USING VARIABLE UNIVERSAL LIFE FOR SUPPLEMENTAL RETIREMENT SAVINGS

The Client

John and Pat, ages 45 and 42 respectively, have been very successful in their individual careers. While they are taking maximum advantage of all the opportunities to save through their various employer sponsored qualified plans, they are concerned it won’t be enough. They have two children ages 12 & 15. John and Pat’s finances are pretty much under control and they have just moved into their dream house which carries with it a $500,000 mortgage.

The Need

Until the recent purchase of the new home, John and Pat had sufficient life insurance to meet their needs. However, they are now concerned about leaving this huge mortgage unsatisfied at death as well as having sufficient savings to provide them at adequate income at their retirement.

The Problem

John and Pat have maxed out their qualified plan options such as 401(k) employer pension plans and are not eligible for Roth IRAs. They would like to be able to “kill two birds with one stone” so to speak when it comes to savings and protection.

The Solution

OPTIONS FOR RETIREMENT SAVINGS

	Limits on Contributions?	Tax-Deferred Accumulation?	Taxes on Distribution?	Income Tax Free Death Benefits
TRADITIONAL IRA	X	X	X
ROTH IRA	X	X
QUALIFIED PLAN	X	X	X
CERTIFICATE OF DEPOSIT			X
MUTUAL FUNDS			X (1)
MUNICIPAL BOND FUNDS		X	(2)
ANNUITY		X	X
VARIABLE LIFE INSURANCE		X		X

John and Pat will each purchase a variable universal life (VUL) policy with an initial death benefit of $500,000, using the increasing death benefit option. They will fund each policy annually using the maximum non-MEC premium to their age 65 (3). At that point, the death benefit will be levelized and they will start pulling out income tax free income to their age 90, keeping the policy in force to their age 100. At age 100, provided there is a positive cash value, the then current death benefit will remain in force, with no further expense or mortality deductions until the policy matures as a death claim. Of course, depending on their needs, one survivorship VUL policy could be used instead of two single life VUL policies. An overview is shown in the following chart (4):

Single Life VUL*

	JOHN	PAT	JOHN & PAT
Premium	$25,700	$20,200	$16,700
CV @ A65	$842,200	$865,600	$563,100 (yr.20)
IRR on CV @ A65(5)	4.49%	4.87%	4.76% (yr.20)
Annual Tax-Free Income to A90(6)	$62,100	$64,700	$40,900 to yr.48
Death Benefit @ Standard Mortality	$716,100	$542,000	$176,400 (standard joint mortality)
IRR on Death Benefit @ Standard Mortality	5.31%	5.51%	5.59%

* The data shown is taken from an illustration. It assumes a hypothetical rate of return of 7.00% and is not a representation of expected future results. Unless indicated otherwise, these values are not guaranteed.

If we isolate John’s scenario only, it would sound something like this…”John is going to fund his plan for 20 years, to his age 65, at the rate of $25,700 annually, for a total outlay of $514,000. At that point it is illustrated that he may be able to take $62,100 out of his VUL policy, income tax free every year to his age 90, for a total potential tax-free living benefit of $1,552,500. At his death following the cessation of his income stream, there will be an additional tax-free death benefit paid to his beneficiary. Depending on when John died, the death benefit would be anywhere from $20,000 to $80,000. Based on this scenario, every $1 of after-tax premium would generate over $3 of income tax free living benefits!“

Or another potential scenario might be…….”John is going to fund his plan for 20 years, to his age 65, at the rate of $25,700 annually, for a total outlay of $514,000. At that point it is illustrated that he may be able to take $62,100 out of his VUL policy, income tax free, every year to his age 90. But…if you accept the fact that actuaries are pretty smart people, the odds are that John is going to die about when the actuarial tables say he’s going to die…in 30 years. If that is indeed the case, at his death, he will have already received 10 years of tax-free income for a total of $621,000. Plus, at his death in year 30, it is projected that his beneficiary will receive an income tax free death benefit of approximately $716,000, for total income tax free plan benefits of $1,337,000!! Once again, in summary…every $1 of after-tax premium would generate about $2.60 of income tax free benefits.“

As the actual plan calls for both John AND Pat to have plans, let’s see what potential benefits await our clients when we combine both plans together…

Annual premium	$45,900
Total premium funding to each age 65	$978,600
Annual income tax fee income	$126,800
Total tax-free income to respective mortality ages	$1,656,200
Total tax-free death benefit at respective standard mortality ages	$1,258,000
Total plan tax-free benefits	$2,914,200

As a combined summary…every $1 of after-tax premium would generate about $2.98 of income tax free benefits.

The Benefits

Each spouse has their own life insurance policy that can be tailored to fit their specific financial needs and can be funded based on their specific resources.

At retirement, they can vary their income from the VUL policies to match their needs…sometimes more, sometimes less, annually if necessary.

A new tax-deferred source of money can be converted into potentially tax-free income as a retirement supplement.(3)

At the death of one spouse, the surviving spouse may:

• Use the income tax free death benefit to further supplement their own living needs, or
• Repay any loan that may be outstanding on their own life insurance plan which would…
  • Increase the supplemental retirement income the surviving spouse is taking from his/her own policy, or
  • Extend the time frame to receive such distributions from their policy.