Life insurance is a proven tool for high‑net‑worth individuals to create tax‑free estate tax liquidity at death, allowing heirs to pay estate taxes without liquidating core assets like family businesses, real estate, or private stock. Variable Universal Life (VUL) frequently appears in sales presentations, marketed for its investment flexibility and potential for higher returns.
For older policyholders, especially those age 60 and above, the market‑linked nature of VUL’s cash value introduces risks that do not align with the need for reliable, long‑term coverage. Estate planning at this stage is about predictable, guaranteed liquidity on a defined timeline, not about making a leveraged bet on equity markets.
More stable designs like Indexed Universal Life (IUL) and Guaranteed Universal Life (GUL) generally provide better outcomes for estate tax planning, particularly when paired with modern trust structures such as SLATs (Spousal Lifetime Access Trusts) and ILITs (Irrevocable Life Insurance Trusts).
VUL Risks Intensified for Older Owners VUL funnels premiums into subaccounts resembling mutual funds or stock portfolios after substantial initial loads. The selling point: tax-deferred accumulation to offset rising costs and maintain the death benefit. Yet for someone issuing after retirement age, market volatility leaves little margin for error: Just 15-20 years until estate taxes come due.
Sharp downturns can gut cash value, even as cost-of-insurance (COI) charges climb steeply after age 73, often doubling every few years. Return shortfalls lead to policy lapse, with all embedded gains taxed as ordinary income, a devastating outcome for large premium deposits. Lapse rates for VUL exceed 80% in many cohorts, hitting seniors hardest amid escalating COI.
Compounding this are persistent fees: 1-3% annual mortality and expense charges, plus fund expenses, erode rosy projections of 7-8% returns to a net 3-5% IRR, often trailing simple market indexes or fixed-income alternatives. High agent commissions, sometimes consuming half or more of early premiums, further inflate costs, prioritizing sales over performance. Estate planners demand certainty for that death benefit to fund 40% federal taxes above the $15M exemption, not a gamble on market timing.
In contrast, GUL or survivorship UL can lock in coverage to age 121 with guaranteed, level premiums and no market exposure, delivering reliable estate tax liquidity at a fraction of VUL’s long‑term cost and risk.
IUL vs. VUL for HNW Seniors: A Direct Comparison
Both VUL and IUL offer flexible premiums and adjustable death benefits, but IUL’s indexed crediting, with a 0% floor and the option for a No Lapse Guarantee (NLG) rider, more closely matches the estate tax liquidity needs of older high‑net‑worth clients using SLATs or ILITs.
Feature: Growth Mechanism
VUL (Variable UL): Equity subaccounts (uncapped upside/downside)
IUL (Indexed UL): Index crediting (0% floor, 8-12% cap)
Feature: Downside Protection
VUL (Variable UL): None—full market exposure
IUL (Indexed UL): Built in 0% floor
Feature: Fees (Annual)
VUL (Variable UL): Elevated (2-4% incl. M&E + funds)
IUL (Indexed UL): Moderate (1-2% via spreads/caps)
Feature: Lapse Risk (Age 60+)
VUL (Variable UL): Elevated due to volatility + COI
IUL (Indexed UL): Mitigated with NLG (e.g., to age 90)
Feature: Net Returns
VUL (Variable UL): 3-6% after fees
IUL (Indexed UL): 3-6% more consistent
Feature: Estate Liquidity
VUL (Variable UL): Unreliable for tax coverage
IUL (Indexed UL): Dependable if funded adequately
Feature: Oversight Required
VUL (Variable UL): Active portfolio management
IUL (Indexed UL): Hands-off; carrier-managed
IUL Advantages: Principal safeguards endure COI increases; NLG riders secure the death benefit. Tax-free loans enhance retirement planning sans RMDs.
IUL Limitations: Caps constrain high-flyer scenarios; adjustments like participation rates temper gains.
VUL's Niche: Suited to aggressive investors with decades ahead, not seniors prioritizing preservation.
For high‑net‑worth seniors, the priority is simple: ironclad, tax‑efficient liquidity when your heirs need it, not speculative investing inside a life insurance wrapper. Stepping away from the allure of VUL’s illustrated returns and toward GUL or IUL, ideally housed in a well‑structured SLAT or ILIT, offers far greater predictability at a lower long‑term risk.
These designs can be funded through annual exclusion gifts (currently 19,000 USD per recipient, or 38,000 USD for a married couple electing gift‑splitting), lifetime exemptions, or intra‑family loans, creating a dedicated estate tax funding vehicle that does not depend on perfect market timing. Under realistic return assumptions, VUL cash values often stagnate or underperform, while properly designed GUL and IUL policies focus on one job: delivering the death benefit when it matters.
At LegacyBridge, we help clients evaluate existing VUL policies, quantify lapse and tax risk, and compare them to IUL and GUL strategies tailored to their estate plan. Integrating the right policy inside an ILIT or SLAT can transform estate taxes from a forced‑sale event into a funded, tax‑efficient solution.
If you are age 60 or older and relying on life insurance for estate tax liquidity, now is the time to stress‑test your policy. Schedule a confidential review with LegacyBridge to ensure your coverage matches your goals—and that your legacy reaches the next generation intact.
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