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MDRT INSIGHTS

A Tax-Based Approach To Variable Universal Life

If you are like me, you are always searching for ways to distill information and make it as clear as possible for your prospects to understand.That's why I developed a variable universal life, or VUL, selling system that explains how VUL works and why it might benefit them.

The first component of my system is called "The four ways investments are taxed," a chart that gives prospects a complete and simplified one-page explanation of how taxes affect investments.

Getting started

Once I have broken the ice and have some idea of what my prospects' investments and financial plans are, I tell them that I would like to take five to 10 minutes to explain how investments are taxed. As we look at the chart, I tell them we will determine if money is taxed:

  • as it goes into the investment.
  • while it is in the investment.
  • when it comes out of the investment.
  • Involving your client

    About 50 percent of the time I find that before I even get through with the presentation, many prospects will point down to the fourth section and say that is how they would like to have their money taxed. I make sure to tell them that I feel it is important to have a portion of their assets in this area but that they will also have money in other areas.

    The presentation gets them focused on how they can invest or reposition more of their assets into investments that are taxed in the fourth scenario. I find that once they have a better understanding of how investments are taxed, they are very open to learning more about the vehicles that provide them with the best tax advantages.

  • In the first way that investments are taxed, you will notice that:
  • as money goes in, it is taxed off your paycheck, and these funds are called after-tax dollars.
  • while the investment grows, taxes are paid on interest and dividends yearly.
  • when you take the money out, you pay taxes on either short-term or long-term capital gains.
  • In the second category:
    as money goes in, it is taxed off your paycheck, and these funds are called after-tax dollars.
  • the investment grows tax-deferred -no taxes are paid during the growth period.
  • when you take the money out, you pay taxes on either short- or long-term capital gains.
  • In the third category, your money:
  • goes in pre-taxed so taxes are not taken out of your paycheck before entering the investment.
  • grows tax-deferred.
  • is taxed at your income-tax bracket as ordinary income when you take the money out.
  • Looking at the fourth way investments are taxed:
  • after-tax dollars are used.
  • investment growth is tax-deferred.
  • generally the money is accessed taxfree.
  • As we look at the fourth scenario, here's what to say:

    So, let's say that you have invested $4,000 a year over 20 years for a total investment of $80,000. You paid taxes as you went along on $4,000 each year. And, let's say for example, that over 20 years, your money has grown to $500,000. The difference between what you invested - $80,000 - and what you have accumulated - $500,000 - is $420,000, due to compounding interest.

    Now, let's look back at the third category and use the same scenario; but let's say that after 20 years, your investment has grown to $600,000. When you look at your statement after 20 years, how much money do you think you have in your account? $600,000. But, in reality, we are concerned with what we actually have in hand to spend after taxes. So, if we use a 25 percent tax rate - $600,000 X .25 = $150,000 - you have $450,000 left after taxes. You paid $150,000 in taxes - that's a lot of money!

    Looking at the fourth category, using the same scenario, your investment has grown to $500,000 after 20 years. When you look at your statement for 20 years, how much do you think you have? $500,000. And, in reality, you can access your money, taxfree. So, now that you understand the four ways investments are taxed, how would you like your money to be taxed?


  • David L. Goodrich, LUTCF, is a seven-year MDRT member from Richardson, Texas. He is founder of Goodrich Financial Services, an independent brokerage agency specializing in insurance, estate and retirement planning solutions. Disclosure: VUL should be sold [email protected].


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