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.
Primmer urges advisors to position the product as a focus on benefits for life, rather than death.
“Death is the bad end of the equation, which many clients find unpleasant to think about,” he says. “What we ought to do is look at VUL as a benefit for the living because of its tax advantages. It’s a product to maximize retirement income and accumulation, so a policy in, say, the first seven years is kept at a certain face amount, then starts slowly reducing through loans to the minimum required to keep it a life insurance policy.”
[A VUL would no longer qualify as a life insurance policy under IRS rules if its cash value fell below its face amount--as might happen, for instance, if the underlying investments collapsed and accumulated loans exhausted the remaining value. That would cause any loans against the policy to suddenly become taxable income. Phoenix and other companies offer a rider for an additional charge that allows the individual to withdraw most of the face value and then guarantees the policy will not lapse, which prevents such a taxable event occurring.]
Heirs of wealthy investors can pay estate taxes as high as 70% on a 401(k) plan if the owner dies, Primmer points out. With a VUL, that won’t happen.
He urges advisors to sell the VUL as a long-term investment, which in most cases would nullify the effects of bull markets on the face value.
“You can purchase a VUL when you’re in your 50s with the idea that this is the last retirement money you would take,” says Primmer. “If you then have a time horizon following retirement of 15 years before you need to take the money out, its accumulated value looks very good.”
And if an investor can sit on the VUL even longer, so much the better, he points out.
“If you expect to retire at 60 and live to 80, you can take your pension and 401(k) for your income, and keep the VUL as an emergency fund as a way to max one’s income,” he points out. “You can take your assets and put them in a VUL that will take care of you if you live past your life expectancy. You don’t have to decide who it’s going to. If you need it to spend it down, it’s available in the form of loans.”
Although VUL sales are currently slow because of the bear market, Primmer thinks advisors would probably sell more of them if they weren’t so wary of the lengthy sales process.
He notes there are policies available that can be approved within a matter of hours, with no health exam beyond a simple medical questionnaire.
Primmer feels that VUL sales have begun to build momentum, albeit slowly. “Until people feel the market is stabilized, they aren’t going to jump back in,” he observes.
His recommendation to advisors wishing to give their VUL sales a kick is to stress the long-term time horizon to clients.
“Give them the 10-year view,” he counsels.