Variable Universal Life: Redefining Retirement Income

At kitchen tables across America, the burning question is–What do we make of the American economy and when are things going to get better? The truth is that the recent rallies in the stock market have baffled all of us and left us looking hard for the answer to this frustrating question.

The market rally offers us hope while it lasts, but mere hope is not enough to recover the investment losses incurred over the past two years. The rising oil and commodity prices, along with higher interest rates are both troubling “telltale” signs that foreshadow even tougher times. And as if these problems are not enough, the massive stimulus packages do not seem to be working either, at least for now.

So where do we go from here? How do we reclaim our retirement? In this article we will discuss a popular insurance product called the Variable Universal Life (VUL) that has been touted as an alternative retirement savings tool for years by many in the financial services industry. I know that the last thing people want to hear today is that they should buy another insurance product, but sometimes bad economic times are the best times for making investments, whether in the stock market, or even in depressed real estate; either of which can payoff big in the future.

A VUL is a type of permanent life insurance whereby the death benefit is paid no matter if or when the insured dies, as long as there is sufficient cash inside the policy to cover for policy costs. VUL’s flexibility allows the policyholder to select the timing and amount of payments within certain contractual framework. When a policyholder pays premiums, the insurance company deducts various costs and invests the rest of the money in separate accounts. Separate accounts allow the policyholder to invest the cash in several combinations of stock and bond funds set to a comfortable yet measured risk-preference. As long as the investments within the policy outperform the internal policy costs, the policy holder can come out ahead and guarantee himself a decent retirement income through tax free withdrawals.

The recent turmoil in the stock market however, has wreaked havoc on the cash values within the VULs. The skeptics are absolutely right when they say that a market downturn can make a poorly designed policy virtually worthless. And, it might take years before the cash values yield net positive returns and thereby make the policy assumptions true once again.

The depressed markets do however offer a unique opportunity for certain investors to look into the VUL as a retirement vehicle. Does this mean that everyone should just go buy a new policy and pitch their 401(K), IRAs and other qualified retirement accounts? The answer is a vehement NO. VUL should only be considered as an option for retirement only after maximizing available alternatives for retirement.

Before you make a decision to buy a VUL it is important to understand the advantages and disadvantages of owning a policy. Important advantages of a VUL are flexibility of premiums and death benefit, tax free investment earnings and tax free withdrawals through policy loans. Some important disadvantages are that they are costlier than other types of life insurance, may lose value in bear markets or with bad investment choices and can be very complex to understand and thereby set wrong expectations.

Whether a VUL suits your retirement needs really depends on your specific situation. It is vital to have a vigorous dialogue with your financial advisor to discuss the pros and cons of buying such a policy for the purpose of retirement planning. It is easy to get carried away by illustrations that show unrealistic linear returns over long periods of time. The stock market, as we all know, does not behave in a linear upward fashion. The last thing you want to do is throw good money in a bad strategy and expect a good outcome.

Amol Nirgudkar, CPA, managing partner of Reliance Consulting LLC and a partner at Reliance Wealth & Trust Partners LLC, can be reached at (813) 931-7258 or by email at

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