A Variable Universal Life Insurance Exploration Is About to Get Underway; A Potentially Important Strategy for Boosting Retirement Security?
Written on May 30, 2007
Twenty years ago I was consumed with developing marketing programs that had as their basis the generation of retirement income derived from universal life insurance. My interest in creating ‘private pensions” was ignited following the passage of the Tax Reform Act of 1986, a piece of legislation which, among other things, removed the tax-deductibility on IRAs for many taxpayers.
The premise behind the marketing of this concept was that it was better to forego an income tax deduction on a small amount of money (the contribution) in return for income tax-free access to a much larger amount of money in the future. Even for individuals who were still eligible to deduct IRA contributions it seemed that an alternative to the IRA made sense.
Twenty years ago most people envisioned a future that included higher marginal income tax rates. Therefore a 33% income tax deduction on a $2,000 IRA contribution- a savings of $667- paled in comparison to income tax-free receipt of, say, a $30,000 annual income stream thirty years hence. Income tax-free, you say? Yes. When the cash flow is provided in the form of a loan against the life insurance policy’s cash value, receipt is non-taxable. This is because the loan proceeds are considered an “advance” against the policy’s future (income tax-free) death benefit. Moreover, the death benefit provides a self-completion benefit in the event of the insured’s untimely death.
As you might expect, this attractive mix of benefits led some companies and agents to abuse the concept. Nonetheless, the inherent economic attraction remained.
In 1998 the fundamental economic structure of this type of income tax/retirement savings strategy received unanticipated support and validation when the Roth IRA debuted. Roth-like tax treatment has become quite popular and the concept has been expanded including in the 401(k) marketplace. And why not? It doesn’t cost the Government any revenue today while providing an important incentive to save.
Looking anew at the concept of life insurance-funded strategies for generating supplemental retirement income, I see a potentially significant opportunity for people to strengthen their retirement security while enjoying tax advantages. It may be wonderful opportunity for life insurers, as well. Well-designed strategies funded by variable or indexed universal life insurance plans may offer major growth opportunities.
While all of this may sound interesting, the marketing of such a strategy is fraught with complications. In addition, consumer-oriented insurance policy designs are called for.
In the near future I’ll have more on this topic as I try to more fully develop its potential in light of the retirement security needs of today’s consumers.
©Copyright 2007 David A. Macchia. Al rights reserved.