VUL versus Variable Annuity for retirement savings

[Papaya]

I can hear everyone shouting, "NEITHER!"

Both of these vehicles have been promoted for their asset protection and tax benefits. Since they are pretty much identical in terms of exemptions from creditors, I am curious how they compare on taxes and expenses. Variable Universal Life (VUL) is funded after-tax, then accumulates tax-free, and distributions (policy loans) are tax free but incur interest charges. They also have a built-in cost of insurance, and maybe some opaque commissions and fees. The variable annuity (VA) is funded after-tax, then accumulates tax-deferred, and distributions of earnings are taxed at income rates. There is no hidden insurance cost, and no interest on policy loans.  The expense ratios of the underlying funds are higher than their equivalents in regular mutual funds (Vanguard's VAs average 0.53% inclusive of all costs).

On paper, The VUL has better tax treatment, but the VA has lower expenses and no interest. How does it shake out in the end? Is there a tax bracket where the two vehicles break even?

As a side question, has anyone found a VUL that has minimal insurance cost and minimal interest on distributions (policy loans)?

[Edit: I don't grammar good]

[The White Coat Investor]

Papaya wrote:

I can hear everyone shouting, “NEITHER!”

Both of these vehicles have been promoted for their asset protection and tax benefits. Since they are pretty much identical in terms of exemptions from creditors, I am curious how they compare on taxes and expenses. Variable Universal Life (VUL) is funded after-tax, then accumulates tax-free, and distributions (policy loans) are tax free but incur interest charges. They also have a built-in cost of insurance, and maybe some opaque commissions and fees. The variable annuity (VA) is funded after-tax, then accumulates tax-deferred, and distributions of earnings are taxed at income rates. There is no hidden insurance cost, and no interest on policy loans.  The expense ratios of the underlying funds are higher than their equivalents in regular mutual funds (Vanguard’s VAs average 0.53% inclusive of all costs).

On paper, The VUL has better tax treatment, but the VA has lower expenses and no interest. How does it shake out in the end? Is there a tax bracket where the two vehicles break even?

As a side question, has anyone found a VUL that has minimal insurance cost and minimal interest on distributions (policy loans)?

[Edit: I don’t grammar good]

Click to expand...

They are not identical. Many states protect cash value life insurance but not annuities. Look up your state laws regarding asset protection.

The main problem with both of these vehicles is the vast majority of them are products designed to be sold, not bought. That said, there are a few "good" examples of both types of vehicles. For example, Vanguard's VAs have relatively low expenses. Jefferson National's are even lower if the account value is high. Among VULs, I've seen some stocked with Vanguard-like and DFA funds, but they're relatively rare. Remember if the investments are inferior, it is unlikely that the tax treatment alone will overcome the additional insurance costs. In fact, if your taxes aren't all that high, even a good VA/VUL may be inferior to a taxable account, from an investment perspective not an asset protection one, even over a long period of time. Tread carefully and realize that when you buy these things, it's like getting married. If you don't stick with it until death, it will get very expensive.