Client Scenarios: Applying PPVUL

See the many planning applications that advisor-applied VUL addresses. Below are scenarios representative of the types of clients at your firm.

Retired Widower (Client Scenarios)

Meet Alan, a Retired CEO

RetiredWidower_1400

Background
Alan, the retired CEO of an auto parts company, lives in Indianapolis and is 66 years old. He lost his wife a year ago after a long battle with cancer. The three children and eight grandchildren all live within an hour of Alan’s home, and the extended family enjoys frequent visits to a large lake house three hours away.

Investment Profile
Alan’s company pension pays him $135,000 a year, and he also has two board seats that pay a combined $65,000.

His investable wealth is $6.92 million, 62% ($4.29 million) is in diversified fixed income, 18% ($1.25 million) in municipal bonds, and 20% ($1.38 million) in REITs. The portfolio income pays him $208,000 a year. With his retirement and portfolio income, Alan has an ongoing surplus of $245,000 over his lifestyle budget.

Wealth Planning
After meeting with his wealth advisor, Alan decided to restructure his wealth plan to take care of his needs while also transferring wealth to his three children. It’s important to Alan that the wealth he transfers to his children establish a legacy that can support two generations. His remaining investable wealth will be donated to the American Cancer Society.

The planning priorities are:

  1. Wealth transfer
  2. Minimize taxes
  3. Long-term care
  4. Charitable giving

Investment Plan Execution

Core Tactic

Alan will fund a $1 million PPVUL policy for each of his three children (each paid at $250,000 per year for four years) and set up a charitable trust funded with $3 million.

Planning Priorities PPVUL’s Execution Benefits
Wealth Transfer
  • Each child will be a policyowner funded with $1 million.
  • The municipal bonds and a portion of the fixed income will be liquidated over four years to fund each policy’s premium.
  • Alan’s advisor will set up each PPVUL portfolio after completing a comprehensive wealth plan for each child; Alan will be paying for the initial planning services.
  • There are three stipulations that Alan has made:
  1. The grandchildren will be made beneficiaries of their respective parents’ death benefit.
  2. The portfolio’s value prior to each child’s retirement will be accessed only for education funding or disability.
  3. Each policy is designed to supplement the child’s retirement income, essentially operating as a mega Roth plan.
Minimize taxes
  • The surplus taxable income is eliminated.
  • Alan’s charitable trust provides a deduction in the year of the gift.
Long-term care
  • Alan will use a portion of the charitable trust’s income to fund annual premium payments for a LTC policy.
Charitable giving
  • The American Cancer Society is the charitable trust’s remainder beneficiary.

InsuranceIcon

 

High-Income/Dual Career Family (Client Scenarios)

Meet John & Catherine, Healthcare Successes

HighIncome_935

Background

John and Catherine have been married for twelve years and live in Chicago. They have a son (nine years old) and a daughter (six). John, 45 years old, is the CEO of a publicly-traded, pharmaceutical company; Catherine is a 43-year old cardiac surgeon at a major teaching hospital.

Investment Profile

The family’s combined annual income is $1.35 million and their investable net worth is $5.41 million. The taxable portfolio has 63% in equities ($3.4 million), 14% in government bonds ($1.67 million), 18% in municipal bonds ($0.972 million), and 5% in REITs ($0.27 million).

They own a four bedroom home on the North Shore, and John has options worth $23 million upon exercise.

Wealth Planning

With their income and wealth highly exposed to the health care industry, John and Catherine are especially anxious to build a stable and well-diversified portfolio. John, in particular, wants certainty that their wealth is secure should his company suffer an operational setback.

As a medical professional in a high-risk practice, Catherine is concerned about exposing the family’s wealth to litigants beyond what her malpractice insurance protects.

They want to ensure their children have fully funded college and graduate school expenses regardless of the institution, and, during their empty-nest years, both want sufficient wealth to fund various philanthropic aspirations.

The planning priorities are:

  1. Minimize taxes
  2. Wealth diversification
  3. Long-term security
  4. Funding college
  5. Charitable giving
  6. Wealth protection

Investment Plan Execution

Core Tactic

Invest in a $1 million PPVUL policy for both John and Catherine in a 4-pay structure at $250K per year. The payment structure permits tax-free cash access to the portfolio’s cash value as well as dollar cost averaging the portfolio’s funding to smooth market volatility.

Planning Priorities PPVUL’s Execution Benefits
Minimize taxes
  • • The tax-free structure eliminates taxes on portfolio income and growth.• Any investment receives tax-free treatment allowing for higher returning and higher income investments than possible with municipal bonds.• There are no taxes charged for cash access used to support other planning needs or unforeseen circumstances.
Wealth diversification
  • • The $2 million in total premium payments are funded with methodical selling of municipal bonds ($972,000), government bonds ($750,000), and REITs ($270,000).• The PPVUL portfolio is allocated to investments non-correlated to the equity market generally and the health care industry specifically.• The wealth advisor builds the portfolio from his firm’s approved list, emphasizing strong risk-adjusted returns including an allocation to a hedge fund of funds.
Long-term security
  • • The death benefit is permanent.• The underlying portfolio prevents inflation erosion of the death benefit’s value in later years.• John and Catherine can have any number of beneficiaries for their policies and adjust them as needed.• Death benefit proceeds are tax free to their beneficiaries.
Funding college
  • • Life insurance is not considered in a family’s financial aid calculation.• There are no giving restrictions as with a 529 plan.• No penalties are incurred to transfer balances if the allocated amount is larger than the actual college costs.
Charitable giving
  • • Beneficiaries can be changed to add charities after the two children are independent.• For advanced planning, John and Catherine can use their policies as assets to fund charitable trusts.
Wealth protection
  • • Illinois insurance laws protect the death proceeds and aggregate cash value from creditors as long as the spouse, child, parent, or other dependent of John and Catherine are the beneficiaries.

InsuranceIcon

 

Wealthy Real Estate Investor (Client Scenarios)

Meet Walt & Bernadette, Committed Real Estate Investors

Wealthy_1168

Background

Walt began investing in North Carolina residential real estate back in the late 80s. He would buy, refurbish, and rent homes. As his equity increased, he leveraged his properties and expanded into owning small apartment buildings.

Now 56 years old, Walt and his wife (Bernadette; age 55) are restructuring their wealth plan since their four children are independent; none of the children have chosen to take over the family’s real estate company.

Investment Profile

Walt receives an average of $900,000 in cash distributions each year from his LLC in which he is the general partner. He and Bernadette have a taxable portfolio valued at $3.79 million, 80% of which is allocated to diversified public equities and 20% to private equity. The real estate investment portfolio is worth $38.2 million with a cost basis of $14.1 million.

Wealth Planning

Walt plans to work another 15 to 20 years at which point he and Bernadette want to fund trusts for their children and any grandchildren. Walt’s biggest concern is his highly concentrated positions in real estate, especially given his fears about a replay of the 2008 global liquidity crisis.

Bernadette recently lost her mother after a long stay in a nursing home, and her main focus is a comprehensive long-term-care plan that maintains the lifestyle Walt and she have enjoyed the past ten years.

The planning priorities are:

  1. Wealth diversification
  2. Long-term security
  3. Flexibility for funding trusts
  4. Minimize taxes

Investment Plan Execution

Core Tactic

Invest in a $12 million PPVUL policy in a 4-pay structure at $3 million per year. Two apartment buildings, with a combined $16 million in unrealized gains, will be used as collateral for a bank to fund the premium payments.

Planning Priorities PPVUL’s Execution Benefits
Wealth diversification
  • • The bank loan will be used to fund the premium payments and build a well-diversified portfolio.• The wealth advisor builds the portfolio from her firm’s approved investment list, emphasizing investments uncorrelated to real estate.• The property is still owned as an asset, but Walt’s and Bernadette’s wealth has increased from the funded PPVUL portfolio and is better protected from external economic forces.
Long-term care
  • • A basic, low cost LTC policy (e.g. assisted living; no inflation protection; funding limits; horizon limits) is funded through the family’s annual budget.• To address health care inflation, the PPVUL portfolio’s tax-free growth will serve as the needed inflation protection (i.e. displacing the expensive LTC inflation rider).• Should longevity or care requirements dictate, withdrawals from the PPVUL policy will be used to fund the difference between the LTC policy’s funded care and what is desired.
Flexibility for funding trusts
  • • The policy separately, or in combination with other assets such as real estate property and liquid securities, can be used to fund a variety of trust structures.• An irrevocable life insurance trust can be funded with the existing PPVUL policy; this removes the death benefit from the estate and reduces federal and estate tax exposure.
Minimize taxes
  • • The tax-free structure eliminates taxes on portfolio income and growth.• The unrealized capital gain on the loan’s collateral is deferred until the property is sold, while the resulting PPVUL portfolio immediately gains tax-free status.• There are no taxes charged for cash access used to support other planning needs or unforeseen circumstances.

InsuranceIcon

 

Recent Divorcee (Client Scenarios)

RecentDivorcee1402

Background

Sandra is 49 years old with one child (age 12); she currently does not work. She and her husband divorced last year, and Sandra intends to remain in her Denver home at least until her son graduates from college. When her son goes to high school in two years, Sandra plans to return to work part time as a nurse practitioner, to rekindle the career that has meant so much to her.

Investment Profile

Sandra’s divorce decree provided her with $185,000 in alimony and child support (both will end when her son is 22 years old) and $4.61 million in investable wealth.

Currently, her portfolio is 100% allocated to fixed income. Sandra is responsible for the debt on the home ($670,000 with 14 years left on the mortgage) as well as her son’s college expenses.

Wealth Planning

Sandra’s anxiety about retirement income drives her focus, and it’s her desire to maintain the lifestyle she’s become accustomed to. Given her family history, she expects to live into her 90s and the 40 year horizon is of concern to her.

She will receive approximately $42,000 in social security payments if she begins at age 67, but she lacks any other meaningful retirement income.

Her lifestyle expenses will reduce to $164,000 (inflation adjusted) by the time her son graduates from college, but this requires over $200,000 in gross income, putting her into the 33% federal bracket at current rates.

The planning priorities are:

  1. Education funding
  2. Retirement income
  3. Long-term care
  4. Minimize taxes

Investment Plan Execution

Core Tactic

Since her alimony and child support payments will sustain her for the next 10 years, Sandra will fund a $4 million PPVUL policy at $1 million per year. This will leave her with about $500,000 in a taxable portfolio. This policy will be her primary retirement portfolio and wealth resource for the remainder of her life.

InsuranceIcon

 

advisorfacingAdvisor-Facing
Presentation Description

Why advisor-applied VUL solves client problems and advances your business

clientfacingClient-Facing
Presentation Description

A packaged presentation you can use for one-on-one client meetings

insurancelikeitshouldbefull"Insurance Like It Should
Be" Full Brochure

See how advisor-applied VUL solves a wide range of planning needs for specific client circumstances

insurancelikeitshouldbe2pager"Insurance Like It Should
Be" Two Pager

Get a quick summary of advisor-applied VUL and its many planning applications

vulclientroicalculatorVUL Client ROI
Calculator

Model an advisor-applied VUL policy to see its ROI for your high-income clients

ppvulinactionPlanning Applications
Webinar

Get engaged with advisor-applied VUL in an interactive webinar education session

aw-iconExecuting Webber's Boundaries
through Technology

Private Placement Variable Universal Life (PPVUL)


Advisor-as-Asset
Allocator

Legal and Regulatory Foundation


computerimagePractice Management Blog

rocketimageFinancial Marketing
University