AAVUL is an extraordinary wealth and investment planning tool that brings advisor and client benefits without barriers.

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. AAVUL is also known as private placement life insurance (PPLI) or private placement VUL (PPVUL).  AAVUL is repositioned as an entirely new investing solution for HNW, high-income clients that keeps the advisor in charge of the portfolio design in a fully open architecture platform.

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

Retail VUL and common private placement PPVUL (aka PPLI) 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 AAVU, the advisory firm is approved as a discretionary manager over each HNW, high-income client’s AAVUL portfolio, the advisor builds the portfolio with investments approved by his or her firm’s own investment committee.  It is truly open architecture.  In this way, AAVUL remains integrated into the advisor’s planning and investment execution, and the advisor remains the overseer of the AAVUL assets alongside each client’s other portfolios..

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

Investing and compliance technology is licensed to various AAVUL 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, 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 AAVUL investing and compliance technology offer the wealth advisor?

A wealth advisor building, managing, and monitoring an AAVUL portfolio through one of the Advisable Wealth Engines’ 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 AAVUL 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 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?

Tax-deferred portfolios (IRAs; 401(k)s; deferred compensation) succeed only if there is a tax bracket arbitrage.  This means that the tax bracket in retirement will be lower than the tax bracket during the working years.  For most HNW, high-income clients this tax bracket arbitrage doesn’t exist – the client’s retirement income is exposed to high federal and/or state income tax rates.

When the arbitrage is missing, income withdrawals actually hurt the client’s wealth position.  In other words, tax-deferred withdrawals are taxes as ordinary income.  Absent the arbitrage, the client would have been  better off paying capital gains taxes in the year when they were incurred (i.e. lower than income tax rates) and investing the after-tax amounts in AAVUL.

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.

There are no contribution limits or penalties nor are there any required distributions.  If a client wants to take out $100,000 in one year – tax free – and nothing the next, that’s perfectly fine.  Or, the client can take out money on an ongoing basis like a pseudo annuity (but tax free); AAVUL is fully flexible and supportive of the client’s income planning needs.

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 better 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.  Any unused balances remain in the AAVUL portfolio accumulating tax free income and gains (and compounding) for the child’s long-term income needs.

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

The policyowner can withdraw invested premium tax free and can access the portfolio’s growth tax free through loans in which the policyowner 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.  Especially important, AAVUL withdrawals are tax free.

Asset Protection:  An AAVUL policy is segregated from the insurance company’s creditors and the policyowner has a direct contractual claim on the portfolio.  In many states, there are additional legal protections provided to insurance policies that keep the policyowner’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’s purchasing power 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.)  Permanent insurance is backed by the insurance company’s general account investment performance. This portfolio is beyond an advisor’s planning oversight and has low performance returns.

AAVUL, via a 1035 exchange, can bring the permanent life insurance policy’s cash value directly under the advisor’s investment oversight. This not only facilitates much better investment performance, but it eliminates inflationary risk of a fixed death benefit that loses purchasing power.  Equally important, from the advisor’s perspective, AUM increases while the client benefits from the potential for improved investment performance all with a fully tax-free investing experience.

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 incorporates two levers that must be considered together:  an investment’s rate of return and the client’s blended federal and state tax rates.

Many advisors think of hedge funds, fixed income, and REITs when applying asset location principles 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 equity and high-growth 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 (the average blended federal and state capital gains rate is 28.9% and the realization of gains is sporadic, say, every 4 to 7 years), the higher ROI means that when gains are realized, the higher proceeds (with no taxes) remaining in the portfolio compound much more quickly.  (Note: the more frequently gains are realized, the higher AAVUL’s tax shield benefit will be.)

For example, an AAVUL portfolio allocating a portion of assets to private equity, small cap growth returns, and/or non-US equity will find the AAVUL’s tax shield benefit to be higher than the tax savings solely on investments subject to income taxes (that often have low returns).

What benefits do investment product firms gain by having private wealth clients invest through an AAVUL portfolio?

Investment product firms with private wealth clients often face complaints when tax bills are due.  Usually, these firms are commingling institutional (and tax free) investors with private wealth in the same fund structure (i.e. an LLC for hedge fund and private equity investing).  Institutional investors are enjoyable to serve in a frictionless tax-free structure.

Previously, if a product firm wanted to take advantage of AAVUL’s tax-free benefits, it would create an insurance dedicated fund (iDF) as a clone of a firm’s existing strategy (i.e. a mother strategy). This has proven to be a very ineffective strategy.  IDFs must be set up as a separate legal entity with its own operations, trading, accounting, audits, and portfolio.  This means the performance track record is separate from the mother strategy and the set-up and operating costs are high.

AAVUL makes IDFs obsolete.  The Advisable Wealth Engines investing and compliance technology provides for a portfolio built, managed, and monitored by the private wealth advisor according to the fiduciary standard.  The investments inside the portfolio are open architecture.  Here, any publicly available investment – ETFs, mutual funds, private equity LLCs, hedge fund LLCs, REITs, and/or unit investment trusts – can be allocated in the AAVUL portfolio.

For product firms, this allows the same existing fund – and track record – to commingle AAVUL assets alongside other non-AAVUL investors.  The firm incurs no additional costs or oversight.

Note:  the VUL diversification law (i.e. “817(h)”) requires portfolios that do not use an IDF or variable insurance trust (VIT) structure (i.e. “insurance dedicated” aka the “look-through” rule) to adhere to a diversification safe harbor:  no one investment can be more than 55% of the portfolio; no two more than 70%; no three more than 80%; no four more than 90%.  Therefore, a compliant AAVUL portfolio is a diversified portfolio with a minimum of five investments.

An investment product firm introducing an AAVUL tax-free investment structure to its private wealth client (or advisor) will achieve higher after-tax performance in one step.  Once set up, the AAVUL portfolio structure becomes a highly flexible container for the client’s other investments that will benefit from AAVUL’s tax-free structure.

For example, direct lending and credit-based strategies deliver high returns and low risk, but the tax exposure has prevented wealth advisors from allocations.  AAVUL eliminates these issues.  The client gains a high-income strategy unlike traditional fixed income.

Instead of a portfolio with one IDF (that doesn’t meet a fiduciary diversification standard), the AAVUL fiduciary portfolio becomes the tax-free investing companion to the client’s other wealth sources.

Now, the AAVUL portfolio’s diversification permits each investment to serve its investment role alongside other investments; all of which produce an overall portfolio return benefiting the client for decades.




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