In our last article we covered the concept of how to use Universal Life Insurance in a Business Succession Plan. The main point was to offer some flexibility in the payment of Life Insurance premiums. A secondary concept was to accumulate cash on a tax-free basis to help fund your retirement in a Business Succession Plan. Now we will discuss three variations of this Universal Life Insurance and examine how they all apply to a business succession plan. First let’s discuss Variable Universal Life.
This flavor of Universal Life is the same as we previously described. It has flexible premium payment, accumulates tax-free cash, provides tax-free income and offers a death benefit to provide liquidity for your business in the event of a premature death. Yet there is a significant difference. Instead of offering a fixed yield, currently in the range of 4.5%, it participates in the gains of the stock market. In short, the Life Insurance industry joins Wall Street. To accomplish this objective, the insurance policy offers various sub accounts. There are too many different sub accounts to list them all but here are the broad asset classes.
U.S. Equities Income Funds Money Markets
International Funds Global Income Funds Sector Funds Commodities Real Estate
One very important factor you must take into consideration is the expenses on these policies. You of course have the regular Cost of Insurance charges. However, there is a new charge to be aware of. Now the insurance company is deducting fees for the management of the various sub accounts. So in effect, there are higher charges or expenses for these types of policies. Nevertheless, the cash value in these policies generally out-perform fixed interest rates. In essence, you have to belief in the long term growth of the stock market to invest in these types of policies.
One notable feature of these policies is its’ transparency. Each month and also in the annual report, you can see a complete breakdown in all the costs and expenses in these plans. In many respects, it is more transparent than your 401k and IRA statements.
Another point to keep in mind is that the various sub accounts are separate for the claims paying ability of the Life Insurance Company. They do support the Death Benefit but keep in mind that the policies’ cash value helps support the Death Benefit of your policy. Thus it is imperative that you keep track, along with your agent, the cash value balance of your account.
In summary, this type of policy offers you these following features.
Flexibility in premium payments
Flexibility in Tax-Free Death Benefits
Tax-Free accumulation of equity assets, participating in the growth of the stock and bond markets
Ability to make lump sum additions (pursuant to IRS guidelines)
Tax-Free withdrawals
To do justice to your Business Succession plan, this is a policy worth consideration.