In our previous discussion we addressed the concept of Universal Life Insurance. While the premium is higher than your Term Life Insurance, it accumulates tax-free monies. For this reason it may an important consideration for many to use this vehicle in a Buy-Sell Plan. At first glance you may say why pay a higher premium when all I want is the death benefit protection. The reason is pure and simple, FLEXIBILITY. As a business owner myself, I love the idea of attacking a problem with a solution that offers me flexibility. That is exactly what Universal Life Insurance affords you. So explain to me how just does this concept of flexibility work in my business for my Business Succession Plan?
After a few years in contributing monies to the Universal Life Insurance plan, you begin to accumulate a cash balance. Fortunately this grows at a fixed rate of return so you do not have to worry about any volatility in the financial markets. Additionally, the cash is tax-free so you need not be concerned with and taxable dividends and or capital gains. Now by having a cash balance, you can perhaps skip a few premiums or even reduce the premiums. Please keep in mind as this is very important. When you skip a few premium payments or reduce the premium payments, this also reduces your cash balance. So you cannot do this indiscriminately and for a long period of time. However, this FLEXIBILITY does exist and in many instances offers the business owner to use the premium dollars for a business opportunity that may appear. From experience in working with business owners, this option is a very appealing one.
Now you may be thinking that it’s not a wise idea to tinker with the annual premium on a Life Insurance policy. As I said above, this is not to be done consistently because you could end up having the policy terminated. But let’s take a closer look at the mechanics of a Universal Life policy to better understand how this concept can work. The Universal Life policy is nothing more than a combination of Whole Life and Term Insurance. The premiums are higher than Term but not as high as Whole Life. In fact, with a good many Universal Life policies, the plans are a Term policy that assesses a higher premium and the difference goes mostly to accumulate a cash balance. Let’s describe it another way. The difference between the TERM premium and the Universal Life premium goes mostly to fund the cash value. Why is this important for the inherent flexibility? The reason is that the primary concern of the Universal Life is the Death Benefit Protection. So by skipping and or reducing the premiums, you still have the Universal Life Death Benefit in force. Thus you are accomplishing what you want the plan to do. This is why its important to have a competent financial planner monitor the plan for you. You may want and need to make withdrawals but at the same time it’s of paramount importance to have the plan in-force should a premature death occur.
Let me add that the best program lies in funding the plan to its’ maximum to accumulate cash value on a tax-favored basis. Not only are you adding to a supplemental retirement plan but also you are giving yourself that added flexibility. Furthermore, within IRS guidelines, you can make additional lump sum deposits that not only enhance your flexibility but also accumulate monies on a very favorable tax-free basis. This enhanced cash value can be used to fund supplemental retirement benefits and or use for a business opportunity.
There are two other forms of Universal Life Insurance that may be more appealing to you. They are Variable Universal Life and Indexed Universal Life. The plan we have been dealing with thus far is the pure vanilla Basic Universal Life Insurance that offers a very competitive fixed rate of return. In the next few articles, we will address the other forms of Universal Life Insurance.