Fund Structures in VUL and Insurance-Linked Products: A Strategic Overview


Introduction
Variable Universal Life (VUL) insurance and other insurance-linked products offer
a unique blend of investment potential and tax advantages. At the heart of these
products are various fund structures that provide policyholders with access to
diverse asset classes. This analysis provides a clear comparison of these fund
structures, outlines their strategic benefits, and illustrates the advantages of
leveraging a ‘40 Act Fund to create an Insurance-Dedicated Fund.
Understanding Fund Structures in VUL and Insurance Products
Insurance-linked products utilize several distinct fund structures, each with unique
characteristics, advantages, and use cases:
- Separate Accounts:
Segregated from the insurer’s general assets, allowing policyholders to participate in
investment returns while maintaining asset protection. - General Accounts:
Pooled insurer assets backing guaranteed interest products, offering lower risk but
limited upside. - Insurance-Dedicated Funds (IDFs):
Specialized funds available exclusively within insurance products, providing access
to alternative investments (hedge funds, private equity). - Private Placement Life Insurance (PPLI):
Customized, tax-efficient insurance solutions for high-net-worth clients, often using
IDFs or custom separate accounts. - Exchange-Traded Fund (ETF)-Based Portfolios:
Low-cost, transparent options using exchange-traded funds for diversified market
exposure. - Model Portfolios:
Pre-designed investment strategies offering balanced, diversified portfolios managed
by professionals.
Comparative Analysis of Fund Structures
The following matrix provides a side-by-side comparison of the core VUL fund structures, highlighting their key characteristics:
Detailed Analysis: Separate Account Structures
Separate accounts in VUL and insurance-linked products can take various forms, each offering different levels of customization and control:
Comparing ’40 Act Funds, IDFs, and PPLI
The following matrix provides a side-by-side comparison of the core key characteristics of a ‘40 Act Fund— an investment fund regulated under the Investment Company Act of 1940, a cornerstone U.S. securities law governing the structure and operation of investment companies, which include Mutual Funds and ETFs—alongside IDFs and PPLIs:
Strategic Process: Leveraging a ‘40 Act Fund to Launch an IDF
The following flowchart illustrates the strategic process of transforming an existing ‘40 Act Fund into an Insurance-Dedicated Fund (IDF):
Strategic Advantages of Using a ’40 Act Fund to Create an IDF
Conclusion: Strategic Insights
Understanding the nuances of fund structures within VUL and insurance-linked products
is essential for fund managers, financial institutions, and high-net-worth advisors.
This analysis provides a comprehensive, yet concise breakdown of each structure,
highlighting their regulatory, cost, and investment characteristics.
It also provides a clear, comparative understanding of the various fund structures used
within VUL and insurance-linked products, including the strategic advantages of using
a ‘40 Act Fund structure to create an IDF. Understanding these options empowers fund
managers, insurers, and advisors to design better solutions for their clients.
Leveraging a ’40 Act Fund structure for an IDF can provide the best of both worlds: the
tax efficiency of insurance with the regulatory rigor and transparency of SEC oversight.
While Mezrah Consulting specializes in designing, implementing, and administration of
nonqualified plans funding with Corporate-Owned Life Insurance (COLI), which contain
IDF’s, we can also provide counsel on creating and managing the IDF build process for
institutional clients, fund sponsors, and high-net-worth investors.