The 15 ways universal life insurance is used list includes providing cash for a family and protecting key people in business, as well as more advanced strategies like using premium finance to leverage a universal life policy to generate higher returns.
Let's get started.
Life Insurance to Protect a Family
Buying a life insurance policy is one of the easiest and simplest ways to provide for your family. For high net worth individuals, a universal life insurance policy is a popular choice.
1. Cash for the Family
A cash lump sum payout from a life insurance policy can provide a family with a financial lifeline if the breadwinner passes away.
The cash can protect a family’s lifestyle. It can replace lost income and cover the day to day needs of the family, as well as paying for larger items like school fees.
2. Protect the Family from Creditors
If there are personal loans and real estate loans owing when an individual dies, banks and finance companies will want those debts repaid.
Debts will be part of an estate when an individual dies, and it will be up to the executor of the estate (usually a family member) to pay those debts.
The cash payout from a life policy can pay off loans and protect a family from creditors.
3. Pay Your Wealth Tax
In some countries, over 50% of wealth can be taken upon death to pay for the wealth tax that becomes due. This tax upon death is also known as inheritance tax and becomes payable by the beneficiaries before they receive their inheritance.
The amount that has to be paid depends upon where an individual lives and in which country a person’s wealth is situated. A wealthy family will almost certainly have to pay wealth tax in one, or more, countries given their global asset base.
International Wealth Tax
A list of countries with some of the highest wealth tax rates in the world.
Japan - 55%
South Korea - 50%
France - 45%
United States of America - 40%
United Kingdom - 40%
Spain - 34%
Germany - 30%
Belgium - 30%
Your family or beneficiaries of your estate must pay wealth tax before they can inherit your assets. A cash payout from a universal life insurance policy can help a family pay wealth tax.
4. Tax-Free Returns
Did you know that the cash payout from a life insurance policy is tax-free?*
It's just one of the reasons high net worth individuals buy universal life insurance to protect their family's.
But there are other advantages also.
Tax Facts of a Life Insurance Policy
- A cash payout to your family from a life insurance policy is tax-free^
- The death benefit is paid out by the insurer free of tax
- Tax-efficient growth means a life insurance policy can grow more quickly
- No tax to pay on any premium financing you take which is secured against your policy
* Take tax and legal advice to make sure your policy is structured correctly, so it pays out tax-free
5. Cheap Loans
Need a loan? You can borrow money cheaply secured against a universal life policy. It's called premium financing and is available for life insurance policies.
Private banks and premium finance companies give loans to high net worth individuals looking to borrow against their universal life insurance policies. The life insurance company that you bought the insurance plan from may also give you a loan secured against it.
The best bit is, you can use the loan secured against your policy for anything you like.
If you die with an outstanding loan balance, the policy financier or life insurance company will deduct the loan balance owed from the death benefit before the cash balance is paid out to your beneficiaries.
6. Borrow Other People's Money to Finance Your Life Policy
Borrowing money to buy a universal life insurance policy is a popular strategy promoted by life insurance brokers to clients looking to buy a plan.
Research by Capital for Life found that:
72% of wealthy individuals borrow money to buy their universal life insurance policy
Buying life insurance with a loan is a strategy known as premium financing. Like a real estate loan for buying a home, you need to come up with the deposit yourself, but private banks and premium finance companies will lend you the rest of the money to help you buy your universal life policy. Your life insurance broker will put you in touch with a premium finance lender.
One of the reasons a premium financing strategy has been so popular, particularly over the last ten years, is because returns on the life policy were typically higher than the cost of the loan interest.
But it gets better.
7. Investment Returns Up to 500%
Sounds too good to be true? Well, by leveraging, or borrowing the money to pay the majority of the premium, or cost of your universal life insurance policy, you can skyrocket the returns made by your life policy.
How Leverage Works in Life Insurance
Leverage is the strategy of using borrowed money to increase the returns on your investment.
It's the same technique hedge funds use to make money. But don't think of high risk. We're talking about life insurance here.
If you buy a universal life insurance policy, you can achieve leverage by taking out premium finance. You are borrowing other people's money to invest in the policy and its potential returns.
For example, a standard down payment of 20% translates into a leverage ratio of around 5X. That could equal a 500% return on the underlying life policy returns.
In summary, leverage works in life insurance by magnifying the effect of the policy gains.
8. Maximise Your Life Cover
Buy as much life insurance cover as you can, as young as you can. This maxim is good advice.
But buying a lot of life cover can be expensive. And most people don't want to sell off investments to buy life insurance.
Universal life insurance has the advantage that you can premium finance your policy. You can borrow most of the cost AND still get the life cover you want.
Life Cover WITH NO Finance
For example, you have a budget of $200,000 to spend on life insurance cover. Depending upon a range of factors including your age, smoking status and country you live in, your $200,000 may buy you $600,000.
Life Cover WITH Finance
With your budget of $200,000, a premium finance company may lend you $800,000. You now have $1m of buying power for your life cover.
So, $600,000 x 5 = $3m of life cover. Compare this to the original $600,000 of cover you could afford to buy.
That's a massive 5 X more life cover that you can buy.
Buy as much universal life cover as you need using premium finance to cover the cost.
Don’t forget though you will need to pay interest on your loan and repay the loan.
9. Diversification: Don't Put All Your Investments in One Basket
Diversify your investment - it's a basic rule of investing.
Why? Diversification reduces risk.
It's why high net worth investors have portfolios with a range of assets including shares, bonds and property.
But what about life insurance? Some investment advisors use life insurance to improve investment returns and reduce the risks in a client portfolio.
For example, a typical universal life insurance policy will invest in a wide range of assets. That makes it a diversified investment. And potentially worthwhile including in your portfolio.
Currency diversification is another reason why high net worth individuals buy life insurance policies.
Universal life insurance policies are US dollar-based (US$) based, which is a strong currency, making a life policy attractive to hold as a long term investment.
The US dollar is stable compared to many other global currencies, which also makes a universal life policy attractive to hold as an asset as part of a portfolio.
10. Forced Heirship Rules
Forced heirship rules stop a person deciding how their wealth is to be shared after their death.
When you die, forced heirship rules mean your inheritance will be decided by the law of the country in which you live. Forced heirship takes place in the following countries:
United Arab Emirates
Typically, forced heirship means you must leave a fixed amount of your wealth to individual family members. This can be enforced by local laws, even if it is against your wishes.
A life insurance policy can help high net worth individuals bypass forced heirship rules. But careful planning on how your policy is structured and where you hold it is essential. If done correctly, a life policy can be a great way to leave cash to your loved ones.
11. Political Risk
Political risks affect investors worldwide. In extreme circumstances, a government can confiscate your assets.
One way of protecting your assets is to invest them outside of the country in which you live, also known as 'offshore investing'.
Universal life insurance policies are usually owned offshore in a company or trust, which can be an effective way of protecting your wealth against the risk of confiscation by a government.
12. Give to Charity
Are you thinking of leaving money to charity?
Did you know you can use your life insurance policy to make a philanthropic donation?
You can do this by including your universal life insurance policy in your estate plan and gift the policy payout to a charity of your choice.
It's potentially a great way to provide the charity of your choice with a large cash lump sum that will provide a lasting legacy. It also means your loved ones can inherit the rest of your wealth. But bear in mind, they may still need to pay wealth tax before they can inherit your wealth.
Universal Life Insurance for Business Owners
From the loss of key people to repaying business debts, universal life insurance is used to protect businesses against a range of risks.
13. Key Person Insurance
A key man is somebody whose skills are critical to your business, which means if you lost them, the company would be severely impacted. Examples of key people include high performing salespeople, talented designers or vital software engineers.
Keyman insurance is designed to protect your business from the loss of these crucial people by providing a cash payout if they pass away. A key man insurance cash payout can be used in several ways:
Provide for the family of the deceased employee
Allow a generous financial package to be offered to a suitable replacement key employee who can help the business
Used to pay off business loans, especially if the key person is the business owner. Banks will review business loans upon the death of a company owner.
Provide a large cash lump sum that can be used by the business for cash flow so it can continue to trade.
If the founder dies, the business may be put up for sale. Keeping day to day operations going until a buyer can be found for the business, or a key employee can take over is critical. A payout from a life insurance policy could make all the difference to the business during the sale process.
14. Business Loans
A business will often take on debt in order to grow.
Did you know you can borrow against the cash value of your life insurance policy?
You can buy equipment for your business or use it to grow your company by making key staff hires. Borrowing against your life policy is also likely to be cheaper and quicker than taking debt from a bank. You may be able to secure better terms than those from your bank.
15. Buy Sell Agreement Life Insurance Cover
Buy-sell agreement life insurance is used by many companies that operate a partnership structure. A risk for partnerships is that one of its members passes away. Here is an example checklist of a Buy Sell Agreement planning agreement.
A universal life insurance policy can be used to fund a buy-sell agreement.
The policy cash payout allows the remaining partners to buy the deceased partners shares in the company. The cash generated by the policy can go to the former partners family or beneficiaries in exchange for shares in the partnership.
With billions of US dollars being invested into universal life insurance each year, it's clear that high net worth individuals like this combination of life insurance cover and investment. Universal life insurance has been around since the 1970s and is widely used by professional advisers for a combination of the 15 reasons listed here. Some of the wealth planning strategies discussed are complex, while others are more straightforward.
Whatever your reasons for buying this type of life insurance, you should work closely with your professional advisers and discuss how you want a universal life insurance policy to help you meet your needs and goals.
Capital for Life provides life insurance and premium financing solutions to life insurance brokers, private banks, trust companies, wealth managers and family offices. Capital for Life provides services to advisers and clients in over 200 countries. Want to grow your life insurance business? Contact us today.