Readers: As I’ve written recently, this blog will be expanding to a multi-author format, while remained focused like a laser beam on real estate investment for retirement through a Purposeful Plan. David Shafer is a welcome addition to say the least. I’ve written about EIULs often on these pages — David has been my go-to expert on the subject. Though he’s written here a few times as a guest author, he now part of the BawldGuy Talking family. The following is his initial post. Welcome, David.
Written By David Shaffer
Hello all. When Jeff asked me to be a contributor to his blog, I jumped at the chance. As a regular reader of Bawldguy and someone that has gotten to know Jeff on a personal level, I have received much wisdom on a whole host of topics. The offer to give back to his readers some of the wisdom I have on using life insurance to fund retirement is something I look forward to doing.
This first post will give the reader a general idea about the insurance product, Equity Indexed Universal Life insurance, which I believe best carries out the strategies we will talk about going forward.
Universal Life Insurance was created by a financier on Wall Street called E.F. Hutton. Those old enough will remember his brokerage commercials as being very creative. Unfortunately for E.F., his firm got into trouble with the SEC and eventually was bought out. EF Hutton recognized the advantages of life insurance in building cash value, but was unimpressed with its limited ability to take in premium and pay out dividends. So he created a hybrid of whole life insurance that combined term insurance with a “savings” component. Since Life Insurance can compound tax free, and you can access the money through policy loans tax free, it allowed EF’s high net worth customers to put in large amounts of their wealth and then access without a taxable event happening. This was a revolutionary advancement for the wealthy in avoiding taxes. Two things came about which solidified his initial financial invention, first the IRS got involved, and second the cash value in the policy started to be invested in a variety of ways which increased the returns inside the policies.
The IRS made two set of rulings [1983, 1993] that settled the open question of when life insurance is really something other than life insurance. I won’t bore you with the details, but what has now been settled is how much life insurance you must carry for each $ of premium paid and how quickly you can input the premium. Follow these two rules and you have life insurance with all its tax benefits.
Readers should know we realize that universal life insurance was created to allow flexible premium payment, to allow for large amounts of cash inputs, and to have choices of investment vehicles on the cash value, all to benefit those with wealth to protect. Now lets talk about the specific universal life product I believe is best.
The EIUL
Equity indexing as an investment vehicle in life insurance policies was first designed in the late 1980s and gained momentum through the late 1990s into this decade. When choosing an equity indexed universal life [EIUL] policy you are choosing a “fixed rate” policy as opposed to a “variable policy” which allows you to invest directly into the stock market via mutual funds. Most EIULs offer a choice of a fixed rate or a rate connected to several stock indexes [ex. S&P 500 index, Dow Jones index, etc.] In order to create the interest crediting connected to an index, the insurance companies take a small portion of their reserves and invest in European options on the index in order to credit you with the gains. These options expire worthless if the index goes down in the time period, therefore allowing the insurance companies to just credit you with no gain [as opposed with a loss] when the indexes go down. Because the majority of the reserves are still invested in fixed income securities they can offer you a “guarantee” on the policy usually around 2-3% annual gain for the life of the policy.
Typically, the insurance companies have to create a ceiling for how much they will credit you, which is generally derived by the overall interest being collected from their fixed rate investments in order to protect their overall investment portfolio. This ceiling currently is at all time lows because of the low interest rate environment we are experiencing. Currently, my favorite EIUL [Minnesota Life] offers a 16% ceiling, while most of the others fall in the 12-15% range. What this means to policy holders is that each year they will be credited with interest ranging from 0% to 16% [Minnesota Life] depending on what happened to the index in that year.
Of critical importance for you to understand is that by not going negative these policies give you an extreme advantage in retirement. One can easily look at recent history to understand how in retirement you can be hurt [really devastated] by bear markets. This “no less than zero” policy creates at least one pool of capital that can be accessed when the various markets are down.
It should be made clear that an EIUL policy is designed to legally avoid taxes, to gain a rate of return that is several percentage points higher than inflation [but is not going to make you wealthy], and to provide a death benefit should an untimely death occur. They are not designed to be a trading instrument or to get in and out of over a life span. By allowing a policy to lapse the tax benefits disappear.
As you now understand, for folks worried about future taxation [and you should be] this could be a major financial vehicle to employ. But for real estate investors it is a perfect match. BawldGuy has explained how to get large sums of your equity out of your real estate using depreciation allowances. To be able to get that wealth into another tax advantaged position is like finding gold at the end of the rainbow.
BawldGuy Here: Can I pick ‘em, or what? David will be writing weekly posts, give or take, more frequently when the mood hits. You can visit his blog here. Have a good one.
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About David Shafer
More power to you.i have actually bookmarked it to show some of my friends