5 years of funding for tax-free income. In this episode, we are going to address the question "Why can't you fund a universal life insurance policy with one lump sum?" This is number 5 video in a series of twenty one titled Secrets To a Tax-Free Retirement. I implore you to watch all of these 4 hours of your time could generate an extra million dollars of cash tax-free that will generate $100,000 a year of income for the rest of your life. So, my name is Doug Andrew and I've been a financial strategist, retirement planning specialist for more than 45 years. My favorite financial vehicle especially for retirement, business owners, college funding, real estate management bar none is a max-funded, tax-advantaged indexed universal life insurance contract. Because it passes the liquidity safety and rate of return tests with flying colors and it's tax free to boot. So, in this episode, we are going to talk about why you cannot put all of your money in one lump sum into an indexed universal life insurance policy since June 21st 1988. So, in episodes 1 through 4, I talked about the history behind the emergence of universal life insurance, the brainchild of EF Hutton. And when they came out with the idea in 1980, it was like, "Wow!" And there was this massive exodus of money that began to go from the banks and the credit unions and the brokerage firms into these contracts with a multi trillion dollar insurance industry, the backbone of America and the backbone of the world. And so the IRS came in and they challenged it and in the last episode I talked about tax citations Tefra and Defra. That dictates the minimum amount of insurance required based upon your age and gender to have your money accumulate tax-free and be able to access that money tax-free. Well, there were a lot of brokerage firms, banks and credit unions that were jealous back in 1984, '85, '86, '87. They couldn't compete. And they were pouting. We cannot compete with this. You've got to help us out. People are coming and taking money out of our banks out of our brokerage firms and they're putting them into these max funded insurance policies because they're safer. They pay higher interest, they don't have near the risks, the safety is way higher. And they're tax-free. And when they ultimately pass away, they blossom. They couldn't even come close to doing that. So, you know what? They all got together and lobbied congress. And they succeeded in 1988. The exact date, June 21st. I will never forget that day. They convinced congress under the technical and miscellaneous Revenue Act of 1988. Now, that spells the acronym TAMRA. T-A-M-R-A. They convinced Congress to slow the flow of money from their institutions which were actually inferior into these which were superior. They said, you've got to slow the flow. Make it so that people aren't coming in and grabbing a big lump sums and putting him over to these institutions. Well, I thought this is going to come back and hurt them. But they wanted to make sure that the money took at least 5 years to leave their institution. So, Tamra said this. After June 21st 1988, if you wanted to maximum fund a universal life insurance contract up until that point, okay? If you wanted to put in let's say 500,000 in a month fell swoop. Which many of my clients put in $500,000, a million. You could do that and you could hit the ground running at a 10% net internal rate of return. People would put in a million dollars and start accessing 100,000 a year of tax-free income. Well, that all changed June 21st. 1988, what happened is when you went in and put in a lump sum... By the way, if you had an insurance contract prior, you didn't have to abide by the new law. See, people who had universal life before Tefra, Defra or Tamra were grandfathered. So, that's why it's so important to grandfather yourself so that you don't have to adhere to new tax law changes. Now, thank goodness, they haven't had any other tax law changes as they relate to universal life since then. But if they ever did, you want to make sure your grandfathered. But after June 21st, if somebody came to me and they wanted to throw in let's say a half a million dollars into the insurance policy, they could still do that. But it would only grow tax-free. And if they died for the 60-year-old under Tefra Defra, the death benefit minimum would be a million two fifty. If they died, they would leave behind a million 250,000 tax-free. Well then, what did they change? So, your money accumulates tax-free still. When you die, it transfers tax-free. Oh, what about the access? What about the tax-free income? See, universal life was the brainchild of Hutton for living benefits. Tamara said this: "If you throw in a big lump sum and you want to start taking out income, now it's taxable." And it's taxable LIFO. Now, that means last in first out. That means you have to start paying tax on all the interest first just like annuities and most investments. If you wanted tax-free income, you had to comply with Tamra. So, what did you have to do? So, let me explain Tamra in this way: I often compare a max funded universal life insurance policy to a bucket. This is a bucket where you want to put your money to accumulate cash. And so many times the people would tell me how much money they want it to be grandfather to put into the bucket. You don't have to put this all in at once. But prior to June 21st 1988, if I had somebody that wanted to come in and fill it up in one fell swoop with $500,000, they could do that. And they could start taking out income immediately or this would double to a million and 7 to 10 years. And whatever it grows and however it grows to, you can then start taking out income tax-free. The income was tax-free. Tamra changed that. And they said, "Well, if you put that in in one fell swoop, it will only grow tax-free." And when you die it blossoms and transfers tax-free. What does that blossom to if you die the next day? For a 60-year old, that would be $1,250,000, okay? So a million two hundred fifty. Okay? A million two fifty. But this is the amount or what is called the guideline single premium. Tamra said this: 'If you want to take tax-free income out of here, this bucket as it grows, you cannot put this in all at once. You have to spread it out over at least 5 years of its universal life. If its whole life, you have to spread it out over 7 years." That's one of the reasons why I like universal life over whole life. I get my money in faster and it's more flexible. So, since we're talking about universal life, that means that the most I could put in would be about 20% of that or about $100,000. This varies plus or take a few dollars depending upon your age. But basically you can only fill up the bucket 20% of the way. A $100,000. Now, why did they do that? Because they were slowing the flow. If you have a half a million, you want to reposition and you can only put in 100,000 here. Most banks and brokerage firm said, "Oh, we still get to keep the other 400,000 for another year." And then next year, you can put in another 100. In other words, you can have up to 200,000 in there. And the next year, okay? This is one year and one day later. You can have up to 300,000 of deposits into here. And then 400,000. And finally, you can put in the last 100,000. Now, if you put this in the first day of the first year, in 4 years and one day, you could put in the 100.Now, you've complied with Tamra. And now, forever after, the income you take out of here, the 500 it doubles to a million, to 2 million, to 4 million, to 8 million. Whenever you start taking out income, it's tax-free. Because you complied with Tamra by not funding the policy, the bucket faster than 5 years. This is 7 years or what is called the 7 pay test with whole life. I can maximum fund this. Now, what's neat is I don't have to put in 100(thousand). put in 10,000. That covers the cost of the insurance easy. That means I have 90,000 of room that I could have put in that I didn't use. Tamra is one of the rules that if you don't use the room, you don't lose the room. So, I've had people put in 10 thousand, 10 thousand, 10 thousand. And in 3 years and one day or 4 years and one day, they finally got a windfall and inheritance. And if they've only put in 40,000 and they could have now put in 500(thousand), they can put in 460,000 in one year because they're making up for the room they didn't use. So, this is very powerful when you're designing a maximum-funded insurance contract in compliance with Tamra. So, let me tell you what happens if you violate Tamra. If your objective is death benefit, you don't really have to worry about Tamra because if you're putting in the money and you're trying to leave behind the most money when you die with a tax-free death benefit, you don't even have to worry about Tamra in my opinion. But if you're wanting to preserve the right to make sure you can have access to tax-free withdrawals or income in retirement, you want to make sure you comply with Tamra and not fill up your insurance policy any faster than 5 relatively equal installments. That's the fastest you can fill it up. You could take 20 or 30 years to put in your money. But the fastest you can put it in is 4 years and one day. Does that make sense? Now, what if you put in more? First of all, the insurance company will refund you the amount. If you put in more than Tefra never allows, they have to refund it to you. Because now you violated the definition of tax-free insurance. But if you put in more money, in other words, if you put in 100,000 the first year and all of a sudden you put in another hundred thousand on the 365th day, not the 366th day, you violated Tamra. Bells, whistles go off. And it goes Mec! Mec! Mec! Like a dump truck backing up, okay? What's a MEC? M-E-C, that's a modified endowment contract. That means that when you violate Tamra, you've created a modified endowment contract. And if you go to access money, it's going to be taxable now instead of tax-free. That's not the end of the world. Because the IRS says sometimes people just make mistakes and they pay money sooner than they needed to. And so you can perfect a Mec, okay? So, as I often say, if you MEC it up, you can unmec it. You actually have a 60 day window after the next policy anniversary to perfect the Mec, how do you do that? You just tell the insurance company, "Oh, I made a mistake, refund me. Refund me the money I put in there." So, if you put it in on the 360 fifth day, you have basically 61 days to ask for a refund and then you can put the money back in again and now it's perfected. If I put in a whole half a million on the first day of the first year and created a mec, I actually have that year plus 60 days of the next year to perfect the mec. And they would refund me the 400,000 and the interest on that. And then I could redeposit just another 100,000. When you fund it according to the Tamra guidelines, you now preserve the right ever after to have tax-free income. So, sometimes when I teach audiences about Tefra, Defra and Tamra, they hear about Tamra and they go, "Shucky darn." Well, yeah. Sometimes we have to spread it out but it's well, well worth it to do it. It doesn't mean you have to wait 5 years to access money. If I put in 100,000 the first year, a 100,000 the second, 100,000 on the third and all of a sudden I have an emergency, I can go grab money. This has nothing to do with when you can access money, you don't have to wait 5 years. But if you are going to be using a retirement income and you want tax-free income, it would behoove you to wait four years and one day at a minimum, get the money in there, maximum fund it and then start taking out income somewhere there after after it continues to grow tax-free and provide that incredible tax-free rate of return. So, this is why Tamra was pass to slow the flow. Do you know that within 3 weeks after the Tamra law was passed in 1988, the insurance industry came out with temporary sight buckets where you could park the excess money for 3 or 4 years or annuities. And so, it really didn't solve or give the brokerage firms in the banks the money. But they never rescinded the law. So, we must comply with Tamra to this day. We are the number one experts that teach tax attorneys law firms all over the country, CPAs about Tefra, Defra and Tamra as it relates to section 72E, 7702, and 101A. If you want to learn about this, my eleventh book, The Laser Fund is 300 pages of charts graphs explanations. And you flip it over and there's 12 chapters with 62 actual clients stories. I'll tell you what, I'll buy this book for you and send it out to you. You just pay $5.95 shipping and handling by going to laserfund.com. And you can also get an audio version or a digital version. There's an 18-hour master class. But I implore you to watch this episode next and connect the dots on how powerful this can be for all kinds of financial goals.