- Introduction to Legacy Planning With A Universal Life Policy
- Key Use Cases For Universal Life Policies
- Universal Life Insurance Advantages
- Key Planning Considerations
- Conclusion and Summary
1. Introduction to Legacy Planning With A Universal Life Policy
Business founders and high net worth individuals have unique succession and estate planning requirements. High value life insurance such as universal life policies, also known as permanent life policies, can cost-effectively supplement liquidity for heirs while also providing tax advantages. This guide covers strategies for using high value universal life policies for:
- Funding leadership transitions and buy-sell agreements
- Smoothing the transfer of wealth to the next generation
Properly structured universal life coverage offers several advantages:
- Income tax-free death benefits passed to heirs
- Potential to access accumulating cash value while living
- Protection of proceeds from creditor claims
- Flexibility to adjust coverage and premiums over time
Partnering with ShockProof.me's experienced insurance advisors helps properly incorporate high value life policies as part of comprehensive succession and estate plans. Our guidance and expertise will help maximize the benefits and avoid costly errors.
2. Key Use Cases For Universal Life Policies
Planning Business Leadership Transitions
Founders beginning to contemplate exiting their firm can face a daunting challenge to ensure continuity and maximise inheritance for the next generation. Universal life insurance policies that fund buy-sell agreements are an optimal tool that can enable smooth leadership transitions while keeping the company in the family.
Funding Buy-Sell Agreements
Universal life insurance can provide heirs with the liquidity needed to purchase a departing founder's ownership shares. This prevents the founder's shares from having to be sold to outside entities and allows the company to remain in family control from generation to generation. The tax-free death benefits from the policy also maximize the net inheritance the founder can leave behind.
If structured properly, the insurance proceeds avoid forcing heirs to urgently sell other company assets simply to finance the founder share buyback at the time of their passing. Insurance death benefits passing into a trust provide ready capital accessible right when it is needed to fund the terms of the buy-sell agreement.
Tax-Advantaged Financing
Universal life insurance also offers income tax advantages if structured correctly. Death benefits can pass to the trust as income tax-free proceeds. This is in contrast to using other assets from the founder's estate that would incur income taxes before heirs receive their inheritance. Income tax-free insurance proceeds allow more of the founder's wealth to pass to heirs undiminished by taxes.
Premiums can also be structured as loans to the trust to avoid gift taxes on the premium payments. This prevents erosion of the founder's lifetime gift tax exemption amount. An experienced legal advisor can provide guidance to maximize these tax advantages.
Avoiding Fire Sales
If an unforeseen situation like premature death or impairment of the founder occurs before leadership transition planning is adequately addressed, life insurance policies pay dividends. The income tax-free death benefits provide heirs with immediate liquidity and prevent the need to urgently sell the founder's shares in unplanned "fire sales" simply to raise funds for the heirs' benefit.
Maintaining Family Ownership
Capital from a life insurance policy death benefit can give heirs the financing needed to maintain family control of the company rather than being forced to sell founder shares to outside investors or private equity firms. This ensures the founder can successfully pass the business on to the next generation's stewardship.
Estate Planning for High Net Worth Clients
For wealthy individuals, universal life insurance can be a cost-efficient way to significantly supplement inheritances for heirs. Sizable death benefits are far more economical than attempting to fund the entire inheritance with assets. This allows more wealth to be passed on rather than consumed by taxes and estate expenses.
Supplementing Estates Cost-Effectively
Due to annual IRS limits on tax-deferred retirement accounts and potential estate taxes on large asset balances, life insurance death benefits are usually a far more cost-effective mechanism for leaving behind a sizable inheritance. The insurance death benefit can be structured to cover projected estate tax liabilities, with remaining proceeds boosting heir liquidity.
Quick Access to Liquidity
Unlike many illiquid assets, life insurance provides quickly accessible liquidity for trustees managing estates. Upon the death of the insured, cash is speedily available for any distributions needed from the estate, avoiding the need to urgently sell assets to meet obligations.
Income Tax Advantages
If structured properly with an irrevocable trust as owner and heirs as beneficiaries, life insurance death benefits can potentially avoid income taxes completely when inherited (dependent on jurisdiction). This contrasts with assets like investment portfolios or retirement plans that assess income taxes on distributions to heirs.
Asset Protection and Control
The cash value built up within a permanent life insurance policy and any proceeds payable at death enjoy strong creditor and legal protections if structured correctly. This prevents depletion of the policy assets to settle claims. Proceeds passing to an irrevocable trust are shielded from creditors of heirs as well.
3. Universal Life Insurance Advantages
Universal life policies offer particular advantages making this product uniquely well-suited for business succession and estate planning needs:
Flexible Premiums
Policy owners enjoy flexibility in the amount and timing of premium outlays, as long as sufficient premiums are paid to cover mortality costs and desired expenses. This prevents policy lapse if the insured experiences periods where surplus funds are tight.
Adjustable Death Benefits
Policy owners can choose to scale the death benefit coverage amount up or down as needs and financial circumstances evolve over their lifetime. This adjusts the required premiums accordingly.
Cash Value Options
Cash accumulating in the policy's side account is accessible to the owner via withdrawals or policy loans if supplemental funds are needed for emergencies, opportunities, or to supplement retirement income.
Income Tax-Free Death Benefits
If structured properly with an irrevocable trust owning the policy, death benefit payouts to heirs avoid income tax. This maximizes the amount beneficiaries ultimately inherit.
Lifetime Coverage
Unlike term insurance, universal life policies provide permanent coverage that continues unchanged for the insured's entire lifetime, up to age 120. This ensures liquidity whenever it is needed.
4. Key Planning Considerations
Properly structuring high value universal life policies involves assessing:
Projecting Liquidity Needs
The death benefit and respective premiums should be sized based on a projection of the total liquidity heirs will require after estate taxes and other expenses.
Determining Appropriate Death Benefits
The death benefit should be adequate to cover projected liquidity needs in excess of other inheritable assets, factoring in potential taxes and liabilities.
Selecting Policy Owners and Beneficiaries
To maximise tax advantages and creditor protections, an irrevocable trust with heirs as beneficiaries should own the policy.
Balancing Premiums, Cash Value, and Coverage
With guidance from the life insurance provider, determine the premium schedule required to achieve the desired death benefit while optimizing cash value accumulation within policy limitations.
Withdrawing and Borrowing Cash Value
Assess how accumulating account value could supplement retirement income or provide funds if emergencies or opportunities arise. Understand repayment requirements if borrowing.
5. Conclusion and Summary
- High-value universal life insurance aids succession and estate planning for business founders and high net worth individuals, offering tax benefits, liquidity, and creditor protection.
- They provide liquidity for heirs, preventing the need to sell founder shares to outside entities and maximizing the net inheritance.
- Universal life policies fund leadership transitions, prevent "fire sales," and maintain family ownership.
- For high net worth clients, universal life insurance is cost-effective for inheritance and estate tax coverage.
Contact our expert team now, and let one of our experienced advisors help to ensure you properly structure high value life insurance within your overall succession or estate plan.