Universal life (UL) and survivorship universal life (SUL) insurance products offer specific advantages for both personal and business uses of life insurance. These products appeal to clients by offering financial protection against premature death, as well as providing income tax-free estate and wealth transfer solutions. They work exceptionally well for business and estate planning purposes, and what follows are some of the reasons why.
Flexibility
Both UL and SUL offer greater flexibility than whole life. After the initial payment, the client can reduce or increase the amount of death benefit (although to increase the amount, medical proof of good health will usually be required). Also, after the initial payment, clients can pay premiums any time, in almost any amount within the policy's required minimums and maximums. These policies do require active management to maintain sufficient funding, especially on universal life products without secondary guarantees.
Choice
Many UL/SUL products now contain multiple rider options which offer clients even greater flexibility and choice. For example, a Supplemental Coverage Rider can give clients the flexibility to add a lower cost layer of death benefit protection while a Guaranteed Insurability Rider gives insureds the ability to increase death benefit coverage in the future.
Business-friendly options
Another option being used today is the Level Term Insurance Rider. It gives clients the option for additional, convertible level term insurance on the person insured under the base amount of the policy. It is typically available on the primary insured or other insured -- this could be a spouse or a business partner. Also, a Change of Insured Rider allows clients who purchase key person insurance the option to "swap out" insureds in the case of personnel departures, without having to purchase an entirely new policy and without upfront loads or surrender charges. Additionally, both UL/SUL offer death benefit proceeds to beneficiaries free of federal and state income taxes.
Let's examine the specific uses of the products in greater detail. For example, universal life insurance can be a great option when looking to transfer a business interest. The first scenario involves transferring the business between partners or from a business owner to key people. The second involves using universal life to fund the transfer of a business to a child or other family member. And the third outlines how SUL can be a critical tool.
Scenario 1 -- UL
Two brothers, Brother A and Brother B, who are 12 years apart in age, are equal owners in multiple businesses worth $10 million. In addition, they have each accumulated significant assets and real estate over the years. As a result, estate taxes will be significant and a burden for both families. Both brothers agree that they do not want their respective spouses becoming owners of the business upon their death with the expectation that the older brother, Brother A, will be the first to die.
In this case, UL can be used as a strategic tool to fund the transfer of the business at the death of either brother. Under a traditional buy-sell, each brother would buy the other brother's interest at the time of his death. While this removes the spousal ownership issue, the downside is that it increases the taxable interest of the surviving brother significantly, both by the initial purchase price as well as any future growth and income from of the business.
However, by using UL to fund a business acquisition trust (BAT) for each family and implementing a stock split that consists of 1% voting stock, which the surviving brother would buy, and 99% non-voting, which the surviving brother's family BAT would purchase, two main goals are met. First, the issue of who controls the business has been erased because the family owns only non-voting stock. Second, the taxable portion of the surviving brother's estate has not increased significantly. Remember, the key here was the UL policy; the most beautifully designed plan in the world will not work unless there is sufficient money to fund the plan at the time the event occurs.
Scenario 2 -- UL
Now let's look at a second scenario. This one outlines how UL can be used to help in the estate planning process when it involves the transfer of a business to a child. While there may be situations in which this option would not work, it can still be a valid solution given the right facts and circumstances. Let's consider the following example:
The business owner is married and has one child. While the owner's spouse is not involved in the operation of the business, which happens to be worth $10 million, the child is. It doesn't make sense for the business owner's wife to take control of the business at the time of the husband's death because the child is expected to take over day-to-day operations eventually. If the wife took ownership, the taxable portion of her estate would be expected to increase significantly over her lifetime due to the son's ability to grow the business. Ultimately, the solution agreed on is to bequest the business to the son at the father's death.
Of the business' $10 million value, approximately $3.5 million will have no estate taxes due. That leaves around $6.5 million. Assuming the tax rate is 45%, approximately $3 million will be the amount of tax due. The goal now is to transfer the business to the son while at the same time allowing him to pay the $3 million in taxes. Again, a UL policy would enable this to happen.
Scenario 3 -- SUL
There are cases, however, in which using survivorship universal life as a lynchpin in the estate plan can be the most effective tool to achieve your goals. For example, SUL can be used to help fund the estate tax at the death of the second spouse. In addition, in some cases, using an SUL product can have a significant benefit for those families who have strong philanthropic objectives.
Typically, families that do have these strong philanthropic ties use a significant portion of their assets to support the various charitable organizations they love. However, they may not want to take money away from a surviving spouse in the process. In this case, SUL can be used to fund a survivorship trust which enables the insureds to leave a significant portion to both the family and to their philanthropic endeavors. In addition, by giving the surviving spouse limited powers of appointment, the survivor is able to decide exactly how much is left to the family and how much is left to the charity.
Whether your clients are seeking efficient business transfer options, considering charitable giving, or simply wanting to ensure that their estate plan factors in all their needs, UL and SUL can provide the flexibility and choice that will help create the right solutions to complete their estate and business plans.
Michael Parker, FSA/MAAA, is Assistant Vice President, Insurance Solutions for Lincoln Financial Group. Dianna Parker, CFP, is Director of Planning for Southern Regional Planning Group, Sagemark Consulting/Lincoln Financial Advisors.
