Single Premium VL: A Good VA Alternative

When confronted with the choice between selling or purchasing an SPVL or a deferred VA, people often bring up the element of the cost for the "pure" insurance element inherent in the product. This "cost" is not present with a deferred VA.

This is a legitimate point. It is true that an SPVL can be slightly more expensive than a similar deferred VA. However, the cost is not really a significant amount.

Likewise, since we all need life insurance coverage, it is easy to look at the SPVL's cost of insurance as being little more than the ownership of the same amount of term insurance with the premium being paid with pretax dollars–i.e., from the investment gain on the policy's assets, rather than from the after-tax funds that would otherwise have to be used to pay term insurance premiums.

A similar analysis applies to equity index and straight fixed annuities. For both, an analogous life insurance product provides a better tax treatment than with the annuities and enables contract owners to profit from low-cost insurance coverage that is, in effect, paid for with pretax dollars.

But, you may ask, what about the ability to annuitize a deferred VA to get income that cannot be outlived? It's an important point; we always are preaching about the need to include longevity concerns in everyone's financial plans. What should be noted is, most SPVLs (or any types of life policies, for that matter) permit conversion of policy values to annuity payments. Even if an SPVL lacks such a provision, one can do a tax-free exchange of a life policy into an annuity (unfortunately, exchanges in the other direction are not possible under current tax law).

Therefore, if the SPVL's policy values are needed to secure the policy owner's longevity planning needs, an annuity payout program is always available.

A note of caution regarding converting a life policy to an annuity payout option: Annuity payouts are taxable, for the portion of the payout that is taxable, at ordinary income rates. This is a far cry from the life policy's income tax-free distributions on death. Therefore, converting from a life policy to an annuity is not warranted unless absolutely necessary.

The SPVL is an ideal product to provide the flexibility necessary for financial planning, whether for retirement planning or to provide tax-free assets on death. Hopefully, the financial services community will do a better job of making the product available to clients.