Variable universal life insurance often draws attention for potential tax advantages, though these advantages require careful handling to realize their full benefit:

Tax-Deferred Growth

Any growth in the subaccounts often accumulates on a tax-deferred basis, meaning you don’t pay taxes on gains each year as you might with a taxable brokerage account. This can allow the policy’s cash value to compound more efficiently over time, provided the policy remains in force.

Policy Loans and Withdrawals

Generally, withdrawals up to your cost basis (the total amount of premiums paid) can be taken tax-free in many jurisdictions. Amounts above the cost basis are taxable. Policy loans, on the other hand, can often be accessed tax-free if the policy remains in force until the insured’s passing. If the policy lapses, however, the outstanding loan amount can be considered a distribution, triggering taxes if it exceeds the cost basis.

Estate Tax

Life insurance death benefits may or may not be included in your estate for tax purposes, depending on ownership structures and beneficiary designations. Some individuals place policies in irrevocable life insurance trusts to keep proceeds outside their taxable estate, but this step requires precise legal and tax planning.

Modified Endowment Contract (MEC)

If you overfund a variable universal life policy beyond federal tax law limits, it might be classified as a Modified Endowment Contract. MECs lose some of the traditional tax advantages of life insurance. For instance, withdrawals or loans from an MEC might be subject to different tax treatments. It’s crucial to monitor your premium contributions to avoid unintentionally crossing this line.

Because tax regulations vary widely across jurisdictions and can be intricate, seeking professional guidance helps ensure you structure and manage your policy in a manner that aligns with your tax strategy.