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AAVUL: The Better Roth

by | Feb 1, 2017 | Blog | 0 comments

A core premise in setting up a tax-deferred retirement portfolio is the assumption that the retiree’s income tax rate will be lower than the marginal bracket during the working years.  Unfortunately, for high net worth clients (HNW) in retirement, their substantial taxable income from portfolios, pension payments, social security, real estate rental income, board member compensation, and so forth makes the hope for meaningfully lower retirement tax rates unlikely.

Added to this retirement income stream, traditional retirement portfolios with required minimum distributions, may exacerbate these top clients’ overall tax exposure by pushing marginal rates higher, resulting in an even greater tax drag on all retirement income.

Therefore, a top client’s pre-retirement income planning requires more sophisticated strategies.

One common tactic is to convert a traditional IRA into a Roth IRA by paying the deferred taxes now for the benefit of tax-free withdrawals after 59½ (for HNW investors, this is known as a backdoor Roth).  However, as advisors are well aware, the major Roth disadvantage is no further contributions can be made post-conversion above certain income limits: $132,000 (filing separately) and $194,000 (filing jointly).  These income levels are easily reached by an advisor’s top clients. (Note: some employers offer a Roth 401(k) option (allowing for after-tax contributions regardless of compensation up to the annual 401(k) contribution maximum).)

Advisor applied variable universal life (AAVUL) provides all the benefits of a Roth IRA without its limitations.  Consequently, AAVUL must be considered as an advisor’s core pre- and post-retirement income planning solution.

Common Benefits Shared by a Roth IRA and AAVUL

AAVUL carries with it the same important benefits that make a Roth IRA valuable:

  • Availability of a wide array of investment choices enabling flexible portfolio construction
  • Already taxed contributions earn tax-free income and gains, both federal and state
  • Withdrawals of contributions can be made at any time tax free
  • There are no required minimum distributions
  • The portfolio’s value is easy to transfer to heirs
  • Beneficiaries receive the proceeds tax free

Benefits Exclusive to AAVUL

AAVUL’s benefit package eliminates a Roth IRA’s disadvantages for high-income clients:

A Client’s ROI

The comparison diverges even more because AAVUL comes standard with a highly valuable death benefit.  Indeed, the cost difference between an AAVUL policy and a Roth IRA reflects the cost of AAVUL’s death benefit instead of cost differences associated with structures or investments.  For the death benefit’s costs, there is real economic value for wealth transfers, wealth replacement, and charitable planning.  (And, unlike permanent insurance policies such as whole life, the death benefit is inflation resistant since the final amount paid to beneficiaries is a function of the underlying portfolio’s growth.)

While Roth IRA’s set-up costs are low compared to AAVUL’s insurance costs (that provide the death benefit), the full cost-benefit structure must be analyzed.  This analysis considers the ongoing federal and state tax shield – income taxes; capital gains taxes; tax-free cash access – against the policy’s ongoing costs and its unconstrained contribution amounts.

 A Profitable Solution that Compounds

Generally, net of an AAVUL policy’s costs and fees, a family with a blended federal and state tax rate of 35%, 2% premium tax, and an average portfolio return of 6% will earn a positive ROI after six years (see below) and a 40% or higher blended tax rate will breakeven after only a few years.


After breakeven, the tax savings compound year after year, making the cost-benefit ROI unlike any other investment portfolio (and substantially better than a Roth IRA since the investor can shield far more wealth from portfolio taxes).

Considering the likelihood of high retirement income tax rates, the better wealth planning decision for HNW clients is to avoid investments in tax deferred portfolios and corporate deferred compensation plans, pay the taxes due now while cash flow is high, and take the investable amount into AAVUL.  This sets the protected wealth on a tax-free course with compounding gains from the tax savings for decades to come.

Insurance Like It Should Be:  Benefits without Barriers

Advisor-Applied VUL is a vastly different – and more powerful – wealth-planning tool than your past experience may suggest.  You and your clients gain VUL’s high-value benefits but the obstacles that may have prevented you from using it in the past are stripped away.

The new Advisor-Applied VUL.

 It’s low-cost, one-step tax alpha. 

Insurance Like It Should Be

Benefits, without Barriers

You’re most familiar with retail VUL and its drawbacks:
loads; high costs; complex products; investment limitations; a difficult sales process.

Check out our PPVUL and Registered AAVUL partners’ solutions that keep VUL's benefits while removing the barriers.

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