that a modified endowment contract turns life insurance from life insurance and being tax advantaged to being a modified endowment contract Because the Rockefeller concept, the reason that works, is they have different types of life insurance bought by a trust that then, when the individuals pass away the death benefit goes back into the trust tax-free so that life insurance money is never taxed. If it's a modified endowment contract, that life insurance money is taxed so you lose all the tax benefits. Rockefellers would never buy a MEC, not for this purpose. They may buy a MEC for another purpose, but for this purpose the MEC doesn't make sense.
Speaker 2:All right. So what I'm hearing is kind of the first mistake could be, because this is something you think would be good If I dump as much as high as I can go, it could actually have a negative effect by losing those tax benefits.
Speaker 1:Correct and you're kind of leading into the other piece of the legislation.
Speaker 2:The other piece of the legislation.
Speaker 1:Most agents might not know it by its name of DEFRA, but they might know it more as 7P, and what that means is the legislation dictates how much premium you can pay into the policy in order to maintain those tax benefits, the seven pay.
Speaker 1:The way the seven pay strategy works is if it looks at how much money if this were a whole life policy, how much money over the course of seven payments could you pay in to completely buy out this contract at the initial death benefit you can put in up to that number but you cannot exceed it. So if to buy the whole contract we'll use easy small numbers here If the whole contract was $1,000 a year for seven years, $7,000 would buy out the entire contract and have it completely paid up if it were whole life. If that were the case and you put $7,001 into this policy in the first seven years, then it becomes in violation of this and it becomes a modified endowment contract. Now a 7-Pay also looks at it every year. So you can only put in in that analogy. You can only put in $1,000 year one. You can only put in in that analogy. You can only put in $1,000 year one.
Speaker 1:You can only put in up to $2,000 cumulatively between year one and year two, and so on up to year seven. Now why that number is important and in my opinion this is probably the most important one is because that is what defines our maximum contribution limit. That is, the number that defines that maximum contribution limit. We want to be as close to that seven-pay number as we possibly can be without exceeding it.
Speaker 2:Thanks for listening to our podcast.
Speaker 1:We hope this helps you on your balance freedom journey.
Speaker 2:Please share your thoughts in the comments section below.
Speaker 1:Until next time, stay balanced.