Variable Universal Life Insurance - Tax Advantages

Tax Advantages

• Tax deferred growth of cash surrender values while a policy is in force
• FIFO withdrawal status on premiums paid into the contract
• Income tax free policy loans from policies that are not Modified Endowment Contracts
• Income tax free death benefits (may be subject to estate tax if policy is owned by the insured)

Taxes are the main reason those in higher tax brackets (25%+) would desire to use a VUL over any other accumulation strategy. For someone in a 34% tax bracket (Federal & State), the investment return on the separate accounts may average 10%, and at say age 75 the policy's death benefit would have an internal rate of return of 9%. In order to get a 9% rate of return in an ordinary taxable account, in a 34% tax bracket, one must earn 13.64%. Another alternative is a Roth IRA, because one would get the 10% tax free. The contribution limits on the Roth are $5,000 in 2009, and is normally unavailable to those in the 34% tax bracket. An alternative for this in the 34% tax bracket would be to consider using Variable Annuities which does not limit the contributions and withdraw from it without annuitizing the contract.

Other alternatives for those in the 34% tax bracket that own their own companies would be to consider SEP IRA's, company 401k's or retirement arrangements from a company perspective, or to incorporate and consult a tax specialist.

These numbers assume expenses that may vary from company to company, and it is assumed that the VUL is funded with a minimum face value for the level of premium. The cash values would also be available to fund lifestyle or personally managed investments on a tax free basis in the form of refunds of premiums paid in and policy loans (which would be paid off on death by the death benefit.)