Tax alpha is laborious and costly to deliver. Advisor-applied VUL delivers tax alpha in one step.

What is advisor-applied variable universal life (AAVUL)?

Adviser-applied variable life insurance (AAVUL) is a new wealth planning category that uses the same laws and regulations underpinning variable universal life (VUL). Unlike retail VUL with its loads, trailers, surrender charges, high costs, and difficult sales processes, AAVUL strips away these barriers.  AAVUL is institutionally priced (no load; no trailer; no surrender charges; low costs) and allows the financial adviser to be the builder, manager, and monitor of each policy’s underlying portfolio.

(Note:  if an advisor works with an insurance professional, there is a low load and/or low trailer option if the advisor chooses.)

AAVUL enables advisers to meet a wide array of top clients’ wealth planning needs. There are two versions:  private placement VUL (PPVUL) for an advisor’s clients with investable wealth greater than $5 million and registered AAVUL for high-income clients with less wealth.

How does the advisor interact with the policy's underlying portfolio?

Retail VUL and common PPVUL largely remove the advisor from an advisory role, and the assets funding the policy leave the advisor’s AUM oversight.  AAVUL is completely different.

With AAVUL, the advisor is the builder, manager, and monitor of the portfolio.  For PPVUL uses, upon the advisory firm’s approval as a discretionary manager over each client’s AAVUL portfolio, the advisor builds the portfolio with investments approved by the advisory firm’s own investment committee.  It is truly open architecture.  In this way, AAVUL remains integrated into the advisor’s planning and investment execution.

What allows the advisor to be the builder, manager, and monitor of the VUL portfolio?

Investing and compliance technology is licensed to various PPVUL insurance companies.  This technology is tightly aligned with tax code, tax regulations, and precedents from the US tax court.  Given this alignment, the investing technology brings compliant portfolio diversification through the wealth advisor while opening the investment mix to any investment approved by the advisory firm’s investment committee: ETFs, mutual funds, public or private equity, hedge funds, REITs, or separately managed accounts.  This is true open architecture as advisors have come to expect and practice.

What capabilities does the investing and compliance technology offer the wealth advisor?

A wealth advisor building, managing, and monitoring a PPVUL portfolio through one of the PPVUL insurance company partners gains an investing platform fully compatible with a wealth advisor’s existing investment planning.

The advisor can load any investment product approved by the advisory firm’s investment committee.  Then, the advisor can set how the portfolio should be structured.  This includes using various risk factors, performance factors, and market sentiment.  Each set of factors is called an advice model.

A highly advanced optimizer takes the various inputs and produces a full asset allocation down to the product level; just like is done for other investing tasks.

The advisor can apply any number of advice models to the firm’s approved investment mix to view, and, side by side, compare each of the structured portfolios.  The portfolio that best fits with the client’s wealth and investing planning is selected by the advisor and becomes the target portfolio until it is restructured.  Portfolio rebalancing works with the target portfolio’s allocation.

The target portfolio is then executed through the advisor’s chosen custodian and order management system.  After execution, the custody feed for the newly-traded portfolio is compared to the optimized portfolio for compliance purposes. This process ensures that the AAVUL’s tax shield is not pierced from legal or regulatory violations.

Why is AAVUL a much more effective asset location resource than tax-deferred retirement portfolios?

AAVUL gives one-step tax alpha in which the client receives tax-free portfolio income, tax-free growth, tax-free cash access, no alternative minimum tax (AMT) exposure, and a tax-free death benefit.  Therefore, for the tax management services that top clients demand, AAVUL meets these needs like no other solution.

Any investment receives this full tax-free treatment.  Therefore, allocations to municipal bonds have little benefit given the higher after-tax returns achievable with other investment products.  (Note: many clients don’t realize that municipal bonds are still subject to capital gains taxes and private activity bonds are subject to the AMT; this is not the case with an investment product in an AAVUL portfolio.)

Why is AAVUL better than retirement and education portfolios?

Unlike retirement portfolios that are only tax-deferred and carry penalties for unintended uses, AAVUL has no distribution limitations (age or amount), no taxes charged on distributions, and no penalties.  And, unlike Roth IRAs, there are no contribution limits; this is why AAVUL is often called a mega Roth.

An AAVUL policy set up when children are still young brings a much more flexible funding vehicle.  The AAVUL portfolio is open architecture, the portfolio is fully tax-free (instead of being tax deferred), there are no penalties on unused balances, and no stipulations on who can receive education payments.

How does AAVUL's tax-free cash access benefit planning applications?

The policyholder can withdraw invested premium tax free and can access the portfolio’s growth tax free through loans in which the policyholder essentially borrows from him or herself; loans can be up to 90% of the portfolio’s value.  (Note: loans need not be repaid; if there is a loan balance at death, it is netted against the death benefit.)

Long-Term Care:  Since the AAVUL portfolio’s tax savings compound over time, with a long-term horizon in mind, the AAVUL portfolio can be a low-cost supplement to a basic long-term care policy (i.e. one without costly inflation riders or high coverage amounts). The AAVUL’s cash access can fund the long-term policy’s coverage gap.  This flexibility takes away an advisor’s challenge in predicting future care needs beyond basic coverage.

Annuity Income:  Unlike a variable annuity, an AAVUL policy doesn’t have investment restrictions nor expensive riders for coverage such as death benefits or guaranteed income.  Also, the AAVUL policy doesn’t have distribution limits or irrevocable choices.  Through an advisor’s planning practices for HNW clients, an annuity-like income program can be designed into the client’s retirement plan at a lower annual cost than a variable annuity.

Asset Protection:  A VUL policy is segregated from the insurance company’s creditors and the policyholder has a direct contractual claim on the portfolio.  In many states, there are additional legal protections provided to insurance policies that keep the policyholder’s creditors and/or potential litigants from gaining access to the portfolio’s value.  Finally, inside a cost-effective South Dakota, Nevada, Alaska, New Hampshire, or Delaware trust, a wealth client can achieve high caliber asset protection such as is often needed by a business owner or professional services practitioner.

Estate Planning/Wealth Replacement:  Many clients have permanent life insurance (e.g. whole life; universal life, indexed universal life) as an estate planning tool to replace wealth from wealth transfers, to pay projected estate taxes, and/or to benefit beneficiaries.  Unfortunately, for traditional insurance policies such as whole life, the death benefit (or face amount) remains static for the policy’s life.  This has important implications since the death benefit value erodes due to inflation. (Note: while dividends received from the policy can be reinvested to increase the death benefit, this simply increases the policy’s basis.)

With AAVUL, the death benefit tracks the portfolio’s value.  Well diversified portfolios are likely to exceed inflation over time and the death benefit increases in lock step.  An advisor is freed from projecting wealth replacement amounts far into the future, and the advisor has limited maintenance to keep the death benefit’s planning purposes on track.

How can a 1035 exchange benefit a client's wealth plan and investment program?

A client’s existing life insurance policy can be exchanged tax-free for AAVUL.  (Note: a new underwriting may be required.)  A whole life policy is backed by the insurance company’s general account investment performance. This portfolio is beyond an advisor’s oversight.

AAVUL, via a 1035 exchange, can bring the whole life policy’s value directly under the advisor’s investment management. This not only facilitates much better investment integration, but it eliminates inflationary risk of a fixed death benefit (see #7 above).  From the advisor’s perspective, AUM increases while the client benefits from the potential for improved investment performance.

What investment categories best fit AAVUL's tax shield?

The portfolio income and capital gains earned in the portfolio are tax free.  The resulting tax savings compounds over time for an increasing benefit.

Asset location analysis considers two levers that must be considered together:  an investment’s rate of return and the tax rate its income and gains are subject to.

Many advisors think of hedge funds, fixed income, and REITs when considering asset location because of the higher marginal federal and state taxes imposed on the income and/or short-term gains.

Often, to an advisor’s surprise, private and public equity strategies can be even more advantaged inside an AAVUL portfolio.  While the tax rates may be lower via the capital gains tax rate (and the realization of gains is sporadic), the higher ROI means that when gains are realized, the higher proceeds (with no taxes) remaining in the portfolio compound much more quickly. For example, an all equity portfolio that uses the S&P 500 return profile as a proxy for equity returns over, say, 30 years will find the AAVUL’s tax shield benefit to be higher than the tax savings on investments subject to income taxes.  This is true even if the all-equity portfolio realizes gains every four, seven, and ten years (with the biggest benefit the more frequent that gains are realized).

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