Tier One: LIRP 2.0 - Unlocking the Full Potential of Variable Universal Life Insurance

When Life Insurance Strategies Group is approached by potential clients seeking to determine if they are a fit for private placement life insurance (PPLI), often the conversation turns to retail variable universal life (VUL).  For high-income individuals who have already maxed out traditional tax-advantaged retirement accounts, VUL offers a potential next step. It combines permanent life insurance coverage with the opportunity for tax-deferred investment growth. More than just a death benefit, VUL provides a flexible, dynamic tool for wealth accumulation, risk management, and long-term financial planning.

Understanding How VUL Works

Variable Universal Life Insurance is a form of permanent life insurance designed to last your entire life, provided premiums are paid and the policy is managed properly. What differentiates VUL from other forms of permanent life insurance like whole life or indexed universal life, is the control it gives policyholders over the investment portion of the policy.

When you pay a premium into a VUL policy, part of it covers the cost of insurance and policy expenses. The remainder goes into a cash value account that can be invested in a selection of subaccounts, essentially insurance dedicated fund portfolios that span a range of asset classes, from equities and bonds to more conservative fixed income or balanced strategies.

Unlike a fixed-rate or indexed product, VUL allows you to allocate funds across these investment options, giving you exposure to market returns. This feature can be especially attractive in bull markets, where a well-managed portfolio inside a VUL can experience significant tax-deferred growth.

Flexibility to Fund Based on Life Events

One of the key advantages of VUL is its premium flexibility. During years when income is strong, perhaps after a business sale, a large bonus, or a windfall, you can overfund the policy, increasing the cash value and its growth potential. In leaner years, you may reduce or skip premium payments, provided the policy has enough value to cover its internal costs. This level of flexibility is difficult to match with more rigid products like whole life insurance.

Many high-net-worth clients use VUL as the foundation of a Life Insurance Retirement Plan (LIRP). In this strategy, the policy is structured to accept maximum funding without becoming a Modified Endowment Contract (MEC), which would compromise its tax advantages. Over time, the policy accumulates cash value, which can be accessed tax-free in retirement through loans and withdrawals up to basis.

Accessing Cash Value Strategically

The cash value inside a VUL policy is not just growing behind the scenes; it can be used as a living benefit. Once the policy has built up enough value, you can access it in several ways. Policy loans are a popular strategy because they allow for tax-free access to the cash value without recognizing income. The loan is secured by the policy itself, and repayment terms are flexible. Alternatively, you can take withdrawals, which are tax-free up to the amount you've paid in premiums (your basis), or fully surrender the policy, though that may trigger income tax on the gains. 

Used correctly, this liquidity can provide retirement income, serve as an emergency fund, or even help fund a child’s education or a business opportunity, all while the death benefit remains in place for your heirs.  A policyholder should be aware that if they allow their policy to lapse and that policy has a loan balance, that loan balance will be taxable to the policyholder.

Market Exposure and Investment Control

For clients comfortable with market volatility, VUL can offer a significantly higher upside than general account products like whole life or indexed universal life (IUL). With VUL, there are no performance caps or participation rate limits with the cash value growing or declining based on the performance of the subaccounts selected.

This also means the policyholder assumes the investment risk. Poor investment performance can reduce both the cash value and the long-term viability of the policy. Therefore, ongoing monitoring of the policy’s investment allocation is crucial. Clients should review their VUL policies annually with their advisor, adjusting the allocation based on life stage, market conditions, and evolving goals.

Some modern VUL contracts offer optional riders or features that can provide guarantees or downside protection, giving the policyholder some level of insulation in volatile markets.

Tax Efficiency in an Uncertain Environment

The tax advantages of VUL have become more appealing in light of potential tax law changes and inflation concerns. Premium dollars grow tax-deferred, and when the policy is properly structured and managed, loans and withdrawals can provide tax-free income. Additionally, the death benefit is typically paid income tax-free to beneficiaries.

VUL also benefits from recent changes to life insurance funding rules. The Consolidated Appropriations Act of 2021 modified IRC §7702, allowing more premium to be paid into permanent life insurance contracts without triggering MEC status. This makes it easier to fund a VUL contract efficiently and build a significant cash value faster.

These enhancements are particularly relevant for clients worried about rising taxes or reduced access to traditional tax shelters in the future.

Who Should Consider VUL?

Variable Universal Life Insurance is well suited for individuals with high incomes and a long investment time horizon who want more than just insurance coverage. It's ideal for those seeking flexible premiums, asset diversification, and the ability to supplement retirement income with tax-advantaged access to cash value.

That said, VUL is not a “set-it-and-forget-it” product. It requires careful design and regular oversight. The investment choices, funding strategy, and loan management all impact the policy’s long-term success. If neglected, the policy could lapse, and any outstanding loans could become taxable.

The Right Fit for the Right Plan

Not every client is a candidate for VUL, but for those who are, the benefits can be significant. It offers a unique combination of permanent protection, tax deferral, investment flexibility, and liquidity. For clients who want to be active in managing their long-term financial plan, and who understand the risk/reward trade-offs of market investing, VUL may be a perfect complement to other wealth strategies.

At Life Insurance Strategies Group, LLC, we do not sell products.  We help our affluent individual and institutional clients make decisions involving complex life insurance transactions.  If we can help you, reach out to us at www.lifeinsurancestrategiesgroup.com.