Understanding Universal Life Insurance Strategies

Sep 27, 2024

Lecture Notes: Universal Life Insurance and Tax-Free Income

Introduction

  • Presenter: Doug Andrew
  • Topic: Why you can't fund a universal life insurance policy with a lump sum?
  • Series: Part of "Secrets To a Tax-Free Retirement" (Video 5 of 21)
  • Duration: 4-hour series potentially worth extra million dollars tax-free

Presenter Background

  • Experience: Over 45 years as a financial strategist and retirement planning specialist
  • Favorite Financial Vehicle: Max-funded, tax-advantaged indexed universal life insurance contract

Advantages of Indexed Universal Life Insurance

  • Liquidity, Safety, Rate of Return: Passes tests with flying colors
  • Tax-Free: Income and transfers

Historical Context

  • Origins: Idea by EF Hutton in 1980
  • Impact: Massive shift of money from banks, credit unions, and brokerage firms to insurance contracts
  • IRS Response: Tax regulations to control tax-free accumulation and withdrawal

Key Tax Laws

  1. TEFRA, DEFRA: Dictate the minimum insurance based on age and gender for tax-free status
  2. TAMRA (June 21st, 1988): Slowed down flow of money from financial institutions to insurance policies

TAMRA Act Impact

  • Objective: Slow movement of large sums into superior insurance contracts
  • Requirement: Max funding a policy takes at least 5 years
  • Effect on Universal Life Policies: If funded in lump sums, interest withdrawals become taxable
  • Compliance: Spread out deposits over at least five years to maintain tax-free status

Funding and Compliance

  • Max Funding: Prior to TAMRA, lump sums allowed instantaneous tax-free benefits
  • Post-TAMRA: Must spread deposits over 5 years for universal life (7 years for whole life)
  • Bucket Analogy: Policy is like a bucket, cannot fill more than 20% per year
  • Grandfather Clause: Existing contracts before TAMRA remain exempt

Modified Endowment Contract (MEC)

  • Violation: Funding too fast triggers MEC status – makes withdrawals taxable
  • Correction: Possible within a 60-day window post-anniversary

Strategy and Practical Tips

  • Use of Excess Room: Unused funding room can carry forward
  • Accessing Money: Immediate access possible for emergencies, tax-free benefits require compliance
  • Avoiding MEC: Ensure spread of funding to protect tax-free status

Additional Resources

  • Book: "The Laser Fund" by Doug Andrew
    • Content: 300 pages with charts and 62 client stories
    • Offer: Available for minimal shipping cost
    • Additional Learning: Audio, digital versions, and an 18-hour master class available

Conclusion

  • Call to Action: Watch next episode to connect financial strategies
  • Expertise Offered: Teaching tax attorneys, law firms, CPAs about relevant tax laws