WHAT TYPES OF LIFE INSURANCE POLICIES ARE THE BEST?
Welcome back. In this episode, we explore the question “What are the best types of life insurance?” We will cycle through different types, duration, duration, whole life, and universal life. I will show you how to buy more or less term and invest the difference in steroids.
It is my favorite method. But I want you to understand the power behind having your money tax-free, accessing it tax-free, and then when you finally die, thrive and turn it tax-free. How to use life insurance to cover living expenses for more than just death compensation. My name is Doug Andrew. It started in the financial services industry in 1974.
And I’ve been making a big buying period and have invested the difference to its supporters. From 1974 to 1980, I helped thousands of people, more specifically more than 3,000 people in 13 Western countries, learn how to put money into a life insurance policy for a fixed term and invest the difference automatically. Because the biggest problem with buying time and investing the difference is getting people to invest the difference in a safe environment that goes through the security of liquidity and the test of return. Many people do not even invest the difference.
Why did you do all this? Well, like to go out and show people the math behind that. I was able to outperform conventional whole life insurance at the time because there were only full-term or whole life in the 1970s. In 1980, EF Hutton changed all that. And they were basically saying, “Why not buy the terms and invest the difference under a tax-free umbrella.” Well, some people still don’t understand how this works.
But they realized that life insurance policies were a kind of sacred cow in the Internal Revenue Code that allowed any money you put into an insurance policy and that its accumulated cash value would grow with interest or tax-free profits. Why should they punish someone trying to protect their family to be responsible if I accidentally died and left my wife with our six children?
Why do they want to make it more difficult to achieve financial independence? when I die. So I believe in myself to make sure that I die sooner or later if I suffer any economic damage. What we call sudden death. For my wife to have enough to teach my children, to take music lessons, to try such things in football. Well, that’s why they let the money in an insurance policy grow tax-free.
Well, there is also a way to get access to this tax-free money. This is under Section 7702 of the Internal Revenue Code. And when it finally dies, the value blossoms, okay. Usually, the premiums you pay go up and leave 100,000, half a million, million, 10 million, whatever insurance you bought. And this is completely tax-free because they want to take the pressure off the government so that it doesn’t have to use welfare programs to take care of widows, orphans, and the like. Hence it is a sacred cow. According to Section 101A of the Internal Revenue Code, this has been the case for more than 100 years.
So you have life insurance and there you only pay the net cost of your chance of dying in any given year. This depends on mortality costs. For example, when I started, there were 4 children aged 30, 2.13 deaths per thousand. Well, for every thousand life insurance policies, the cost will be $2.13. So, if you had a thousand 30-year-olds, we’d put $2 and 13 cents in a hat. And when 2,1, 3 of us died at the age of 30 this year, there are a thousand dollars in death compensation, 2,3…one 3 widows, okay. This is just a term life insurance. Well, it’s a little more complicated than that.
But sometimes people didn’t want to pay higher rates. Because term insurance goes up every year. Because more people died at age 31, 32 and when you reach age 60, 65. By age 65, a third of American males have already passed away. Therefore, the cost of insurance goes up. Well, that’s where they come up with permanent insurance, where instead of paying the pure cost…there is a term component in permanent insurance but instead of paying the pure cost your way to paying the actual cost of insurance in younger years.
But later, there is a crossing point and then it becomes less than necessary in later years because you have accumulated equity or so-called cash value in your permanent life insurance policy. The problem was, until 1980, that monetary value only added maybe 2 and a half, and 3 and a half percent. Some companies promoted dividend payouts in the 6, 7, and 8 percent range. Now, the dividends were tax-deductible because they are really just a refund of the excess fees according to the IRS. If the insurance company forces you to do this and your chance of death is only that.
This overcharging builds up that protection when you get older and don’t want to pay higher premiums. That was tax-deductible, so if you had profits or the insurance company was operating more profitably by not only insuring anyone on the street. They required physical exams etc. This profit will be refunded or you can use it to buy paid insurance or anything that was tax-deductible.
But it was really just a refund of the excess fees. This was a refund, and it was tax-exempt. Well, that was all there was. In 1980 EF Hutton came up with the idea, “Hmm, why don’t we use life insurance to accumulate money without taxes and more living benefits instead of death benefits?” People want to use this to accumulate their money tax-free. Be able to access tax-free income tax. And then when they finally die, the value will flourish and be tax-free. But did you know? Instead of trying to get that much insurance at the lowest premium.
Let’s flip it over. Let’s try to get the least amount of insurance the IRS will allow us to get away with and invest the most money and turn into a profitable cow. And that’s where I got the average rates of return after the cost of insurance averaging 7, 8, 9, 10 percent. In some years I earned 25 and earned 24 net, so the cost of the insurance is what the IRS requires to classify it as tax-exempt insurance in the Internal Revenue Code.
If you violate these sections of the code, you are no longer tax-deductible. It becomes a taxable investment. So, when EF Hutton came up with this, they called it global life because you can use it for global applications. If you want to use it as a cheap way to buy permanent insurance and the economy is working fine, you can do so. But it’s on the other end of the spectrum if you want to get the maximum benefit from tax-free funded or living income.
You can take the least amount of insurance and put the largest premium and it turns into a profitable cow. This eliminates putting money in a tax-deferred IRA or 401K in the market. So, there are three types of global life. I like public life because it is more flexible. I can put in cash and then I can skip several years and cost as little as a dime. You can’t do that for the rest of your life.
But at any given period especially at the end of the day. I’ve usually been able to generate at least 2 percent higher rates of return in general life than in the whole of it. Because I am able to regulate it according to IRS guidelines for better performance with IRR. In other words, some of the best whole life insurance policies out there if they’re not going to give you up to 8%, you’re only getting 6%. And it takes until you’re 90 years old to realize an IRR in the 2% rate of return growth.
I can earn 9 and 8 net. I net 8 which accounts for most total life policies at best. So, the best global life. But I can put in the money, stop, stop, make up for lost time or do whatever I want. We don’t have that kind of flexibility in our entire life. Because all life was designed primarily in favor of death. Holistic Living was originally designed for the benefits of living.
So, look at the three types that I will explain now. Back in 1980 when EF Hutton came up with this idea. They were called tax-financed maximum life insurance contracts. And throughout life, they tried to respond and became more competitive. Instead of earning at rates of return of 3 and a half or 4 percent. They have become more competitive with their products but the flexibility is still not there. I can usually earn a 2 or 3 percent higher rate of return for the same amount of money in global life.
And I can fund it in 4 years in one day. Most of the whole life takes at least 7 years or 7 salaries to do this. Because there were tax quotes issued in 1982, 1984, and 1988. They spelled the acronyms TEFRA, DEFRA, and TAMRA. It allows for a universal life policy due to greater flexibility in financing faster and allows you to get an internal rate of return. Therefore, I am biased toward global life because of these reasons and there are three types of global life. When EF Hutton first came up with this idea, it fixed it.
This is where the insurance company pays interest only based on its fixed general accounts portfolio made up of double and triple bonds. Maybe some mortgages in malls and skyscrapers. Perhaps 15% of the money managed by an insurance company is in the billions of that amount. If they are going to put money in stocks, they will have to use very safe stocks. Most insurance companies only put about 5% of their general accounts portfolio into it. Thus, in general, the constant gives you everything they earn.
Then indexing is my favorite. But in the 1990s the variant came out. Now, I prefer indexed but that didn’t happen until 1997. Here’s why I prefer it. Fixed and they’ll guarantee you’ll probably like it 3%, so that’s the least you’ll earn. But see? I usually get at least 4 even though the guarantee is 3. But things can go bad enough, that’s it. But since 2000, my average has been just 6.3%. If you just say just pay me the interest you earn minus about 1% of the cost etc.
But you see that my highest earning was from 1980 to 1990 it was about 13 and 3 quarters of a percent in this. And that’s with great company. But look, over the course of 25 years, my average was about seven point five-two. Well, that’s fine, tax-free. Well, a variable who came out from the ’90s said, “Hey! Why don’t we make money from the market? And let’s allocate the money in our insurance policy to the market there and with mutual funds.”
Well, I just took the guarantee.” And so there are periods when people lose 50% of their insurance value. And so they had to hurry up and put more money in. Since 2000, that’s sometimes been as low as one and eight and one percent, which is pathetic There were times when people made a profit of as high as 35. But the average is about nine breaks one four. That’s not bad now, you don’t record nine breaks one four in a variable. Because they are intensive management. See? Maybe knitting only 7.
The reason I like indexing is that 0 is the minimum. I won’t lose in a year that the market goes down. During downturns, and during accidents I don’t lose. Zero is the hero, so to speak. When the market goes up, I participate and win up to 39 intervals of two to two percent. Since 2000, the eight-pointer has averaged four seven percent and that’s not with the second strategy I teach for rebalancing.
But look at this, the 25-year average was ten points oh seven. I notice that this is about 2 and a half percent higher than the flat number. And so, I know that in any 10-year period, my chances of achieving a tax-free rate of return of 2 and a half percent above the flat rate are very, very likely based on 25 years of history. So, this is my favorite. If in some years you feel like we’re heading into a major recession or a terrorist attack. I can just switch back to indexed policies and settle on the general account portfolio rate until the market turns around. And then I can go back in again, and that’s called rebalancing. And this is where people can adjust their rate of return even higher than 10%.
Or use multiples or performance factors. This is explained in another episode where I called my son Aaron to explain it. So, these are the three types of global life. I prefer indexing it but it needs to be properly organized and properly funded so you can throw away the same amount that is being deposited into a tax-deferred IRA or 401k. People say, “How is that? There are fees with this.” No, the cost of insurance is a fraction of what most people pay in income tax sooner or later on other types of investments.
I was hoping this would help in understanding the difference between term and perpetual, whole life, variable, index, and fixed. You could tell that my favorite is an indicator of global life. But it is important that it is properly organized and properly funded. This is what prompted us to write our eleventh book. Max Bennett’s insurance contract has been called the “laser fund” because it passes liquidity safety and rate of return tests with flying colors when properly structured.
So, in this book, we talk about how to tell if the 1 your counselor suggests to you is properly structured. And you’ll tell them quickly if they understand it and they understand it. In fact, people who have read this book know more than 99% of the insurance agents or financial planners out there. I’d like to get a free copy, you can go to laserfund.com and you’ll have the chance. I will send it to you absolutely for free.
It’s 300 pages of information and you only pay a small shipping and handling fee. And you’ll also have a few options if you want the audio, digital version, or some small chapters. But the first thing I want is for you to have a copy of this. If this resonates with you and you want to dive deeper and understand, “Julie, how does this work, and what are the historical rates of return?” Even and different from what I showed you here.
This is about you and your future, not about me. I’ve already done all of this. I’m learning the hard way that I want you to avoid the mistakes I’ve made. And you’ll be way ahead of where I am now and not too bad for these strategies. I want you to be in better shape.