AAVUL Tax Shield Primer

Let’s see how double A VUL is put together by looking at a couple financial models. Here, a client is in the 35% blended federal and state tax bracket. Assuming a 6% annual return and 1.6% in total costs for the double A VUL policy, your client will earn more in tax savings than the policy’s costs in year six. Emphasizing once again that the tax savings compounds over time, the amount of increased wealth, the tax alpha benefit, increases each year.

At 10 years, your client has $15,000 more wealth than keeping the money in the taxable portfolio, and by year 20, this increases to over $70,000. When viewed as return, you’ve delivered an extra 7.22% in total return; this is the tax alpha benefit.

Do you see the star over the death benefit column at the far right? Double A VUL has a very important life insurance component and that is the death benefit. After breaking even on the tax savings alone, your client also has a highly valuable death benefit. Let’s go back to what a variable insurance product is. The word “variable” is associated with a payout structure that isn’t fixed but variable. For a death benefit, it grows as the variable portfolio grows.

With term and whole life insurance, the death benefit is fixed. What ends up happening over 10, 20, or 30 years is the purchasing power of the death benefit declines with inflation. This can have a severe impact in how your wealth transfer, wealth replacement, and estate plans are executed. Many advisors overlook the importance of paying more into premium to increase term and whole life death benefit amounts in order to keep the required inflation-adjusted value.

You don’t have this issue with Double A VUL. The Double A VUL death benefit increases with the underlying portfolio’s value. With your portfolio guidance and advice as you build, manage, and monitor the Double A VUL portfolio, you will expect a higher return than the insurance company’s fixed income portfolio that backs term and whole life death benefits. This means that double a VUL’s death benefit has built-in inflation protection and it always remains under your direct oversight.

This model keeps all other inputs the same, but increases the tax rate by 5% to a total federal and state blend of 40%. Remember, that each dollar saved in taxes creates wealth and increases the client’s ROI. At higher and higher blended tax rates, more dollars are reinvested into the portfolio and more compounding occurs.

At a higher blended tax rate, your client’s breakeven on all the double A VUL’s expenses is in the 4th year. At 10 years, this high-income client gains an extra $32,000 in wealth, and at 20 years you’ve increased your client’s wealth by over $125,000. Another way to look at double A VUL’s powerful economic benefits is to consider the added value you bring to the portfolio and to your client’s increased after-tax returns.

For example, assume you manage $5 million of this client’s wealth and you charge 75 basis points for doing so. That’s $37,500 a year. In year 11 of this model, the annual tax alpha benefit produced by your Double A VUL portfolio will exceed your overall AUM fee for all the client’s wealth. In other words, your tax alpha services produce more in savings than your entire AUM fee!