Tax Advantages
- Tax deferred growth of cash surrender values while a policy is in force
- FIFO withdrawal status on premiums paid into the contract
- Income tax free policy loans from policies that are not Modified Endowment Contracts
- Income tax free death benefits (may be subject to estate tax if policy is owned by the insured)
Taxes are the main reason those in higher tax brackets (25%+) would desire to use a VUL over any other accumulation strategy. For someone in a 34% tax bracket (Federal & State), the investment return on the separate accounts may average 10%, and at say age 75 the policy's death benefit would have an internal rate of return of 9%. In order to get a 9% rate of return in an ordinary taxable account, in a 34% tax bracket, one must earn 13.64%. Another alternative is a Roth IRA, because one would get the 10% tax free. The contribution limits on the Roth are $5,000 in 2009, and is normally unavailable to those in the 34% tax bracket. An alternative for this in the 34% tax bracket would be to consider using Variable Annuities which does not limit the contributions and withdraw from it without annuitizing the contract.
Other alternatives for those in the 34% tax bracket that own their own companies would be to consider SEP IRA's, company 401k's or retirement arrangements from a company perspective, or to incorporate and consult a tax specialist.
These numbers assume expenses that may vary from company to company, and it is assumed that the VUL is funded with a minimum face value for the level of premium. The cash values would also be available to fund lifestyle or personally managed investments on a tax free basis in the form of refunds of premiums paid in and policy loans (which would be paid off on death by the death benefit.)
Read more about this topic: Variable Universal Life Insurance
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