Risk refers to the potential for things to go wrong, resulting in financial loss.
For high-net-worth individuals, managing risk effectively is an essential part of a successful wealth management strategy. However, they often forget or fail to address one of the biggest risks – their mortality.
Life insurance is one of the best ways to address this and to ensure your loved ones are set up financially.
A universal life insurance policy provides cover that lasts your entire lifetime and high death benefits to ensure your loved ones are taken care of financially. It also offers a savings component that you can access while you are alive.
And unlike other life insurance products on the market, you have greater flexibility and control over your policy.
So, is a universal life insurance investment the right move for you?
Below, we break down everything you need to know about universal life insurance.
In this article
What is universal life insurance?
Universal life (UL) insurance is a type of permanent life insurance. Due to the size of these policies and the coverage they provide, they are sometimes known as jumbo life insurance products.
Like whole life insurance, UL provides lifelong coverage for the policyholder. Both also combine a death benefit and a savings or cash value component.
The death benefit is how much is paid out when you die. So, the higher the payout, the more the policy will cost. The other component is the cash value, which is the savings element.
One of the selling points of UL insurance is the cash value growth potential. The cash value grows on a tax-free basis. This means you don’t pay tax on the cash value savings component or interest earned as it grows.
What separates UL and whole life insurance is premium flexibility. UL offers flexible premiums, allowing you to increase or decrease how much you pay.
And while it is recommended that clients commit to annual premiums, they can be lowered, unlike whole life cover.
You also have control over the death benefit level. You can switch between increasing and level death benefits. UL insurance also lets policyholders decrease the death benefit while the policy is active.
How does universal life insurance work?
With universal life insurance, premium payments are split between the cost of insurance (COI) amount and the cash value savings component. There are also some policy charges to consider.
The COI is the minimum premium amount needed to keep the policy active. This covers your death benefit payout and other costs, such as admin fees.
Any more premiums above the COI are added to your cash value. You can also make additional payments to top up this account within reason. There is a cap that means you can’t overfund the policy.
The cash value account earns interest and grows over time. Growth is often tied to stock market performance, so your rate of return can vary. However, there is a zero floor, meaning your cash value balance can never fall because of stock market losses.
Types of universal life insurance
While there are various types of policies on the market to choose from, the two main types are indexed and traditional universal life insurance.
Indexed universal life (IUL) insurance policies have an investment component. The policy earns interest based on the stock market’s performance.
The cash value portion of the policy is set up to track the performance of a particular index, such as the Hang Seng or S&P 500. So, the better the market performs, the better your returns.
You should be aware that indexed UL policies usually have caps and participation rates.
Caps are pretty straightforward. This is the maximum percentage you get, regardless of how well the index performs. So, if the cap is 10% and the market goes up 15%, your returns would remain capped at 10%.
Any gains from the index will be added to your policy based on a percentage. This is referred to as the participation rate, which is set by the life insurance company.
For example, if you have a participation rate of 50%, the index gain is 10%, and your policy’s cash value is $500,000. In this scenario, $25,000 would be added to your cash value (10%x50%x$500,000=$25,000).
Remember, this is the total return before factoring in any administrative charges attached to the policy.
Traditional UL is similar to the option above. However, with this type of policy, you are relying on the performance of the insurance provider’s fund.
Annually, the insurer will declare a crediting rate based on their fund performance for that year. This crediting rate is the amount that is then added to your policy.
The benefits of universal life insurance for high net-worth individuals
Universal life insurance offers several benefits for high-net-worth individuals. Some of these include:
With most other life insurance options, the policy premium costs are fixed. However, most universal life policies have built-in flexibility.
For example, you can choose to increase premium payments above the COI. Doing this adds additional premiums to your cash value, allowing it to benefit from interest.
This premium flexibility allows high-net-worth individuals to customise their policies to meet their financial goals and needs.
Flexible death benefit options
Some UL policies have flexible death benefits. You can choose to increase the death benefit level if you feel you need more coverage or lower the level of coverage and pay less cost of your monthly premiums.
Be aware that you can only add additional death benefits if you take that option from the outset.
With adjustable death benefits, you have more control over your policy than you would with other types of insurance.
Cash value growth
Universal life insurance provides lifetime coverage and allows policyholders the potential to accumulate wealth over time.
The policy’s cash value component grows tax-free and can be accessed through policy loans or withdrawals. You can also use the cash value to cover or supplement premium payments. Although this is often not advised.
Your policy’s cash value can also form part of your retirement planning strategy, as it can provide a source of income when you stop working.
UL policies offer various tax advantages, such as tax-deferred asset accumulation. This means you won’t owe taxes on current earnings or interest.
Also, policies offer tax-free death benefits, meaning your beneficiaries won’t face a hefty tax bill. However, you should seek specialist advice to ensure your policy is structured correctly and benefits from tax-free payouts.
High-net-worth individuals can take advantage of these benefits and use their policies as part of their wider planning strategy.
More financing options
Universal life insurance opens up more financing options, allowing you to borrow money secured against your policy without tax implications. This is called a policy loan.
HNWIs looking to borrow money against their policy can do so through a policy loan. They can also consider premium financing companies and private banks. Interest rates on these loans are typically lower than on personal loans.
Be aware that any outstanding loans when you die will be deducted from the death benefit.
High-net-worth individuals (HNWIs) need to take a different approach to wealth management, including what happens to their assets when they are gone. This is because they often have complex estates with various tax implications to consider.
UL insurance can provide a tax-efficient way to transfer wealth to beneficiaries and cover any estate taxes that may be owed. This can help ensure your loved ones receive the maximum inheritance possible and settle your estate quickly and efficiently.
Universal life insurance Vs other types of life insurance
Life insurance is a key component of a risk management strategy. Having the right policy helps ensure you are prepared and your family will be looked after financially when you are gone.
And while universal life insurance is a fantastic option for a HNWI, there are alternatives. We recommend speaking to a financial adviser to find the right option for you and your needs.
Whole life insurance
This is another type of permanent life insurance policy. Like UI insurance, it provides lifetime protection, a death benefit and a cash value element.
Whole life cover offers:
- A death benefit guarantee
- Guaranteed fixed cash value accumulation
- A consistent level of premiums
However, the premiums are typically higher, and you don’t get the same level of flexibility and control as you would with UI insurance.
As the name suggests, term life insurance provides coverage for a specific term. This is typically for a 30, 20, or 10-year period and offers a death benefit to the policy’s beneficiaries if the policyholder passes away during the coverage period.
Term life insurance is generally less expensive than universal life insurance. It can be a good option if you are looking for coverage for a specific period of time.
But while term life insurance premiums may be lower, there are some drawbacks. For example, there is no death benefit if you pass away after the term expires.
Also, there is no cash component to borrow from or cash in. This means you are more limited than other options, such as a universal policy.
Get the cover you need with Holborn Assets
Universal life insurance can be an effective tool for high-net-worth individuals looking to protect their wealth and ensure their loved one’s financial future.
They provide flexibility that other permanent policies don’t, tax advantages and other benefits.
Whole life insurance
However, before investing in a policy, it’s essential that you understand the product features and limitations to ensure it fits in with your financial plan.
One of the best ways to guarantee that you have the right type of policy and coverage in place is to speak with a financial professional. If you are ready to get started, we can help.
Holborn Assets is an award-winning global financial services company. We provide tailored wealth management solutions to help you reach your financial goals.
Our experts work with some of the leading insurance product providers to ensure you have the right type of coverage in place to meet your needs.
Don’t take any chances. Make sure you have the protection you need by speaking to Holborn Assets. Book a free, no-obligation meeting today and learn how we can help you.
Frequently asked questions
Like whole life cover, universal life insurance is permanent life insurance coverage. This means it stays in place for your entire life as long as you continue to pay your premiums and the policy remains active.
A universal life policy has a savings element that can grow over time. Policyholders also have the flexibility to adjust their premiums and, in some cases, their death benefit.
Both types of cover offer a death benefit and a cash value component you can borrow against. While whole life cover offers more guarantees, it does not have the level of flexibility and control that UL insurance provides.
Universal life insurance is an excellent option for high-net-worth individuals seeking more flexibility from their policy.
UL insurance offers permanent coverage and high death benefit payouts. On top of this, if the policy is structured correctly, the payout is tax-free.
The cash value portion of UL insurance grows on a tax-deferred basis. This means earnings and interest from your cash value won’t be liable for tax.
You can also borrow and make withdrawals from the cash value tax-free. But beware, if you withdraw more than the amount funded by your premiums, the money you take out can be taxed as income.
One of the benefits of universal life insurance is that it allows you to withdraw or borrow against the cash value savings portion of your policy. This makes a UL policy a good option for building savings to access later in life, like when you retire.