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.

Please note the above discussion is not intended to be inclusive of all tax code sections that may apply. Mezrah Consulting and its affiliates are not tax professionals, and this document should not be considered tax advice or guidance.

For more information, email Mezrah Consulting at connect@mezrahconsulting.com
or call (813) 367-1111. Visit our website at mezrahconsulting.com to learn more.

Who We Are

Mezrah Consulting, is a national consulting firm based in Tampa, Florida, with more than 30 years of expertise in executive benefits and compensation consulting for over 300 companies throughout the U.S. As subject matter experts, we specialize in designing, funding and administrating non-qualified executive benefit plans while uncovering value and mitigating risks. Our proprietary cloud-based fintech platform, mapbenefits®, provides enterprise plan management for plan participants and plan sponsors. Our focus is on sharing ideas that enable companies and key personnel to accumulate and preserve wealth on a tax-favored basis through innovative solutions and protect their business strategies and financial performance.

Confidentiality

These materials may not be shared with benefit consultants, consulting actuaries, insurance brokers, insurance carriers or others without the specific written approval of Mezrah Consulting. These materials are proprietary, must be kept confidential and are subject to an executed NDA. The materials may be shared with your directors, officers, employees and legal and accounting advisors as needed, provided that such persons are informed as to the confidential nature of the materials and directed by you to treat such information as confidential.

Securities offered through Lion Street Financial, LLC. (LSF), member FINRA & SIPC. Investment Advisory Services offered through Lion Street Advisors, LLC (LSA). LSF is not affiliated with Mezrah Consulting. LSF, LSA and Mezrah Consulting do not offer legal or tax advice. Please consult with the appropriate professional regarding your individual circumstances.