New tax benefits are attracting high-net-worth clients looking for solutions
by Garry TiltonMr. Tilton is Head of Life Insurance Products, Equitable Financial.
It was a run for the record books: the variable universal life insurance (VUL) market underwent an unprecedented 19 consecutive quarters of growth until investors hit the brakes in late 2022, according to LIMRA. And while the VUL market has since plateaued amid stubborn inflation and rising interest rates, it has remained remarkably resilient.
It’s a fascinating turn of events. VUL insurance allocates a portion of clients’ premiums to variable investment options (informally referred to as “investment funds”), meaning the cash value of the policy is directly tied to the performance of equity and fixed income markets. One would think that after a sanguine January and a disappointing February on Wall Street, consumers would be more likely to avoid wealth management products like VUL altogether.
But this hasn’t been the case. Recent predictions suggest that global VUL market revenue will reach over $178 billion by 2031 according to JC Market Research. After a series of favorable legislative reforms, the VUL plateau may actually start to look more like a speed bump on the way to possible greater expansion.
Here’s how VUL insurance products have been able to weather the tumultuous financial markets of the last year—and why right now may be an opportune time for financial professionals to educate their clients on the benefits VUL insurance offers, making it a powerful strategy increasing the probability of overall successful planning.
Why VUL Insurance Continues To Stay Robust
In late 2021, lawmakers rolled out changes to Section 7702 of the Internal Revenue Service (IRS) Code, which enabled policyowners to allocate more cash to their polices while still reaping tax accumulation benefits and avoiding death benefit increases.
One of the largest impacts was that consumers could purchase the lowest cost life insurance coverage and use their VUL policies to increase premium payments largely tax-free or tax-deferred. These changes may be attracting high earners who have exhausted other tax-advantaged investment options and are looking for other smart ways to save in addition to the generally income tax free death benefit provided by VUL insurance.
Other VUL product enhancements, such as buffered indexed options, track the S&P 500® Price Return Index and have made the risks of VUL products more tolerable to the wider public. These buffers cap investment growth at a certain percentage while offering varying levels of downside protection thus helping to partially protect policyowners from investment losses. Say the value of a VUL policy dipped by 8% – with a -10% buffered indexed option, the policyowner would lose nothing. And if the policy value were to drop 12%, the policyowner would only lose 2%. You can see why this may be an appealing proposition for those looking to ride out the highs and lows of today’s rollercoaster economy. It is important to note that although the buffered options can minimize or eliminate potential investment loss within the policy’s cash value for a given period, there still are insurance charges for the policy and there is still risk of substantial losses once the buffer is exceeded.
VUL insurance also offers greater upside potential than its closest analog, indexed universal life (IUL) insurance. While IUL policy gains are currently capped from 8% to 12%, VUL policies with buffered options have higher cap rates—currently 15%- 20% depending on the buffer and option. On the upside potential that could mean a difference of hundreds of thousands of dollars in cash value by the time a client reaches 65. There are a lot of factors to consider when comparing products and features as part of an overall strategy. The more financial professionals and their clients know about what VUL insurance with buffered indexed options can provide, the more likely it will be considered for overall financial planning.
Now Might Be The Time For Clients To Consider VUL
The VUL insurance market is entering something of a renaissance. While higher interest rates are spurring uncertainty among investors, they are also helping to increase the already-competitive cap rates on VUL policies. That, and the fact that markets are down—the old adage, “buy low, sell high,” may apply here—meaning there’s great potential for clients to boost their retirement portfolios over the coming months. Of course, please keep in mind there is always investment risk including the possible loss of principal invested.
The race to add guardrails to these policies is also well underway. For many years, few (if any) organizations offered buffered indexed options on their VUL products, with the exception of Equitable Financial, which has had a Market Stabilizer Option since 2010. Equitable Financial has, in fact, continued to innovate in this space through the recent rollout of its Market Stabilizer Option II, which offers three protection buffers ranging from -10% to -20% in combination with Step Up and Dual Direction enhancements. The latter two features can provide upside potential even when the market is flat or down, making these policies even more attractive for clients concerned about investment risk.
As other insurance giants begin to introduce their own buffered options, financial professionals should emphasize that these options are flexible. They are available in one-year durations, so that if a client’s confidence in their investment changes, or if their savings priorities shift, so too can their financial strategy. For example, as clients get closer to pulling from retirement savings, they may shift to a buffered option with greater downside protection for added stability and protection.
For those in need of a death benefit, this flexibility can make new VUL policies an attractive option for clients willing to take additional investment risk.
Incorporating VUL Insurance Into Clients’ Investment Portfolios
Many financial professionals remain adamant that permanent life insurance is either too costly or unnecessary. They’ll often suggest that clients just buy term life insurance and invest the difference through some other means, such as 401(k)s, 403(b)s, mutual funds, stocks, or other investment vehicles.
The truth is, VUL insurance may not be the silver bullet for everyone’s financial plan. Yes, they can increase the after-tax value of retirement distributions, and in turn, help ensure that clients don’t outlive their retirement savings.
But financial professionals shouldn’t be overselling these policies in the first place—they are not replacements for retirement plans, and no one should be putting all their assets into a cash-value life insurance policy. They are instead meant to provide a death benefit, supplement those existing plans, shore up the diversity of client portfolios and offer greater financial certainty later in life.
Loans and withdrawals reduce the policy’s cash value and death benefit, may cause certain policy benefits or riders to become unavailable, and increase the chance the policy may lapse. If the policy lapses, is surrendered or becomes a Modified Endowment Contract (MEC), the loan balance at such time would generally be viewed as distributed and taxable under the general rules for distribution of policy cash values. If the policy is a MEC, all distributions (withdrawals or loans) are taxed as ordinary income to the extent of gain in the policy, and may also be subject to an additional 10% premature distribution penalty prior to age 59½, unless certain exceptions are applicable.
A variable universal life insurance contract is a contract with the primary purpose of providing a death benefit. It is also a long-term financial investment that can also allow potential accumulation of assets through customized, professionally managed investment portfolios. These portfolios are closely managed in order to satisfy stated investment objectives. There are fees and charges associated with variable life insurance contracts including mortality and risk charges, administrative fees, investment management fees, front end load, surrender charges and charges for optional riders.
Variable life insurance is sold by prospectus only that contains more complete information about the product, including investment objectives, risks, charges and expenses. Please read the prospectus and consider the information carefully before purchasing a policy or sending money. You should contact your Equitable Distributors representative for a copy of the current prospectus.
S&P 500 Price Return Index — Includes 500 leading companies in leading industries of the U.S. economy, capturing approximately 80% coverage of U.S. equities. The S&P 500 Price Return Index does not include dividends declared by any of the companies included in this index. Larger, more established companies may not be able to attain potentially higher growth rates of smaller companies, especially during extended periods of economic expansion. S&P®, Standard & Poor’s®, S&P 500® and Standard & Poor’s 500® are trademarks of Standard & Poor’s Financial Services LLC (“Standard & Poor’s”) and have been licensed for use by the company. Market Stabilizer Option® II rider is not sponsored, endorsed, sold or promoted by Standard & Poor’s, and Standard & Poor’s does not make any representation regarding the advisability of investing in the Market Stabilizer Option® II rider.
Life insurance products are issued by Equitable Financial Life Insurance Company (Equitable Financial) (New York, NY) or Equitable Financial Life Insurance Company of America, an Arizona stock corporation and are distributed by Equitable Distributors, LLC.
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