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.
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.
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 Prover. In this episode, jon and I pick up where we left off on IUL, part 1. If you haven't listened to that episode, we strongly encourage you to go back, listen to that one and then jump back over to here so that you're all up to speed.
Speaker 2:We hope you enjoy. Thank you for listening. So then is this where you brought up before If someone does then have extra cash, do you change the limit on that or the top number on that plan, or do you open up a second 7702?
Speaker 1:So, because of the seven pay limits. Yes, you can alter the life insurance component. However, because of the seven pay limits and maximizing, you're not going to pull that down or increase that in order to dump more money into it.
Speaker 1:Just because you're not optimizing. What you end up doing is, if you do that, say you do that. Year four, or even if you did it year eight, after you're outside of the seven pay, you increase 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've made it so that years one through seven are no longer max funded Because you now increase. Where you are here Now you can.
Speaker 1:The nice part with an IUL policy is you can kind of think of it as a hotel, and each year you're building a new hotel and each year you're building a new hotel, no-transcript. So $12,000, $12,000. Year three something came up and you didn't have all the money, so you only put in $10,000. Year three something came up and you didn't have all the money, so you only put in $10,000. So you have $2,000 of vacancy there 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 increase in pay or you get a bonus. You get a $2,000 bonus. You're like what am I?
Speaker 2:going to do with this.
Speaker 1:You can go back and pay into that $2,000 vacancy in previous years to get it to the max contribution limit, so you can back pay your premiums. So what's the benefit of back paying it Benefit of back paying is in that situation you didn't optimize it that year because you had the $2,000 vacancy so it wasn't fully maxed out. So instead of us saying, oh, we can go buy another policy now that you have this increase in income, instead of buying another policy, let's look and make sure you max fund your policy first and back pay any premiums so that your policy is fully maximized out and has as much cash value in it as possible.
Speaker 2:Because if you buy, buy another policy.
Speaker 1:There are expenses in these policies. There's a life insurance cost and there's additional fees in there. A new policy increases your fees, increases your expenses. We want to make sure we're maximizing the current one before we go and take out a second one and increase your expenses okay, that makes sense.
Speaker 2:Um, and then?
Speaker 1:again that window between the target and the max. That's where we're dumping the vast majority of the money into the cash value, and so that's where we're going to really be able to take advantage of this indexing strategy.
Speaker 2:All right, so I'm following you pretty good so far, but there's obviously a lot here and it's a lot of good information. When you're listening to a podcast but say I don't have access to, I lucky at the moment and I do, but I wanted to take this to someone else, a different financial advisor what am I looking for around this topic, like how do I even bring it up with some stuff?
Speaker 1:so a lot of advisors will be aware of this and they try to sell it, and that's because the issue is is that they try to sell it off that target premium and that's because they're making like my commission range in most of the states that I operate in is 70% on that minimum to target premium and then I'm only making 2.8% on the target to max premium. But I'm still fully funding everybody 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 it for you, what are you making and I'll point it out.
Speaker 1: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 have competing quotes from other companies and then I'll show and they'll bring up the pros that that person said to their strategy and I'll go okay, but these, not this number will not lie. Let me show you the difference. If you take the same amount of premium, one's max funded ones, if only funded to target, there I have contracts where 80 of the premium falls between target and max.
Speaker 1:So I mean one of the larger cases that I've worked this year, which we're only on the 18th of the year, so it's, you know, not necessarily the largest case I've worked, the largest case I've worked this year they're going to be able to dump in $4,000 a month into it. Target premium on that is only like $9.50 a month and so if you take the same so I'm getting, if you round that up to $1,000, I'm going to make 700 bucks on that plus roughly 3% of 3,000. So almost $800 that I'm going to make on this, versus if I did it the way the competing strategy was showing it, where $4,000 was actually target, then I'm able to show, I'm able to know that, because of doing a seven pay calculation and figuring out where, where everything falls, that agent was going to be making, assuming the same interest rate, assuming the same payout rate, seventy percent of four thousand dollars.
Speaker 1:So they're gonna make thirty four hundred dollars where I was making less than a thousand. So why are?
Speaker 2:they. So what's the difference for the client then?
Speaker 1:The difference for the client is that there's at Target. If you're putting $4,000 at Target versus $4,000 at Max, the death benefit is going to be way higher, which means your life insurance cost is much higher. The cash value is going to grow at a much smaller rate. It's not going to be as robust, it's not going to have full occupancy in that hotel analogy and so you're not optimizing the money At that point. You're buying really expensive life insurance. Is what you're buying. You're not buying life insurance for the legacy component and then also having these tax advantage distribution qualities to it.
Speaker 2:So that's where I assume the bad rep's coming from, and it's the only reason they're doing $4,000, as the target is to benefit them.
Speaker 1:It's the only thing that I can see.
Speaker 1:In a policy, like everything that 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 the client, it's all to the agent. There's no benefit to the client, it's all to the agent. And the agent is just making three times as much money on it. And the reason why they do that and I explained this to a client just yesterday the reason why they do that is they don't care if you find out in a year, because after a year they've made their first year commissions and where I have to work with three times as many people in order to make the same amount of money on this, they don't. So they can rip off one person for every three people that I help and they're making the same amount of money that I'm making. Yeah, they don't care. Yeah, they don't care, because if they write one or two of those a month and and assuming that they're selling other products as well but if they sell two of those a month, they're making $72,000 a year.
Speaker 2:Yeah, and we're not being pessimistic or negative. There's people like this in every industry health industry, financial industry.
Speaker 1:It's just.
Speaker 2:life insurance is full of them yeah and that's why life insurance gets a bad rep mainly.
Speaker 1:Yeah, there's tons of them in here, because it's an industry where you can.
Speaker 1:If you're a sleazy salesman, you could still sell all these benefits, you could talk about all the benefits that I talk about, and if the client doesn't know that they're not optimizing because they don't know what they don't know and they don't know there's a better option, then they're not going to see it. The number one way you can tell if your policy is being max funded because I don't expect you to do a seven pay calculation, I don't expect you to go and research camera, defra you have so much other stuff going on. You just really hope that you're a really good financial advisor. If your IUL policy is max funded or is close to being max funded.
Speaker 1:If you look at the illustration, every illustration by law is going to have to show you each year how much you're paying in, what the growth looks like on that In year one. The cash value should not be zero. There should be a dollar amount there in year one and that means that you're above target and headed towards or at max premium. Now in the illustration, if you really want to test it out in the illustration, there should be a seven-pay calculation number. It should say further up in your illustration seven-pay calculation and the dollar amount and then technically you could calculate off of that what that is. However, that's a little bit more nuanced and a little bit more intense If you want an easy, quick one spot to check. Look at year one of the contract. What's the cash value in the contract?
Speaker 2:If it's zero.
Speaker 1:you're being taken advantage of. It's not properly structured for index universal life. Now, if you buy a whole life policy and we're not trying to 7702, we're not trying to do all these things If you buy a whole life policy, you can't dump in all these other numbers. The premium's fixed. That'll be zero. So we're specifically talking index universal life here.
Speaker 1: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 and then you can check there they're right, or they have to present that graph too yeah, legally, some of the southern states I might not know if it's a law, but the vast majority of the southern states I might not know if it's a law, but the vast majority of the states, if not all of them require you to show an illustration and that illustration is going to show you how much you're paying in each year, what the projections are on the cash value growth, and it should give you different options.
Speaker 1:Like in New York, we have to give you three different graphs or charts of accumulation, different graphs or charts of accumulation. The first column is a New York state regulation. In my opinion it's bogus because the first column, the first column, assumes all guarantees, so it insures and assumes the highest insurance cost that the contract allows for the insurance company to charge and it assumes the lowest interest rate, which, with a 0% floor, is 0% and with an indexing strategy that means that the market would have to go down every year for the life of the contract. So if that happens, I mean we're in an apocalypse. It's just never going to happen and if it does, our life insurance contract is the last thing we're worried about.
Speaker 1:And our money at that point legitimately is completely worthless. So you know if you're tying it to an index in the US economy and it's going down every year your US dollars are junk.
Speaker 1:So it completely throws everything off. But New York State requires it, so you have to have it there. And then the next column is a conservative number. And then the third column is I would say the middle column is like an ultra conservative number. And then the third column is I would say the middle column is like an ultra conservative number and the right column is a conservative, conservative to moderately conservative number. It actually illustrates that 50 basis points below what the 20-year average was for that strategy. So even if you take the 20-year average for the strategy, it's still 30 or 50, 30 to 50 basis points below that.
Speaker 1:So it allows you, but the key component there is looking at what's the cash value in that first year. Is it zero or is there a number there?
Speaker 2:Because if it's zero, then you're not max funded.
Speaker 1:I guarantee you that If it's zero, you're not max funded.
Speaker 2:Awesome. So that's a good tip for IULs. And always remember, don't mix it up. If you have a hole, it's going to be zero and that's okay. Sweet Right, Right. So then I mean we've talked about a lot. We talked about what you're doing if you're going to do it with an advisor. Was there anything else there? Because I know we're kind of on the topic of if you're meeting with an advisor. So is there anything we missed there, or is that pretty much wraps that up.
Speaker 1:I would talk to them about modified endowment contracts and just and I honestly I would play ignorant go in and say you know, I know nothing about modified endowment contracts. Can you tell me about them? Can you tell me how I can avoid that? Ask them if they know about Tamara Defra. Ask them if they can explain what a 7702 plan is, you know. Ask them to really point these things out, Because at this point 7702 is kind of caught on as like a sales tactic and people just say it because they don't want to say life insurance, so they say 7702. They don't even realize that 7702 is the tax code. They just know that it's a term that they can use and it's catchy, and people don't hear life insurance and they're not immediately turned off, which is a benefit to using 7702, but if you don't know what that, is If it's not structured properly.
Speaker 2:what's the difference?
Speaker 1:Well, if you're just saying four numbers for the sake of saying four numbers, so you don't have to say life insurance, what are you? What are you doing? Like that's a tax code, what makes it have all the tax advantages of cash redistribution while you're alive, tax redistribution, retirement, access to it, death free or tax free death benefit? You know all these components. Access to it before 59 and a half. If you don't know all these things, then why are you referring to it? As far as referencing the tax code, yeah yeah.
Speaker 1:The other part that I want to bring up, though, is because we've talked, we've sprinkled in some of the cons to this yeah and I want to really bring them up, and then I guess I'll open it up for like your specific questions 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 not structured properly, you're basically throwing your money away like if you're not max funding this.
Speaker 1:It's garbage. I mean, I had a client in here two days ago and they knew they wanted to do the plan. They know that their financial position is going to change in six months because they're moving and their rent's going to change and there's all these fluctuations, but they don't know what their rent's going to change to. And they had said, well, why don't we just start this, put the ceiling for the max at 200, and I'll put in 100, 150 now and then change it down the road. And I actually wouldn't, I wouldn't sell the contract. I said let's review this in six months, when we actually know what your budget is, because you're moving, your income's also not like. Your income's going to fluctuate, your living expenses are going to fluctuate, your rent's going to fluctuate. There's too many fluctuations here for us to be able to maximize it. And so you want to know that you're going to be able to maximize it, because, while you'll have access to it in year one in order to properly grow this vehicle, you really don't want to touch the money in the first 10 years. Because another downside to that the first 10 years and why you don't want to touch it in the first 10 years is if you're taking loans against it, you won't get hit with these penalties. But if you take distributions from it which you don't want to take, distributions because that doesn't have tax benefits, you will be taxed on the interest earned on that money. If you take the money out of the policy, if you take a loan out, you won't be taxed on that. So little nuance there. Talk with your advisor to get specifics on that which way to do it.
Speaker 1:But during the first 10 years there's a surrender charge period which just means that you're not going to have full access to the cash value. So again, if you look at that illustration you'll look at they'll have a cash value number and it'll have a surrender value number. Surrender value will be less in the first 10 years than cash value and then after year 10, starting year 11, it'll be equal. Now each company can alter that so it could be slightly different. Some companies have 15 years, Some companies have seven or eight years.
Speaker 1:It all fluctuates. Ten is generally the average in the industry standard and the way that works. It's similar to an annuity. So an annuity has the same thing where you have a 10 year or 7 year or 15 year surrender charge period where at year one, if it's a 10 year charge, year one you have a nine percent charge, year two you have a nine percent 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 have less of a charge the longer it's in there.
Speaker 1:And that's really there because, with the guarantees that they're giving you, they need to be able they, being the insurance company, need to be able to go invest that money, make back the returns in order to pay you those cash accumulations that they're giving you, and giving you the guarantees of the 0% floor, or in a whole life policy, because the surrender charge exists in a whole life policy as well, and so the reason it's there is, if they're going to guarantee you 3.4%, they need to be able to make at least 3.5% in order for them to be profitable on the venture. And so they make you keep your money tied up for at least 10 years in order to do that.
Speaker 2:Okay. So in my easy terms, first downside really seems to be If you take money out against it in the first 10 years, they're going to charge you a percentage versus after.
Speaker 1:You have access, but you have limited access in the first 10 years. After 10 years you have full access. Most advisors glance over that, don't talk about it.
Speaker 2:I guess what I'm confused there in terms of you have limited access, as in you can't take out all your money, or you could take it out, but they're going to charge you a big fee or percentage.
Speaker 1:Correct, you could take it out. You could surrender your policy. Take out all the money that's in there, but you're going to be charged that fee Okay. Okay, right, which ends up being similar to a Roth IRA for a 7702 plan. It ends up being similar to a Roth because before you age 59 and a half, there's a 10% tax penalty. So if the penalty on the 7702 is 9%, ultimately that distribution is less than that 10% number. So you're technically at an advantage there.
Speaker 2:Now it's not a dollar for dollar, the amount of money that you're putting and paying towards the policy isn't all going into the cash value.
Speaker 1:A portion of that's paying for the life insurance, a portion that's paying for the expense of the contract.
Speaker 1:So there are components there that you're buying and so you know, in the first 10 years of the first year, first two years, if you're at nine percent. I've never actually calculated which I, when we get off this call I'm going to, is to see what that actual percentage would be versus a 10% penalty from the IRS for early distributions from a Roth. I wonder what that nominal percentage would be and where the breakeven point is on that.
Speaker 1:So that's interesting I've never actually looked at it that way, but that's definitely a downside is that you have a penalty in the first 10 years, but outside of those 10 years you don't have that penalty.
Speaker 1:So, downsides limited access. I always call it limited access because you do have access, but there's a limit to how much you can take out, because there's a portion that's going to be penalized. The other piece is is, as we and then we've already talked about these two which is, if it's not max funded, then you're paying for more life insurance. You're paying, you're buying more options that you don't need because you's not max funded. Then you're paying for more life insurance. You're buying more options that you don't need because you're not max funding it. So you're not optimizing the strategy. And the other flip side of that is, if you put too much in because it's not structured properly, you get a modified endowment contract. You lose all the tax benefits. It's actually garbage from what we're talking about, yeah, so those I mean those three things in my opinion are the massive downsides. The other component is you have to be able to get approved for life insurance.
Speaker 1:You can't have this plan if you can't get approved for life insurance and if you can't get approved for life insurance in a good class code. So if you have, if you've had cancer, you potentially still could get. Depending on what cancer you had and how long you've been in remission or how long you've been recovered, you could potentially still get life insurance. But what class are they going to put you in? Are they going to put you in substandard? How much are they going to charge you for the life insurance If you're not in a good class code? Now your life insurance cost goes up and the optimization of the strategy decreases because you're paying more in fees. Because there are guarantees, there are fees. Nothing in this world is for free. You're not getting that 0% floor for free. You're paying for that. That allows you to have that component there. But that's a downside is that you have to pay for it. That is an expense that you're taking on.
Speaker 2:Obviously, all that is if people maybe haven't even gotten life insurance yet, which I haven't, but I know about that is basically, the younger and healthier you are, the better, better class you're in, right, so do you usually get a better rate?
Speaker 1:correct. The younger and healthier you are, the better your rate's going to be. Every year you get older, your insurance rate's going to go up. The longer you wait, the more it's going to cost.
Speaker 1:And this is why we build in the baseline level plan which, if people go to my website, gainsgroupnet, they can actually download my life insurance buyer's guide, which is 10 pages of explaining life insurance and two pages of explaining how we sell you life insurance from the get-go. And so for that entry-level plan that that policy talks about, it doesn't even it explains to you in the 10 pages. It explains your universal life index, universal life. It does not talk about selling you it in the strategy, because this is a very targeted sale. This is for a very specific individual, this is not for everybody, and so we typically, when we're meeting with most clients, we have a very small portion of whole life and then we use term for all of the different age brackets. You know, income replacement while you have kids, income replacement during your working years, paying off debts, 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 something that's guaranteed to happen.
Speaker 1:So if we buy, you a small life insurance contract based on what a funeral would cost at your retirement age or at your expected age of death age or at your expected age of death. If we buy that at a young age, then we know that we don't have to section off a piece of our retirement accounts for distribution. We don't have to take a piece of that to buy our funeral expenses and do all that. We can have a life insurance contract in place if we buy it when we're younger. Generally speaking, the internal rate of return looking at the death benefit distribution and what you pay in is going to be somewhere between depending on the contract we're talking whole life here, internal rate of return is going to be somewhere between 5% and 7%.
Speaker 1:Not the 8% 9% that you can get in the stock market, but 5% or 7% for something that has guarantees in it and covers an expense and is conservative that's a good option. That's a good rate of return for something that's conservative.
Speaker 2:People jump up and down for CDs right now because they're 5% 5.5%.
Speaker 1:You can get the same thing on your funeral expenses by buying a life insurance contract and sectioning off that piece of your retirement. Which is why we do it, because the internal rate of return plays to the case that this is a good part of the strategy. And again we use the analogy of a sports team no championship-winning team has a really good offense and no defense. Life insurance is part of your defensive strategy.
Speaker 2:Yeah, I mean to me it sounds like a great plan and really the cons of it are either because it's not structured properly or you just want to make sure you're learning about it and starting at a young age. So I mean that was that was one of the better ones for me. I followed pretty well. I got to ask a lot of good questions. The beginning was great where we kind of I saw because I always, I I think, put them in the wrong order of which one's the best, which I know there really is no best one. They all have. You know there are.
Speaker 1:You've said before, they're all used for specific tools, but that was a good overview they're all the best and the worst if they're used in the right or wrong situation right right you know, like they're? They're amazing or they're garbage, depending on what you're trying to use it for and what you're actually using it for.
Speaker 2:Yeah, so I don't think I have any other questions and we're probably at a good point here. Anything else you want to add?
Speaker 1:No, I think that overview is the top of it. Like I said, we touched on the very basics, so there's a lot of stuff that I left out in order to and I know it might not seem like we just touched on the basics, but we touched on the basics of what you need to know without going into the weeds on a lot of this stuff.
Speaker 1:More than happy to talk through anything with anybody if they want to reach out, but these are the conversations you should be having with your advisor, and just don't get trapped or sucked into those videos that show you an illustration or oh, you can become your own bank and don't really talk about this stuff Like it's not. You're not going to do this with a couple hundred dollars a month typically a more expensive policy 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:Health or finances, there's usually no magic quick pill.
Speaker 1:No, there is no magic quick pill?
Speaker 2:Don't believe it. I think even, too, we could have this conversation, basically around the same topic, three other times. Different stuff's going to be brought 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: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.