Vul "retirement"

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Mar 19, 2009 1:00 pm

i have a local competitor (ok, not really competitor, just a pain in the arse) selling business retirement plans which consist of VUL's.  i have a couple questions:

 
1.  are employer premiums deductible as expenses for the owner? (i think i know this answer)
 
2.  can employees even pay for these with pre-tax dollars?
 
Mar 19, 2009 1:14 pm
theironhorse:

i have a local competitor (ok, not really competitor, just a pain in the arse) selling business retirement plans which consist of VUL's.  i have a couple questions:

 
1.  are employer premiums deductible as expenses for the owner? (i think i know this answer)
 
Yes, under Section 162 of the IRS Code (to keep the DB tax-free).  But as we all know, there's no such thing as a free lunch.  If used as a way to bonus an executive, the premium will be considered taxable income to the employee.  Same thing if the owner is bonusing himself. 
 
2.  can employees even pay for these with pre-tax dollars?
 
Yes, but the death benefit becomes taxable.  A rather unfortunate result - the power of a permanent, tax-free death benefit FAR outweighs the pennies saved through deducting premium.
 
IIRC, horse, you used to be at the Quiet Company.  You understand how VUL works.  There's no reason you can't go in behind this joker and blow up their plans.  VUL works in a vacuum, but can be a disaster in the real world.  In fact, I'm working on one right now.  At a 10% R/O/R year-over-year, the policy collapses in 26 years.  As we all know, no investment does that.  At a 0% R/O/R, the policy blows up in 20 years.  Basically, this guy has a really expensive 20-year term policy.  FWIW, he's putting in more than the minimum, has a moderate allocation, and is young.  Imagine having this kind of senario with an older person!
Mar 19, 2009 1:58 pm

right, i have no problem competing for the business without the above info, but i also want to now "for sure" beforehand.  i just asked a former colleague of mine, who is still a good buddy, and he believes strongly in this concept.  he told me "If market was up, there wouldn't be a problem" 
 
 

Mar 19, 2009 2:01 pm

yeah, this concept is being sold to rank and file 35 year olds making 40-55K and being promoted as the way the CEO's do it.  i understand this is used for deferred comp stuff, but not in place of a 401K or SIMPLE.  and my experience has shown whole life is used more than VUL for these plans anyway.

Mar 19, 2009 2:32 pm
theironhorse:

right, i have no problem competing for the business without the above info, but i also want to now "for sure" beforehand.  i just asked a former colleague of mine, who is still a good buddy, and he believes strongly in this concept.  he told me "If market was up, there wouldn't be a problem" 
 
 

 
We all know the market doesn't go up in a straight line, but the expenses on VUL do!  I guess there could be cases where VUL has worked, but I haven't seen them.  I've seen plenty that have, or are about to, implode.  Also, why take risk with something that is supposed to be a vehicle to transfer it?  Just never made sense for me. 
Mar 19, 2009 2:39 pm
theironhorse:

yeah, this concept is being sold to rank and file 35 year olds making 40-55K and being promoted as the way the CEO's do it.  i understand this is used for deferred comp stuff, but not in place of a 401K or SIMPLE.  and my experience has shown whole life is used more than VUL for these plans anyway.

 
From what I understand, CEOs own WL, not VUL.  There are group exec life insurance plans offered by companies that use VUL, but I would imagine the senario would be so esoteric that it isn't even a conversation starter.
 
FWIW, you described a portion of my business - younger business owners and professionals who don't make a ton of money now, but will in the future.  I use WL with almost all of them.  Why?  For one, a permanent death benefit will give them so many more options at retirement than flying without it (pension max, CRT, gasp reverse mortgage, etc).  Two, if you believe a portion of your clients' long-term assets should be invested conservatively, there is not a better vehicle than WL insurance.  Three, it self-completes in the event of disability.  I could go on and on, but we'd be here all day.
 
Understand, however, I never discuss policy design until we have determined the amount of coverage.  The death benefit is the most important part of my clients' discussions about life insurance.  Almost always, we do a smaller amount of WL, and a whole crapload of convertible term, then work on converting it to WL in affordable increments. 
Mar 19, 2009 9:01 pm

theironhorse, I don't think that I understand the question.   Who is the owner and beneficiaries on the policy?  In general, it's going to be treated as income.


Here is an example from my practice.  Business owner has 2 kids who work in the business.  He is uninsurable.  A policy is being purchased on the owner's wife.  The kids will be the owner of the policy.  The premium is $30,000.  The business is paying the premiums.  The premium will be deductible to the business.  However, each kid is going to be picking up $15,000 of income.

Mar 19, 2009 9:14 pm
deekay:
theironhorse:

yeah, this concept is being sold to rank and file 35 year olds making 40-55K and being promoted as the way the CEO's do it.  i understand this is used for deferred comp stuff, but not in place of a 401K or SIMPLE.  and my experience has shown whole life is used more than VUL for these plans anyway.

 
From what I understand, CEOs own WL, not VUL.  There are group exec life insurance plans offered by companies that use VUL, but I would imagine the senario would be so esoteric that it isn't even a conversation starter.
 
FWIW, you described a portion of my business - younger business owners and professionals who don't make a ton of money now, but will in the future.  I use WL with almost all of them.  Why?  For one, a permanent death benefit will give them so many more options at retirement than flying without it (pension max, CRT, gasp reverse mortgage, etc).  Two, if you believe a portion of your clients' long-term assets should be invested conservatively, there is not a better vehicle than WL insurance.  Three, it self-completes in the event of disability.  I could go on and on, but we'd be here all day.
 
Understand, however, I never discuss policy design until we have determined the amount of coverage.  The death benefit is the most important part of my clients' discussions about life insurance.  Almost always, we do a smaller amount of WL, and a whole crapload of convertible term, then work on converting it to WL in affordable increments. 



i assume you mean when discussing their insurance needs, not their retirement plan funding from the employer sponsored group retirement plan?

Mar 19, 2009 9:19 pm

i am not trying to make this overly difficult.  your scenario is not the same anonymous.  you ar enot talking about a group retirement plan.
for arguments sake, let's assume it is set up like a normal plan, and the owner does not own and he is not the beneficiary of the contracts (but in most cases the owner does own the policies to maintain control).
my assumption is that if the premiums are paid by the employee, through a bonus, the employee pays taxes on the bonus.  if they are paid pre-tax, the benefit is subject to income tax should said insured die.
if the owner pays premiums they may or may not be deductible, depending on how the plan is set up-whether inside a qualified plan or not.