With many baby boomers focused increasingly on retirement planning, variable universal life insurance can be an ideal product, maintains Bob Primmer, senior vice president of life distribution and sales of the Phoenix Companies Inc., Hartford.
It’s not a great market for equity-based products right now, with risk-skittish investors escaping to fixed rate products.
But Primmer insists VUL policies have a place in the portfolio of wealthier boomer clients who have the pluck to take a modest risk that carries significant tax advantages, and who are willing to wait for a payoff.
Many financial advisors are looking for a “magic product” for retirement, says Primmer. “But it’s still going to take a complement of several products to accomplish,” he says. And for clients with net assets of $1 million or more, VULs merit consideration.
As with traditional life insurance, VUL provides a death benefit to protect heirs in the event of the client’s demise.
On the other hand, Primmer says, the advantage of VUL is “not so much the death benefit as it is tax-free accumulation of assets that can be drawn down late in life through loans from the policy. You get tax-free income from the policy, and should you die, the balance of the face value [minus the loans] go to heirs tax-free.”
Although they provide many of the benefits of tax-qualified plans, VULs have two advantages over 401(k)s and similar retirement savings vehicles: First, they don’t have dollar limits on tax-free contributions; and second, loan withdrawals against the policies are tax-free, giving them retirement income advantages similar to Roth IRAs.
“VULs are the last drop of money you get tax-free in retirement” Primmer says.
Rather than replacing other retirement vehicles, Primmer says the financial advisor should recommend the client continue to invest the maximum into qualified plans first, then in nonqualified plans such as a Roth IRA.
But those types of plans have limits on what can be invested, in addition to which the client is required to start taking withdrawals by age 70 1/2.
That’s where the VUL comes in.
“There’s no limit to contributions,” Primmer points out.
Advisors also can sell VULs for other purposes beyond estate planning. Because of their loan features, VULs can be used to pay for college, pay off a mortgage or buy a retirement home.