March 17, 2018

What Are Uses of Universal Life

Some common uses of universal life insurance are:

  • Final Expenses, such as a funeral, burial, and unpaid medical bills
  • Income Replacement, to provide for surviving spouses and dependent children
  • Debt Coverage, to pay off personal and business debts, such as a home mortgage or business operating loan
  • Estate Liquidity, when an estate has an immediate need for cash to settle federal estate taxes, state inheritance taxes, or unpaid income in respect of decedent (IRD) taxes.
  • Estate Replacement, when an insured has donated assets to a charity and wants to replace the value with cash death benefits.
  • Business Succession & Continuity, for example to fund a cross-purchase or stock redemption buy/sell agreement.
  • Key Person Insurance, to protect a company from the economic loss incurred when a key employee or manager dies.
  • Executive Bonus, under IRC Sec. 162, where an employer pays the premium on a life insurance policy owned by a key person. The employer deducts the premium as an ordinary business expense, and the employee pays the income tax on the premium.
  • Controlled Executive Bonus, just like above, but with an additional contract between an employee and employer that effectively limits the employees access to cash values for a period of time (golden handcuffs).
  • Split Dollar Plans, where the death benefits, cash surrender values, and premium payments are split between an employer and employee, or between an individual and a non-natural person (i.e., trust).
  • Nonqualified Deferred Compensation, as an informal funding vehicle where a corporation owns the policy, pays the premiums, receives the benefits, and then uses them to pay, in whole or in part, a contractual promise to pay retirement benefits to a key person, or survivor benefits to the deceased key person’s beneficiaries.
  • An Alternative to Long Term Care Insurance, where new policies have accelerated benefits for Long Term Care.
  • Charitable Gift, where a UL policy is donated to a qualified charity, or the policy owner names a charity as the beneficiary.
  • Charitable Remainder Trust Replacement, where a policy owner wants to replace assets donated to a Charitable Remainder Trust.
  • Life Insurance Retirement Plan, or Roth IRA Alternative. High income earners who want an additional tax shelter, with potential creditor/predator protection, who have maxed out their IRA, who are not eligible for a Roth IRA, and who have already maxed out their qualified plans.
  • Term Life Alternative, for example when a policy owner wants to use interest income from a lump sum of cash to pay a term life premium. An alternative is to use the lump sum to pay premiums into a UL policy on a single premium or limited premium basis, creating tax arbitrage when the costs of insurance are paid from untaxed excess interest credits, which may be crediting at a higher rate than other guaranteed, no risk asset classes (i.e., Certificates of Deposit, US Savings Bonds).
  • Whole Life Alternative, where there is any need for permanent death benefits, but little or no need for cash surrender values, then a current assumption UL or GUL may be an appropriate alternative, with potentially lower net premiums.
  • Annuity Alternative, when a policy owner has a lump sum of cash that they intend to leave to the next generation, a single premium UL policy provides similar benefits during life, but has a stepped up death benefit that is income tax-free.
  • Pension Maximization, where permanent death benefits are needed so an employee can elect the highest retirement income option from a defined benefit pension.