Using Variable Universal Life In A Tactical Asset Allocation Strategy

Clients seeking tax-deferred build-up of cash values combined with the ability to trade among subaccounts without realizing taxable gains;

Sophisticated investors who understand sophisticated investment techniques; and

Clients who trust their investment advisors to manage their subaccounts actively like a brokerage account.

Its important to note that it may not be a choice between strategic and tactical asset allocation. Rather, the 2 may complement each other. Diversification of asset allocation models is an important consideration in financial and insurance planning and risk management, in general.

Managing Assets in Trust

In estate planning today, many trust clients seek creative ways in which to achieve estate tax benefits while providing some access to cash values during lifetime. A VUL policy is often used when cash accumulation is an important objective in the trust planning completed by a qualified estate-planning attorney.

For example, one popular trust planning technique, which uses a VUL policy, is the spousal access irrevocable life insurance trust. In this planning technique, the insured spouse establishes and is the sole grantor of an irrevocable life insurance trust (ILIT). The insured spouse makes gifts of separate property to the ILIT, which uses such gifts to pay premiums on a single life policy on the insured spouse.

As owner of the insurance contract, the trustee may take loans and withdrawals from the policy. Assuming the policy is not an MEC and does not lapse, the trust receives the loans and withdrawals income tax-free. Under the typical terms of a spousal access ILIT, the trustee is permitted to make discretionary distributions to the non-insured non-grantor spouse. If ILIT is properly drafted and properly funded with the insured spouses separate property, the spousal access ILIT may provide 2 key benefits: (1) estate tax-free proceeds when the insured spouse dies, and (2) access to cash surrender values for discretionary distribution to the non-insured spouse.

The point is that trusts and trustees may depend on the cash accumulation aspects of a VUL policy as much as individual clients. As a result, trustees need to consider strategic asset allocation and tactical asset allocation products as potential funding vehicles. Of course, trustees must remember and financial advisors must counsel that no investment strategy, asset management strategy or asset allocation strategy ever assures a profit or guarantees against a loss. Strategies that may offer potentially higher rates of return also may involve a higher degree of risk to the principal. Nevertheless, trust planning strategies using a VUL policy demand consideration of the alternatives.

Implementing the Strategy

The tactical asset allocation variable products manufactured today, along with the strategic asset allocation products, package world-class money management and disciplined investment strategies for the financial advisors and their clients. Many insurance professionals using the tactical asset allocation strategies and products point out that they partner with independent investment advisors, specializing in these strategies.

These insurance professionals identify 2 main benefits of partnering with these specialists.

First, the independent investment advisors help implement, monitor and manage the strategies and products for the clients.

Second, the independent investment advisors often have other high-net-worth clients or trust clients who may need and/or want the tactical asset allocation insurance products offered by the insurance professionals.

In summary, tactical asset allocation products can provide value in many ways in the high-net-worth estate and financial planning markets.

Brett W. Berg, JD, LLM, CLU, ChFC, is field director of advanced sales for Nationwide Financial. He can be reached at [email protected].

Reproduced from National Underwriter Edition, August 19, 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.