How to Use Variable Universal Life Insurance

Variable universal life insurance is a great tool for the right client. With that said it is not an investment that should be pushed to every single person.

What is Variable Universal Life Insurance?

Variable universal life insurance is a type of permanent insurance with flexible premiums.

Unlike whole life insurance where many people make premium payments for their entire life, the payments stop at a certain point.

What is also nice is that there is an investment component that allows you to earn tax free returns. This is similar to a whole life policy, but the investment returns are typically better over time.

With whole life policies you invest in the insurance company’s general account, which is typically a very conservative investment strategy. This conservative strategy coupled with the high lifetime fees make it difficult to efficiently grow the money over long periods of time.

With variable universal life you can invest more aggressively over a long period of time, earn better growth, and because it is life insurance you can take distributions in the future tax free.

Those factors are what make it very attractive to the right investors.

Who Does Variable Universal Life Make Sense For?

The clients who tend to benefit from variable universal life tend to be 45 or younger. Although it may make sense for people who are older depending on their overall strategy.

These younger clients tend to be well paid and as a result pay a lot in taxes. They also tend to max out their retirement accounts and other tax-sheltered investments. If they are maxing out everything and still have money left over that is where variable universal life insurance comes in.

Because it is tax sheltered, similar to a Roth IRA, the funds grow tax free. And come out tax free.

I typically set up premiums to be finished around retirement age. Then when a client retires, we start taking money out of the contract.

These distributions are tax free. Meaning that the client could take the whole policy out the day they retire and pay nothing in taxes.

More than likely the client will take money out over their entire retirement to supplement social security and other income streams.

At its core, variable universal life insurance is still life insurance. So, if the investor were to suddenly pass away their beneficiaries would get the life insurance benefit at that time.

A Quick Case Study

I recently onboarded a young couple who was a great candidate for variable universal life insurance.

They were high earners who went to school for a long time. Which left them behind in saving for retirement.

They were maxing out IRAs and 401(k)s but still need more tax deferred growth.

I presented the husband (primary earner of the household) with a solution to invest $50,000 each year into a variable universal life policy over the next 30 years.

He was immediately guaranteed at death benefit around $1.2M. And based off of a very conservative 7% market return the annual contributions grew to around $3M by the age of 65.

That gave the couple $3M in tax free income in retirement. To supplement a portfolio that will likely be near $8M without this investment.

This will provide the couple with approximately $120k tax free from the life insurance policy each year. And after taxes on the other portion of their portfolio they will receive ~240k.

They will have roughly $360k each year after tax to live off of.

Had they just saved the funds in a regular brokerage account they would have needed to earn roughly 9% annually to have the same after-tax equivalent of the life insurance policy.

Not only did I hedge their risk through life insurance I diversified their income streams in retirement to give them more flexibility.

Also, if we were to be a bit more aggressive in the policy that $3M can grow to an even larger number and provide more income.

Putting it All Together

For the right client variable universal life insurance is a great tool.

Outside the primary use above there are many other uses.

• Business succession planning
• Key employee retention
• College savings

It is a great alternative to the traditional whole life insurance policies that some advisors prey on high earners with.

It allows you equity like returns with tax deferral and tax free income in the future. Over time the fees on the contract trend to 1% for the life of the contract – what you would pay most advisors for a brokerage account anyways.

How do you utilize life insurance in your portfolio?