In the high-stakes world of executive retention, flexibility isn't just a luxury: it’s a survival mechanism. Business environments shift, markets oscillate, and the needs of your top talent evolve. If your benefit strategy is anchored to a static, rigid product, you may find yourself drifting off course when the winds of the economy change.
Variable Universal Life (VUL) is often positioned as the "Swiss Army Knife" of corporate-owned life insurance (COLI) and executive benefits. It offers the permanent protection of life insurance, the flexibility of adjustable premiums, and the growth potential of market-based sub-accounts. But with great potential comes great responsibility: and significant risk.
At Schiff Executive Benefits, we believe in reverse-engineering solutions based on your specific goals. VUL is a powerful engine, but it requires a skilled navigator at the helm to ensure it serves the intended purpose of The Perfect Plan®.
What is Variable Universal Life?
At its core, Variable Universal Life is a form of permanent life insurance. Unlike Whole Life, which offers guaranteed cash value growth and fixed premiums, VUL is designed for the business owner or executive who wants more control over how their capital is deployed.
The "Variable" in VUL refers to the ability to invest the policy's cash value in a variety of sub-accounts. These sub-accounts function similarly to mutual funds, allowing you to allocate funds across stocks, bonds, and money market instruments. This means the cash value (and sometimes the death benefit) will fluctuate based on the performance of these underlying investments.
The "Universal" part refers to the flexibility of the policy. Within certain IRS limits, you can adjust your premium payments and even the death benefit amount as your corporate needs change.
The Upside: Why Corporations Choose VUL
For many of our clients, VUL is the preferred vehicle for informally funding Deferred Compensation (NQDC) plans. Here is why:
1. Market-Linked Growth Potential
In a low-interest-rate environment, traditional fixed-income products may not generate the returns necessary to keep pace with the rising costs of executive benefit obligations. VUL allows the corporation to seek higher returns by investing in equities. When the market performs well, the cash value can grow significantly, providing more "fuel" to fund the benefits promised to key leaders.
2. Tax-Deferred Accumulation
One of the most significant advantages of VUL within a corporate environment is the tax treatment. Growth within the sub-accounts is tax-deferred. This allows the company to reallocate investments within the policy without triggering immediate capital gains taxes: a crucial feature for long-term strategies like Corporate Owned Life Insurance (COLI).
3. The Power of the Tax-Free Death Benefit
As we often discuss when addressing the "5 What Ifs," the ultimate cost-recovery mechanism for any executive benefit plan is the death benefit. Because VUL provides a permanent death benefit that is generally received income tax-free by the corporation, it can be used to recover every dollar spent on the executive's retirement, plus the cost of the insurance itself.
The Downside: Understanding the Market Risk
If a product sounds too good to be true, it usually means you haven't looked at the risk profile yet. VUL is not for the faint of heart.
- No Guarantees: Unlike Indexed Universal Life (IUL), which usually provides a "floor" to protect against market losses, VUL is fully exposed to the market. If the sub-accounts lose 20%, your cash value loses 20%.
- The Risk of Underfunding: If market performance is poor, the internal costs of the insurance (which increase as the insured gets older) may eat away at the remaining cash value. This can create a "death spiral" where the policy requires massive cash infusions just to keep it from lapsing.
- Complexity and Management: VUL is not a "set it and forget it" product. It requires active monitoring of investment allocations and regular in-force illustrations to ensure the policy remains on track to meet its goals.
Strategic Fit: When Does VUL Make Sense?
In our nearly 100 years of combined experience, we’ve found that VUL is most effective when it is part of a broader, integrated approach. It makes sense for your organization if:
- You have a long time horizon: VUL needs time (usually 15-20+ years) to weather market cycles and allow the tax-deferred growth to overcome the internal costs.
- You are funding high-level talent: VUL is frequently used in Split Dollar Programs or 401k Mirror plans where the goal is to provide top-tier executives with significant upside.
- You have the discipline for policy management: This is where we come in. At Schiff Executive Benefits, we don't just sell you a policy; we manage the lifecycle of the plan.
The "In the Room" Advantage: Compliance and Expertise
When dealing with VUL and other NQDC funding vehicles, compliance is non-negotiable. Our President, Matt Schiff, wasn't just studying these laws: he helped shape them. As a ranking member of the AALU’s NQDC Committee, Matt worked alongside Michael Goldstein to help draft the regulations for IRC 409A and 101(j).
This "insider" expertise is what separates a standard broker from a strategic consultant. We ensure your VUL-funded programs are designed to comply with the rigorous Top Hat filing requirements and notice/consent rules that govern COLI. You can hear more about these technical nuances in Matt's podcast interview with Dan Hogans, formerly of the IRS Treasury.
Addressing the "5 What Ifs" with VUL
A well-structured VUL policy should act as a safeguard against the uncertainties that keep business owners awake at night:
- Business with a widow: Can the policy provide the liquidity needed for a smooth transition?
- Business buy-out: Is there enough cash value or death benefit to fund a buy-sell agreement?
- Top talent leaving: Does the VUL-funded NQDC plan create enough of a "Golden Handshake" to keep your best people from looking elsewhere?
- Senior exec retirement: Will the policy provide the supplemental income needed to maintain their lifestyle?
- Running out of retirement money: VUL's growth potential is specifically designed to hedge against the risk of outliving your assets.
Restoring Alignment and Retention
At the end of the day, Variable Universal Life is just a tool. Whether it is the right tool for your company depends on your risk tolerance, your corporate culture, and your long-term vision.
Are you looking to build an "Ownership Feel" for your non-owners? Or are you focused on 100% protection for your executive families? We help you navigate these choices by reverse-engineering the solution to fit your unique goals.
If you are ready to see how VUL or other specialized products fit into your firm’s future, let’s start with the facts. Knowing the value of your business and the cost of your "What Ifs" is the first step toward The Perfect Plan®.
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