Using Universal Life Insurance with Corporations

This is another guest post by Brian Poncelet who is an insurance specialist and independent certified financial planner (CFP) working in the financial services industry since 1994. Along with insurance, Brian Poncelet focuses on mortgage and retirement planning.

  • Most personal finance enthusiasts will know that Universal Insurance may not be the best deal for everyone.  However, there are circumstances where Universal Life can be useful, namely, if you have a holding corporation.  I contacted Brian regarding a question that a reader had regarding the advantages and disadvantages of using UL with corporations.  Here is what Brian came back with:

At the point in time when the death benefit is paid, the type of plan is actually irrelevant.  A term policy for $1,000,000 is equal to a universal life policy for $1,000,000.  The main advantage to buying universal life (UL) is for the tax incentives that this type of plan offer while policy owner is still alive.

Throughout the life of the UL policy, additional deposits can be made which will accumulate over the years.  These additional deposits are allowed to grow within the policy tax free until death or until such time as the funds are withdrawn.  It is the growth of the assets and the deferral of the taxes (on the growth) that enables the individual to increase his estate value which does result in a larger payout at death.

The business owner can benefit in much the same way through the effective use of a holding company which is typically used to hold the shares in the operating company and store retained earnings not required to run the operating company.  The holdco uses these excess funds to buy the UL policy.  The same growth occurs within the insurance policy and this transfer of funds to buy the insurance essentially reduces the FMV of the holdco for the purposes of calculating capital gains tax due upon death.

Should the operating company ever require capital, the holding company can still access the funds in the policy by taking a policy loan, withdrawing the funds or by using the insurance policy as collateral  to obtain a third party loan which may be tax deductible as an operating expense.

Added value for spouses with estate planning, a joint last to die can be structured to take a greater advantage of the FMV calculation.  On the death of the first spouse, the holding company can elect to receive a fund value payout as a tax-free death benefit.

As an example, business owner Chuck Jones is 55 years old.  His holding company buys a $1,000,000 Corporate Estate Transfer Advantage policy from a large Canadian insurance company where the investments are guaranteed 4% in GICs.  To maximum fund this plan, Chuck deposits $72,157 for the first 5 years of the policy.

The illustration below compares the UL policy to an alternative investment in stocks, bonds and mutual funds at 7% growth.  I have shown what it would look like if Chuck dies in year one through thirty (age 85).  Since the alternative investment at 7% would be taxed at the highest level, the taxes would erode any advantage even with a 3% higher rate of return.  The third column is the net difference difference between the insurance solution and the straight investment solution.  Yes, over time net difference is less significant but after 30 years, the insurance solution offers more money for the heirs in the insurance solution and Chuck has taken less risk with his money.

Comparing Estate Values

Insurance Solution Investment Solution The Corporate Estate Transfer Advantage
Year 1 $1,031,844 $36,094 $995,750
Year 10 $1,142,222 $291,025 $851,197
Year 20 $1,199,942 $537,538 $662,404
Year 30 $1,167,903 $957,815 $210,088

Disclaimer: This article and example have been simplified for the purposes of this illustration.  There are other elements to be considered when considering universal life and holding company planning.  Consult your financial advisor and chartered accountant.

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Brian Poncelet, CFP
8 years ago

Hi Rodney,

You made a great point about London Life, however there is a few other companies that I believe are excellent as well.

Currently, with UL and the low interest rates…”participating” whole life is in fact better in some cases.

rodney
8 years ago

Hey Guys

London life has a great par product called 20 Pay. Which you pays for 20 years at the most. Can be be earlier if you want.

Dividend for 2011 was 6.9%, dividend for 2012 is 6.5%. It was been paying a dividend out since 1886. Beat Universal Life.

Rod

Brian Poncelet, CFP
9 years ago

FT,

If the UL policy is structured correctly, any value will be paid as well as the death benefit tax free.

Right now some whole life policies have more cash value for the same death benefit protection. For similar premiums!

As you are aware insurance companies make their money on interest rates so any one who plans on getting buying now saves on two fronts. Their age (younger the better) and because of interest rates so low (I assume for a long time) prices for Universal Policies have been going up.

So waiting to buy permanent coverage costs more guaranteed.

One may want to review https://milliondollarjourney.com/how-annuities-work.htm again.

As an aside, even today’s market a male looking to buy an annuity (life time payout) at 71 can get over 8.3% guaranteed on his RRIF. I don’t know anybody that rate guaranteed.

Brian Poncelet,CFP
11 years ago

Evolution of Wealth,

Since you are from the US, there is some differences up in Canada. The cash (whole life) values here are lower (first 10 -15 years). Later, years 20 plus our plans look better.

Plus I think you can roll other other cash values form other life plans without paying any taxes into a new plan.

Brian Poncelet,CFP
11 years ago

Rob,

If they are saying 3% is guaranteed… read the contract it should be there.
Manulife does not have wholelife….they did years ago.

rob
11 years ago

hi Brian,

1)you had mentioned a week or so back that Manulife does not have wholelife..

2) the 3% int guarantee by Manulife..do you think the 3% would hold good for all my life..or could they reduce it..

thanks again..

Evolution Of Wealth
11 years ago

Didn’t I already mention participating whole life insurance? It can definitely outperform UL policies. Anyone who truly understands the internal structure and mechanisms will be able to tell you that a good whole life insurance will work better. When designed properly you can get the early cash value out of a whole life very easily. It all comes down to the way in which the policy is funded. I would even argue that today’s whole life policies are more flexible than UL policies. Unfortunately, for the internal design of ULs they are struggling mightily in this financial environment. The dividend interest rates are up around 6.5%-7% right now.

Brian Poncelet,CFP
11 years ago

Rob,

Another idea (depends on your situation) is to consider Participating Whole Life.
If you have a 15 year time frame or more this can sometimes work better than UL.
The investment part is bonds, mortgages and some stocks…MER about .50. Generally UL looks better in the early years but Whole life is better by year 15 plus.

This is complex to go over everything here, but if you want something to read let me know.

rob
11 years ago

hi Brian,

thanks for your learned reply…your posts have set me thinking about safety in UL..when i checked Manulife …//////////////

INTEREST GUARANTEE
The effective annual interest rate for this account is set at least weekly and is guaranteed to be at least:
•90% of the weighted average yield over the past 15 years on current coupon Government of Canada Bonds with terms to maturity of 10 years or more less 2.25%, or
•3%,
whichever is greater
//////

ANNUAL COMPOUND RETURNS (as at February 28, 2010)
This table shows the historical annual compound return of the underlying index and the universal life accounts that are linked to this index.

1 Year 2 Year 3 Year 5 Year Since Inception Date of Inception
UNIVERSAL LIFE ACCOUNTS
Average GIA Account
Security UL (On or after June 23, 2001) 3.100% 3.070% 3.060% 3.060% 3.200% Jan 2002
Security UL (Prior to June 23, 2001) 3.100% 3.070% 3.060% 3.060% 3.200% Jan 2002
UNDERLYING INDEX
Government of Canada Bonds 10yrs or more 3.850% 3.940% 4.090% 4.200% –

Past results are not necessarily indicative of future performance and investment returns will fluctuate.
///////////////////////////////
your inputs on this product..please