Do Your Clients Know About Variable Universal Life?
There are some misconceptions about those who are highly compensated. One of the most prevalent is that they have more choices in life than those who are paid less money. Unlimited choice is what wealth supposedly brings. That’s where the misconception comes in.
The irony is that many executives with significant income have exactly the same life goals as many of the rest of us. However, they have little use for the traditional qualified methods of investing retirement money, primarily because available qualified plans have no significant impact on the retirement lifestyle that highly compensated individuals envision.
Think about itdo your clients want to take a step down in lifestyle at retirement because they have been so fortunate up to that point? While the answer “yes” would be a modest, it would also be mythical.
The truth is that highly compensated individuals can be severely limited in the number of qualified financial tools that allow them to save large portions of money for future goals, if they want investment growth opportunity and tax advantages. And, these very goals are the cornerstone elements of nonqualified executive benefits. The development of concepts, such as split dollar, 162 bonus, supplemental executive retirement plans, and deferred comp plans were built on the premise highly compensated individuals need investment vehicles that allow them the opportunity to save in flexible and tax-advantaged environments.
Still, the most overlooked aspect for some of your clients in the executive market is also the simplestvariable universal life products.
For some affluent investors, VUL may fill the void rather neatly, because it allows highly compensated executives to achieve the same advantages that others get through their qualified plan. However, many in the affluent market do not even know the option of VUL exists, until an advisor educates them.
A VUL product is designed to be useful for exactly this type of client by providing many critical features. In addition to the death benefit, accumulation and eventual income distributions are the predominant ones. As with any registered security, however, there is risk involved. The suitability of accumulating money in any such product can only be considered on an individual case basis. For those who understand the concept of risk and reward, VUL can be the financial solution that levels the playing field for highly compensated individuals.
The first characteristic you should consider is whether your client has all, or most, of their current life insurance needs taken care of in other types of productsperhaps term, perhaps general account universal life with guarantees. What they get with VUL is the ability to appropriate large sums of money to retirement while purchasing the lowest amount of death benefit possible through the utilization of variable subaccounts. This approach to designing a VUL can maximize the accumulation of cash inside the product. And typically, these subaccounts will include high profile retail names that your client associates with the current mutual fund industry.
In variable life products today, clients can allocate their money among subaccounts, including fixed accounts, to acquire the suitable mix of investment risk and return for their particular needs.
Because this is life insurance and your clients probably won’t want to risk the real-life coverage to the equity markets, you can likely help them insulate their policy by allocating the necessary costs and charges for the life coverage to a fixed account. Another popular feature of contemporary variable products is the ability to designate the account from which these charges are drawn, such as the fixed account. By using this strategy they have, in effect, “term and invest the difference.” During the premium paying years, only those monies not needed to carry the cost of insurance go to the variable subaccounts.
The time value of money indicates that getting funds into any vehicle sooner, and in larger amounts, allows for greater compounding given favorable investment experience. Along those lines, your client will likely fund this variable policy heavily and for a short duration of time. This accomplishes a number of things. It allows the time value of money to work harder inside a tax-favored vehicle. It also allows your clients to complete their out-of-pocket commitment sooner and move on to other life goals.
When utilizing this approach, the minimum death benefit in relation to the funding allows the contract to begin with the lowest amount of costs associated with death benefit. Most software platforms allow the illustration to show the minimum death benefit that keeps the policy from becoming a modified endowment contract. This is crucial so that the tax advantages of the product aren’t compromised. Applying an increasing death benefit may allow a lower death benefit to start off, and provides the room to get the money in without the policy becoming a modified endowment contract. Another benefit to this is that the increasing death benefit in many policies, if left on, will provide a greater return to heirs when the policy pays at death.
In many cases, once the premium duration is over, it is likely that your clients may want to designate a variable account from which to derive insurance costs. This is because it is possible to get a higher return from these than they will from the fixed account. And because the policy will now generate its own premium in this way, your clients would likely benefit from using an account that generates these dollars faster. Remember, any dollar generated in a life contract is tax deferred. Any dollar that never leaves the contract is tax-free. Now your clients are paying for their life coverage with tax-free dollars.