Why Can't You Fund A Universal Life Policy With One Lump Sum? - YouTube

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.