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What Does Cash Surrender Value Mean On Life Insurance Policies? - YouTube
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Surrendering life insurance policies can
trigger
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tax. In this episode, I'm going to address
the question
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"What does cash surrender value mean
on life insurance policies?" As you learn
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this,
you're going to understand some things
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that even a lot of insurance agents
don't know. So, put on your seat belt.
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So, my name is Doug Andrew. I've been a
financial strategist and retirement
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planning specialist for north of 46
years.
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I got my insurance license clear back in
1974
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as well as a series one securities
license which they don't even offer
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anymore. But I could sell any stock bond
mutual fund
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and any kind of life insurance policy or
health insurance policy for that matter
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that somebody may want. And so, in other
episodes, I
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address the question, "Well, what is cash
value?"
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And so, you can watch those to have a
greater understanding. But I'm going to
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summarize from a chart I
use in another episode. Because when we
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look at
insurance whether it's term insurance
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whole life insurance or universal life
insurance, they all have a
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cost of insurance we call it COI which
is inherent in
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any insurance policy. With term insurance,
what's happening is for a 30 year old, if
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this was your age over to age 100, the
actuaries know
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that for a thousand 30 year olds in
America, we're talking about males,
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there might be one 1 陆 to 2
deaths per 1,000
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in order to have a death benefit of $1,000, if 1,000 thirty
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year olds all put
a dollar in a hat, you'd have 1,000
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bucks to pay out to the 1 陆 or 2 that win that year,
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right? Okay. So, that's the actual cost. And
the older you get, the more money you
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have to put into the hat because more
out of the thousand remaining are dying.
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There's a bigger percent.
That's the pure cost of insurance. Whole
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life
was designed to pay a level premium
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let's say for your whole life.
And so, that builds cash value our equity.
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What's actually happening here is you're
way over
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paying for the actual COI, cost of
insurance during the early years.
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And this creates equity so that you can
continue paying this same premium for
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your whole life.
You have this excess cash value. So,
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you're overpaying the early years and
you're underpaying the latter years and
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that's what builds cash value. Generally, whole life was designed to
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calculate well
what is the least amount of premium I
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can pay to have coverage for my whole
life?
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Well, when universal life was born, EF
Hutton
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who was not an insurance company was the
brainchild behind it. And they were doing
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it for living benefit. Because this cash
value in here,
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the IRS for over 100 years has treated
it like a sacred cow. It accumulates tax
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free. You can access this cash value the
smart way, totally tax-free.
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And then when you ultimately die, it
blossoms to the death benefit
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totally income tax free. Nothing else in
the internal revenue code does that.
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And you can learn in other episodes that
that's under sections
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72E, 7702 and 101A of the internal
revenue code that allows you to
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accumulate access and transfer
your money tax free inside of a cash
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value
life insurance policy. So, the 2 types
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of cash value policies are whole life
and universal life. But universal life is
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different in this way.
You can use it for death benefit if you
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want and pay
the least premium. Sometimes a lower
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premium than whole life. But when it was
was first introduced, it was designed to
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put in the maximum that you possibly
could.
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Let's say people wanted to put in a half
a million dollars in one fell swoop. Now,
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you can put in 100 grand, 10 grand, a
million. We have people putting in 10
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million.
When it first came out, you could put in
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this amount maybe clear up to here.
And you just put in one payment. And the
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million let's say that you're putting in
there
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is not really there for buying the most
death benefit. You want the least amount
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of insurance. nd so,
the IRS says, "Oh, well then you only you
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can self-insure."
You put in a million if the death
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benefit is a million or a million
one hundred thousand, then most of it's
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your own money now. You've self-insured.
But the actual amount at risk to the
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insurance company is only the remaining
100,000.
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See, that's how universal life can be
designed to create
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a tax-free cash cow for living benefit.
Well, in 1988 under the Tamra
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tax citation which I address in other
episodes,
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what happened is you had to fund it over
over 5 years. Maybe
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you put in 100 grand.
Let's say that this is a max funded
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index universal life policy and you put
in 100 grand the first year,
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100 grand on the second year, 100 in the third
year. And so, you have let's say
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500K in that policy.
Well, if now if that 500,000
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qualifies as part of the original
death benefit the IRS said you had to
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have which be a million
250,000 if you're 60 years old. Now, you
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can buy
way more life insurance than a million
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250,000
with a half a million bucks. But that's
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not the objective. You want the least
amount.
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So, 500,000 of cash
inside an indexed UL at the rates of
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return that I've averaged,
that will double every 7 to 10
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years. So, let's say 500,000 doubles to a
million
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which it has for me. Many times my money
doubles about every 7 to 10 years
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tax-free. So, the 500,000 doubles to a
million.
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Now, the amount of insurance, the cost per
thousand is going up.
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But the amount of actual risk the
insurance company is covering you for
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is less. Because now i have a million. The
original death benefit was a million
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two fifty.
So, they're only charging me for the
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remaining 250,000. Well, the next
seven to 10 years, the million doubles to
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2 million.
That's more than the death benefit. The
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death benefit now grows with my cash and
stays about five percent ahead according
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to IRS rules.
So, I have 2.1 million of life insurance
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now.
2 million of it is my own money. The
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insurance company is only charging me
for the remaining 100,000
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and the interest. See, all of this
overpayment, if I put a half a million
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and it's doubling, it's because
all of this cash in here is now
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growing at rates of return of 7 to
10 percent tax free.
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Just the interest, just a portion
of the interest on this
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cash covers the cost of the insurance,
the COI.
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So, have you ever seen an insurance
policy that gets cheaper
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as you get older? Then you haven't seen
one designed like this.
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You're actually self-insuring so that
when you have a million or 2 million
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that every million bucks can generate
70, 80, 100 thousand a year of tax-free income
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for as long as you live if you live to
be 120.
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There is not an IRA 401K that i've ever
seen that can do the same thing and give
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you that type of predictable income
cash flow and you're immune from market
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volatility, from taxes. And
inflation actually helps you instead of
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hinders you. So, how does this all connect
together?
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So, let me use the metaphor of a bucket
which I've used for many, many years.
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When i design an insurance policy to be
used primarily for living benefits,
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I compare it to like a bucket where i'm
putting money into it.
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So, you have uh this faucet up here and
this is the
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premium payments that you're putting in
there. And as I said before,
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you want to maximum fund it as fast as
the IRS
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allows and take the least amount of
insurance. And so,
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you can put in let's say a $100,000 a year.
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The second year, third year, fourth year
fifth year. Now,
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this is maximum funding the insurance
contract. You don't have to put in that
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much. I'm just going to use this as an
example.
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But if your goal is to be able to put in
a grand total of $500,000,
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you design or structure it to
accommodate that much money and the
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fastest you can put it in if you're over
age 50 is about
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20% a year. And if you do that,
the money
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that's in that bucket as it grows with
interest... See, the
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the compound interest is the other thing
that's making this bucket grow.
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That will be totally tax-free not only
as it grows but when you start taking
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income. If you put this whole amount in
in one fell swoop in the first year,
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it will accumulate tax-deferred. But
it won't be tax-free when you
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access it. To be grandfathered to have
tax-free
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income, you have to spread out the
funding over 5 years with a whole
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life policy
you have to do it over seven years. So, I
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can get money in faster into a universal
life.
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And actually I can get away with less
insurance and I get a better rate of
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return.
And that's why my preference is
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universal life if you're doing it for
living
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benefits. So, you put in 100 grand a
year for 5 years. It's actually
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the first day of the first year. So, the
last 100 thousand goes
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on the first day of the fifth year
which is technically
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4 years and 1 day later. So now,
let's say you have 500 grand in there.
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Based on actual rates of return that 500,000 will double to a million and
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probably
in about 7 to 10 years. The million
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then doubles in another 7 to 10
years to 2 million.
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I actually have people who started out
with a half a million. It doubled to a
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million,
then 2 million, 4 million, 8 million. And
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they have 8 million now
that generates about 800,000 a year of
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tax free cash flow. They don't even need
that much money. In fact, they're only
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pulling out 300,000.
So, it continues to grow even though
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they're taking out 300 grand a year tax
free.
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Now, the question that I want to finish
addressing in this episode is "What does
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cash render value mean?" This 500,000 when
I put it in there,
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that is the accumulation
value. And the only thing that's
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subtracted off of that is the actual COI.
Do you remember
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I talked about the cost of insurance?
This is like the spigot on the bucket.
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But see this is draining out at a
certain rate. But the compound interest
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that you're earning on this is growing
so fast when you maximum fund it
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that it way more than covers the cost of
the insurance especially as you get it
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fully funded.
Now, that's the accumulation value. During
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the early years of the contract,
maybe 10 years or 15 years, there's a
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difference between the accumulation
value
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and the surrender value, okay? The
surrender value
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only comes into play. Did you hear that?
ONLY comes into play if you cancel or
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surrender the policy.
That would be dumb in many situations
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because if
my half a million doubles to a million
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and then to 2 million, if you surrender
the policy,
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by then, the surrender fee is waived or
gone.
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Because a surrender charge is only if
you cancel the policy
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in the first 10 years or 15 years. It's
all dependent. In fact, you have a writer
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that waives the surrender charge.
And you can have access to 100 of your
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money. But if you take it out
the dumb way, if you surrender the policy,
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if you get back more than the basis. If
your basis is 500,000
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you put into it, every dollar more
than that if you surrender it,
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is taxable. Why would you do that?
If I have, if this grew to a million,
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let's say I have now
1 million dollars in here
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and I surrender it, I have to pay tax
on a half a million gain.
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That would be dumb. What's tax on
a half a million? If you're in a 40%
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bracket like some Californians, you just
had to pay 200,000 of unnecessary tax.
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It'd be better to take it out the
smart way.
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You borrow. You could go in and borrow
90, 94 percent. Let's say 90 of that million.
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You go borrow 900,000 and the insurance
policy
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keeps going. The loan is not doing
payable during your lifetime. In fact, if
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you do it right, you continue to earn
interest on your
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full million while they're you're paying
a lower interest rate
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on the actual loan. And so, if you borrow,
you'd end up with uh 940,000.
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If you surrender it, you get your
million but you're only netting 800,000
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or maybe 600.
See, you have to pay tax. And so why
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trigger unnecessary tax by surrendering
it?
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That is the dumb way to access money. So,
I apologize
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if you feel like you're drinking out of
a fire hose right now. But this is
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why I have authored 11 books. If you want
to know more about this, my most recent
[766]
bestseller is called The LASER fund. It's
a 300-page book. And I want to gift you
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one of these absolutely free.
I'll pay for the book. You just pay a
[775]
$5.95 shipping and handling.
And if you go to laserfund...
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L-A-S-E-R, fund, ".com",
pay $5.95 shipping and handling. I'll fire
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one of these out to you.
It has charts, graphs and explanations if
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you like detail.
If you'd like to just learn about how
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does it really work in
real life, the stories; you flip it over
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and there's 12 chapters with 62 actual
client stories
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of how to design a life insurance policy
to be able to double, to increase your
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cash value as often as every
7 to 10 years and then create tax
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free income
for as long as you live. That's the
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benefit
of a max funded index universal life
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insurance policy.
Why would you ever want to surrender
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something like that?
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