The following is Part 2 of a two-part series exploring the ins and outs of variable universal life insurance focusing on its guidelines, structure, and potential advantages and/or disadvantages for physician-investors. To read Part 1 in this series, visit PMDLive.com.
The number and type of choices available to a physician-investor utilizing a variable universal life (VUL) insurance policy is dependent on the insurer, but some policies are available with a wide variety of separate accounts, also known as subaccounts. Some insurers offer more than 50 separate accounts with investment styles including very conservative fixed accounts, bond funds, equity funds, highly aggressive sector funds, international funds, and emerging market funds.
Separate accounts are organized as trusts to be managed for the benefit of the insured, and are named because they are kept separate from the general account, which are the other reserve assets of the insurer. They are very much like mutual funds, but have slightly different regulatory requirements.
Major Tax Advantages
Taxes are the main reason those in higher tax brackets (25%+) use VULs over any other accumulation strategy. For someone in the 35% tax bracket, the investment return on the subaccounts may average 10%, and at age 75 the policy's death benefit would have an internal rate of return of 8.5%. To get an 8.5% rate of return in an ordinary taxable account in the 35% tax bracket, one must earn 13.1%. In a Roth IRA, however, one would get the 10% tax-free. But the limits on the Roth are low, and the Roth is unavailable to those in the 35% tax bracket. The break-even point may be for someone in the 15% tax bracket, where if they maxed out their Roth contribution, then in a taxable account earning 10% after tax they would have 8.5%, equal to the internal rate of return on the VUL. 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. If an individual is unable to max fund the VUL, it may be better to use term insurance until able to convert to VUL.
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.
Risks of VUL
The following are points to consider before choosing a VUL:
The following are some general uses of VUL:
A Word of Caution
Seek out those individuals whose compensation is fee-driven as opposed to commission-driven. Most of the time when contract owners purchase these policies they fail to notice that the cash accumulation for the first several years of the contract period is, in many cases, far less than the deposits going into the policy. In fact, I have seen illustrations where the cash accumulation is zero in the first few years of the policy because the agent selling you the policy receives their compensation approximating nearly 100% of the "target first-year premium." Please do your homework before making a long-term commitment to funding such a vehicle.
In the June 2007 issue of Physician's Money Digest there was a misprint in Thomas R. Koskyâ€™s article, "Required Minimum Distribution for Your IRA" found on page 16. In the final paragraph the first sentence should have read: "So, using the charts, Dr. Turner would divide her ending balance of $1,875,530 on December 31, 2006, by 27.4 (years)â€”the life expectancy factor in the Uniform Lifetime table for age 70." The "%" originally printed after 27.4 was a misprint. A corrected version can be found on www.PMDLive.com. Thomas R. Kosky and his partner, Harris L. Kerker, are principals of the Asset Planning, Group, Inc, in Miami, Florida. The company specializes in investment, retirement, and estate planning. Mr. Kosky also teaches corporate finance in the Saturday Executive and Health Care Executive MBA Programs at the University of Miami in Coral Gables, Florida. Mr. Kosky and Mr. Kerker welcome questions or comments at 800-953-5508, or e-mail Mr. Kosky directly at ProfessorKosky@aol.com.