Manage Lifecycle Plans Efficiently

By Using A Joint VA/VUL Strategy

BY

Planners are becoming increasingly aware of the growing need to focus on clients needs beyond accumulation.

Planning for the income withdrawal and the wealth transfer phases takes on critical importance as clients age. The entire planning cycle, or lifecycle planning, can be managed efficiently by using a combination of products that each serves its own purpose well.

Variable annuities can be an efficient way to provide lifetime income; variable universal life policies are an efficient way to pass money to heirs. By combining these two into one overall strategy, clients can move from one financial lifecycle phase to another in smooth succession.

How does it work? Heres an example: Clients Alice and Bob are both 35 years old. Both already are contributing the maximum amount to their employer-sponsored 401(k) plans and have fully funded personal IRAs. They decide to purchase a variable universal life policy on Bob for the death benefit protection and for the tax-deferred growth potential of the policys cash values.

When Alice and Bob reach age 45, they evaluate their current assets with their financial planner and decide to purchase a jointly owned variable annuity. The VA will be used to help supplement their retirement income with a lifetime income stream. They would like to retire early.

At age 60, Alice and Bob do retire, and begin drawing income from selected accounts. By retiring after age 59 , they avoid any 10% penalty tax issues.

Social Security will not be available until age 62. Working with their planner, their total cash flow can be coordinated to match their expenses.

Their VA now has grown and they do not need all of the income this annuity could currently provide. If they annuitize the contract, it allows them to supplement their retirement cash flow while directing a portion of it to fund their life insurance coverage.

If Bob were to die first, certain pension benefits would be lost, and the VUL coverage on his life can offset that loss for Alice. In this way, the couple takes full advantage of ongoing tax deferral, can provide for themselves and can reach their goals for their family.

This overall strategy can optimize the value of the annuity while maximizing Alice and Bobs income, including the income they will pass on to their heirs.

The variable universal life insurance policy is an effective wealth transfer tool. By using the VA payments (which are guaranteed by an insurance company) to fund the life policy, it allows for financial planning flexibility.

Alice and Bob can choose to keep the life policy as part of their estate while they are accumulating assets. This allows them the flexibility to draw from the cash values in the life policy, if at some point they find they need additional income.

However, when they are certain they will no longer need this money (and it will simply pass the money on to their heirs), they can move it out of their estate by creating an irrevocable life insurance trust (ILIT) and gifting the policy to the trust. The ILIT will allow the transfer of this wealth to their beneficiaries on a tax-free basis.

Sometimes the best motto is to keep it simple. Helping clients stay invested in the market long term is important, because over the long term, the market generally wins.

Each of these products, when used for its intended purpose, can provide efficient planning choices. Both are insurance products and as such, offer an effective risk management strategy for your clients. Only an insurance company can offer clients a guaranteed income for life.

Using a variable annuity with a variable universal life policyproviding they both offer guarantees against certain impacts of market downturnshelps to mitigate clients concerns. When these products are combined into one lifecycle strategy, this maximizes the overall efficiency and risk management of the clients financial plan.

Heather Dzielak is variable annuity product line business leader-product management, and Stephen A. Roche is vice president and product line business leader for variable life insurance business-both at Lincoln National Life Insurance Company, Hartford, Conn. Their respective e-mail addresses are: HCDzielak@LNC.com and

And SARoche@LNC.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, March 25, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.