By Dan Schulte, Vice President and Manager, Annuities and Insurance


Recent tax increases are giving an old insurance idea new “life.” High-income earners are looking for new ways to minimize their tax bill when they begin to take distributions.  For these individuals, particularly parents with dependent children, using the tax advantages of variable universal life insurance may be very appealing.

In addition to providing a valuable income tax-free death benefit for beneficiaries, these polices also can provide additional savings in tax-deferred professionally managed subaccounts.  The only funding limits are based on the amount of insurance purchased and the age and health status of the insured (subject to medical underwriting).  As a result policy-owners can deposit more than they need to keep the insurance in force to take advantage of the saving component of life insurance.   This is known as “overfunding” the contract, and could result in substantial tax-deferred tax value accumulation. In addition, the policy owner can access the cash surrender value at any time without being subject to an IRS penalty tax. (as long as the contract is not a *Modified Endowment Contract). This allows the policy owner to access the cash value prior to retirement age.  When distributions begin at retirement, or at any other time, the policy owner has the ability to take cash value income tax-free via policy loans and withdrawals.

Keep in mind, the unique pricing structure associated with life insurance includes a cost-of-insurance charge, surrender charges, and other fees and expenses that are substantially higher than typical investments.  As a result, you should discuss with your financial consultant your current life insurance death benefit needs, and evaluate if Variable Universal Life insurance and the tax advantages associated with it are right for your situation.

*A modified endowment contract (commonly referred to as a MEC) is a tax qualification of a life insurance policy which has been funded with more money than allowed under federal tax laws.  A life insurance policy which becomes a MEC is no longer considered life insurance by the IRS, but instead it is considered a modified endowment contract.  Being considered a MEC changes the order of taxation within the contract for money withdrawn, and may penalize the life insurance owner for withdrawals before age 59 1/2 with a 10% penalty.