How Indexed Universal Life Insurance Works? | Tax Free Retirement Series

My favorite strategy is indexing. Now indexing is a strategy. There are a lot of index products but probably 99% of the index products I would not put my money into and the six that I do put my money into I would say over 99% of financial advisors do not know how to structure them to do what I'm going to show you right now. What you need to understand is how indexing can empower you to not lose when the economy or the markets are down. In the multi-trillion dollar insurance industry which is the backbone of America and the world, these large insurance companies and I'm going to use one as an example that manages over two and a half trillion dollars. I mean that's as much money as the IRS collects in income tax in a single year in America. One insurance company. Now these insurance companies that have been around for over 150 years have weathered the Great Depression. In fact how many banks went under during the Great Depression? 60%, 40% never opened their doors again. Some real estate dropped 80% during the Great Depression. Legal reserve life insurance companies have to have reserves on hand in case of those downturns and that's why there was not one legal reserve insurance company that went under in the Great Depression. Even the last few years we have had over 400 banks go under. How many legal reserve insurance companies went under? Not one. Because of what I'm going to show you. They have what is called a general account portfolio yield, a gap yield. They have to put that money safely tucked into very conservative investments like triple A and double A bonds. If they loan money on a skyscraper or a shopping mall, they only get to loan 60 to 70 percent loan to value in case they have to foreclose. They come out smelling like a rose. Now in the 40 years that I've been a financial strategist and retirement planning specialist, the companies that I use have had an average general account portfolio yield of probably around nine percent. They need about one of those percentage points for themselves for their profit. They're in business to make money and I have netted an average of actually 8.2 percent. Now the range has been anywhere from 5 to 17 percent. Back in the 1980s I was earning 15 and a half percent on my indexed insurance contracts. Now the last 10-12 years or so we've been in a 60-year low. So let's just use six percent. Many of these companies during the decade from 2000 to 2010 were earning about six percent or better. They need about one of those percentage points for them. So the net general account portfolio yield is five. If that's true, if I want to put my money, let's say that I worked my whole lifetime and I had a million dollar nest egg and I want to create predictable income. Now I can hunker down and play it safe and just say pay me your general account portfolio net yield which in this case would be five percent. They would pay me 50,000 if I take it. It's tax-free. I don't have to report it on my tax return. If I want to let it sit there and compound I can do that. Let's say I feel bullish about America this year and I want to link it to an index. Now what's an index? We have the S&P 500, the Dow Jones, the Russell 2000. Let's choose the S&P 500, one of my favorite. If I thought the S&P 500 was going to go up, let's say at the beginning of the year November 15th of 2011 that was the beginning of an election year. Well I know historically usually even incumbents make it look better than it really is. So if I linked and a year later on November 15th of 2012 the S&P was 1100, the insurance company is contractually obligated to pay me whatever that was. Ten percent, that's a hundred thousand. They can't get out of that. Now in order to accomplish this, what do they do? Because what if I guessed wrong and we had a terrorist attack and most Americans in the S&P would have lost 40 percent. Not me because by using indexing I have a floor. This is called a zero percent floor and during that decade many times I was able to earn as high as 16 and 17 percent which is called a cap. Let's just use 15 which is about the lowest cap. It means this, I did not authorize the insurance company to use one dime of my million dollars and put it at risk in the market. No, that had to stay safely tucked in the insurance company earning five. What I relinquished was the five percent for sure and they use that fifty thousand dollars to buy options. They're smart. They do this. They're the number one purchaser of options in the world and so they have the wherewithal to pay me whatever the S&P does up to a cap because fifty thousand can double to a hundred or triple to a hundred and fifty thousand but in order to stay safe they only have that much to put at risk. I relinquished the interest and so they have to cap it. Let's say at 15 percent but sometimes zero is hero. Do you know during the worst decade since the great depression you would have had five down years but I didn't lose and five up years. I only capped out twice but the average return was 7.23 percent. Now there's other options. You can raise the floor to two percent and still get twenty thousand in this example but the cap comes down to thirteen percent. Do you know during the the last 30 years, pretty bad 30 years, your average would have been 8.11 percent. Sometimes I take the floor back down to zero because this is another option. The cap stays at 13 but they'll pay me 140 percent participation rate because my money's not in the S&P. That's simply a measuring tape that tells them how much they have to pay me and so if it goes up five I get seven if it goes up nine I get 140 percent of nine I get 13. Do you know that by using all of these people say which one did you use all of them by moving over to the five percent after 9-11 and after 2008 moving over to the zero percent floor 15 percent cap two years and the other years putting it into the 140 percent I averaged 9.62 percent.