Section 7702 - What Do The Changes Mean? - YouTube

Section 7702 changes that can help you. In this  episode, I'm going to address section 7702,  

what do the changes mean? If you're  a financial advisor or a consumer,  

this can impact you. So, get ready. I'm going to  show you recent changes that can actually help you  

with your max-funded indexed  universal life insurance contracts.

So, I'm Doug Andrew. I've  been a financial strategist  

and a retirement planning specialist  now for more than 4 and a half decades.  

I got my insurance license and my series one  securities license clear back in 1974. So, I've  

been around the block a long time. And I witnessed  the emergence of universal life in 1980.And so,  

section 7702 affects the way that you access money  and you fund a life insurance policy especially if  

you're going to be using it for living benefits  more than just the death benefit. And so,  

I'm going to do a little review here. But in  a nutshell, this new legislation that was just  

recently passed in the last few days of the  year 2020 affects section 7702. And this has  

not been touched since June 21st 1988. It's been  a long time. Basically, there are 3 advantages.  

You will see that if you're maximum funding your  life insurance policy to be able to get the best  

net internal rate of return as quick as possible  to use it for retirement income that's tax-free,  

you will now be able to put in more money, you'll  be able to put it in at a faster pace which will  

reduce the cost quicker. So, those are the 3 big  benefits and I'm going to illustrate these numbers  

for you. So, especially if you're a financial  advisor, you're going to be very interested  

in studying these examples as I proceed. Now, if  you're a consumer, if you're a policyholder, I'm  

going to do a little review here in just a moment.  But please pay attention to the screen as I show  

you what's going on here because this happened on  December 27th of 2020. It was really a surprise.  

Changes were made to the U.S tax code as part  of the federal consolidated appropriations act.  

And so, for life insurance policies  issued on or after January 1st 2021,  

these changes may have modified some or all of  the tax-related premium limits in your policy.  

People go, "what's going on?" So, the purpose of  this as as a result, this u.s tax code change,  

the tax-related premium limits... And we call  these Tefra and Defra and Tamra the guideline  

level and the guideline single premium. And I'll  review those in just a moment. So, they have been  

updated accordingly. So, let's do a little review  so that you understand what I'm talking about.  

For years, ever since universal life was first  created in 1980, it was the brainchild of EF  

Hutton and they weren't an insurance company.  But they decided to introduce a life insurance  

contract where you could take the least amount  of insurance the IRS would let you get away with  

and you put in the most premium as the IRS would  allow as fast as they allow. And it turns into a  

tax-free cash cow. So, back in 1980, I had about  3,000 clients I was responsible for in 13 western  

states. And they were never happier than when  I got their money out of the market and into  

these maximum funded universal life insurance  policies. Now, Indexed universal life didn't  

come out to 1997 and that tweaked the rate of  return as interest rates started to come down.  

I have averaged 8, 9.6, 10.07 percent  rates of return for the 40 years that  

universal life has been out. When EF Hutton  first came out with it people were throwing in  

big lump sums like 500,000. I had clients put in  500,000 back in 1980, '81, '82. They were earning  

11 netting 10 because only one percentage point  paid for the insurance that the IRS had had to be  

there in order for it to be tax-free. And so,  they're earning a net rate of return of 10%.  

On 500,000, that's 50 grand a year. They started  pulling out $50,000 a year tax-free instantly. The  

IRS came in and said, "What are you doing?" Hutton  said, "We're not doing anything wrong." They went  

to court. EF Hutton won. Long story short, in 1982  under the tax equity fiscal responsibility act,  

that spells the acronym Tefra and then 2 years  later because they didn't know what they were  

doing, they passed under the deficit reduction  act, defra. This Tefra, defra corridor dictated  

the minimum amount of life insurance, death  benefit. You had to have attached to it okay  

so that it qualified as tax-free under section 72e  and 7702 and 101.8 in the internal revenue code.  

72e says money inside of a life insurance  policy will grow tax-free with the interest  

and dividends. 7702 talks about how you can  access the money tax-free for retirement income.  

101a says that when you finally die, it blossoms  in value and transfers income tax-free. Nothing  

else in the internal revenue code does that.  And so, in order to fall under that definition,  

you had to stay out of the category of being  defined as an investment because investments are  

taxed sooner or later. And they're usually subject  to market volatility. We don't want to be under  

that definition. So, in order to stay tax-free,  you have to comply with Tefra and Defra. In 1988,  

the technical and miscellaneous revenue act was  passed, June 21st. And this affected section 7702.  

And this is how fast you can put the money in. So,  Tefra and Defra relate to the amount of insurance.  

Tamara relates to how you can access your  money tax-free. If you've watched any of  

my educational videos I usually compare this  to a bucket as a metaphor. So, let me show you  

the metaphor of a bucket and then I'm going to  give you some quick examples of what this means.  

I would often compare a life insurance policy to  a bucket. This is a repository. It is a container  

that holds your money. So, you're determining how  much money you want to put into the bucket. So,  

let's say you want to put in 500,000 over  5-year period, 10-year period, 20-year period,  

30... It doesn't matter. So, you determine the  amount of money you want to be grandfathered  

to be able to put into the bucket. And you  want all your compound interest to be tax-free.  

So, in order to do that, under Tefhra and Defra,  you had to determine the least amount of insurance  

that you had to attach in order to qualify as  tax-free under those 3 sections of the code.  

So, for a 60-year-old, if you wanted to put in  $500,000, you had to have a minimum death benefit  

of $1,250,000, okay? You could buy way more life  insurance than a million two-fifty for 500 grand.  

That's not the point. What you want is the least  amount of insurance that you can get away with.  

You want to be able to fill it up with money and  earn a rate of return of 11 back in 1980. People  

were earning 11 up to 15 percent. But they were  netting 1% less than that. If they earned 11 they  

netted 10. That was the objective, not the death  benefit. So, Tefra and Defra dictated the minimum  

amount of insurance for a 60-year-old. It was a  million two-fifty. For a young 20-year old, they  

had to have more because their life expectancy  was greater. But an 80-year old, they could get  

away with less insurance. But Tefra and Defer  gave parity. So, parity means the older you are  

and even if you're unhealthy, you can squeeze  down the death benefit under Tefra and Defra.  

So, if your objective is the greatest net internal  rate of return. A 60-year old can earn 11 and net  

10 just like a 22-year-old athletic marathon  running female or an 80-year old. We had a  

79-year-old friend of our family and he had  three blocked arteries adult-onset diabetes  

a prostate cancer episode. He was able to  earn 11 and net 10 and he only had to have  

a little bit more insurance than the amount he  was putting in. Because the objective was tax-free  

income not the death benefit, okay? That was Tefra  and Defra. Now, if you're earning 11 and netting  

10, this spigot right here on the bucket is the  cost of the insurance that the IRS says has to  

be there in order for it to be tax-free. It's  actually watering a nice money tree at the end  

of the day that's going to blossom. If you put  in 500,000 and you die, it's going to blossom  

to a million two-fifty and transfer tax-free,  okay? So, it's really not a cost it's a benefit.  

But that has to be there or it moves away from  tax-free insurance in the internal revenue code  

over to taxable investments. We don't want that.  In 1988, a lot of brokerage firms banks, and  

credit unions were complaining because these were  safer. They paid higher interest. They have better  

rates of return and they blossom when you die.  There's not a bank or credit union around that  

will do that. And so, they wanted to slow the flow  because they were imploding. But they didn't want  

to kill these because this is where a lot of banks  and credit unions put your money that you put in  

the bank, did you know that? You put your money in  a bank, they pay 1%. They turn around and put it  

in these and earn 5%. They earn 50,000 on every  million and they only have to pay you 10,000.  

Hello? They're making 5 times what they're  paying you by bypassing and putting your money in  

the insurance companies which are safer. So,  Tamra was passed in 1988 and it said, "Oh,  

if you want tax-free income, you cannot put in all  the money all at once." I've been using 500,000  

as an example. You could only put in about a fifth  with universal life. With whole life, you had to  

take 7 years. But universal life is my favorite  because it was designed for living benefits. So,  

you can fill up the bucket faster. I can put in a  hundred thousand the first day of the first year  

and another 100,000 the first day of the  second year. So, in the fifth year which is  

actually 4 years in one day, I can finally  put in the 100,000 and my bucket is full.  

Now, it turns into a cash cow. And  anytime I take income, it's tax-free.  

If I violate Tamra, it still grows tax-deferred.  But if I take money out, it's now taxable,  

LIFO like an annuity. I don't want that. So,  that's Tamra. That's 7702. So far so good?  

Now, I'm going to gift you a copy of my most  recent best-selling book at the end of this.  

And if this is intriguing you already, share this  video, put a comment, please like. But subscribe  

to this channel because i post an in-depth answer  to a financial question almost on a daily basis on  

this channel. And at the end, I'm going to gift  you a copy of my most recent bestselling book,  

300 pages where you can learn more about  this, okay? So, let's talk about 7702. What  

it basically said is that for a million-dollar  death benefit, we'll just use the same example.  

If you're a 65-year-old male, okay? You can now  put in $624,000, okay? This number down here,  

54,000, you can put in 54,000 every year you want  for the rest of your life. But the most you can  

put in to the policy during the first 11 years or  so is 624,000. This down here is called the Tamra.  

You can put in 107,000 a year and be able to take  out tax-free income. You don't violate Tamra,  

what I just talked about. So, what did it used  to be like? Under the previous, okay? Before the  

changes, you could only put in 497,000. So, you're  able to put in more money, you're able to put it  

in faster you could only put in 82,000. Now,  you can put in 107. So, let's just do a summary.  

After this law was passed, I could now put in  for a million dollars of life insurance 624,000,  

I can put in more money. I can put it in as  much as 107,000 a year instead of 82,000 a year.  

I can get more money in there tax-free and  that will perform better. And the cost,  

the spicket on that bucket will get smaller  faster. This is an advantage, okay? So,  

let's look at somebody age 65. See after? Now,  you can put in this, before you can only put  

in this. That's a 25 increase in the amount  of money that you can sock away tax-free.  

This is again the guideline level premium what  you could put in every year the rest of your life.  

That's gone up. Tamra, you can put in 107 instead  of 82. That's a 31% increase. The Tamara limit  

down here went up as far as the ratio between  that and how much you can put into the bucket.  

So, pretty much all around, it's a better  situation. Well, that's for a 65-year old.  

How about a 75-year old? This is after you can  put in 837 versus 728. So, let's summarize that  

one. After this law was passed ,a 75-year  old can put in 837,000. Now, people say,  

"Why would you pay 837,000 into a million-dollar  life insurance policy because you want 837,,000  

to generate tax-free income forever after. That's  why. You're not doing it for the death benefit.  

In fact, the net amount at risk if you put  that much money in, the insurance company  

is only charging you for the difference between  that and the million dollars of life insurance  

because 837,000 of it is your own money now.  The cost of the insurance has gone down quicker.  

So, you come out ahead because you can  put in more money than you used to be  

able to put in as a 75-year old. Well, let's  go to the younger ones. Here is a 55-year old  

after, okay? You can put in 439, you used to  only be able to put in 314. Wow! So, that is  

40% increase. You can put in 40% more money  and have it grow tax-free under this new law.  

You can put it in faster. You can put in 50%  faster money, you can put in more money quicker.  

That makes it perform better and makes the cost go  down. That's the net result of all of this. Let's  

look at a 45-year old. Here's after, here's  before, okay? You can put in 310 versus 198.  

That's a 56% increase in what you're allowed to  set aside tax-free. Under Tamra, okay? You're able  

to put it in again faster. 77% increased under  Tamra. What about a 35-year old? Here is after.  

You can put in 221. Golly! Versus 128. Notice  you can only put in this much money because  

you're younger. The insurance that's required is  higher because your chance of living a long time  

is much greater. The net of this is you can put  in 221 whereas before you can only put in 128.  

72% more faster money into your insurance policy.  It's going to turn into a tax-free cash cow  

faster because you're getting money in  quicker. You're able to put in under the  

Tamra substantially more money. 62 instead of  30 000 a year. This is incredible, okay? Now,  

could you take less life insurance? Yeah. But  frankly, I think most people are going to want  

to put in more money because most of my clients  ended up opening new insurance policies every 2 or  

3 years that was a nice problem because they had  more money. Now, you can put more money into your  

existing policy instead of being stopped. Because  if you put in one dime more then the limits,  

the insurance company was forced to refund it to  you. So, let's take a 25-year old, last example.  

This is after you put in 158. Before,  you could only put in 83,000, okay? Into  

a million dollar life insurance policy. I can  put in way more money, nearly 90% more money.  

I can put it in faster. I can put in 52,000 a year  instead of 21,000 a year and still have tax-free  

access to my money down the road. This means  that bucket I showed you that usually took 4  

years and 1 day or 5 years to fill up, this young  25-year old can fill that up in 2 years and 1 day.  

Doesn't take 5 years. You can fill up the bucket  with money and preserve tax-free accumulation and  

tax-free access in as little as 2 years and 1 day.  For the older people, 3 years and 1 day instead  

of 4 years in 1 day which is what it was for 60,  65, 70 year olds. This is very, very exciting and  

a lot of people don't understand the impact. Your  insurance company is probably making these changes  

right now. But I wanted to be on the cutting edge  and share this with you. If you want to learn more  

about max-funded indexed universal life insurance  policies, I want to gift you a free copy of my  

most recent best-selling book. Here's how you can  claim your free copy. So, if this is intriguing  

you, my most recent best-selling book, book  number 11 is flying off of our warehouse shelves.  

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universal life insurance policy is the dream  solution, the financial swiss army knife for  

all kinds of financial goals not just retirement  to do what? Accumulate your money tax-free  

and then be able to access your money tax  free if you're in compliance with section  

7702. And when you ultimately die, anything in  there blossoms and transfers income tax-free  

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