Universal Life Insurance: A Flexible Option for High Net Worth Investors

Brian Corley, CIMA®, Senior Managing Director and Portfolio Manager, First Republic Investment Management

November 4, 2015

High net worth investors seeking to diversify the fixed income component of an overall portfolio may choose to consider a universal life (UL) policy. The cash value of the policy performs in a similar manner to a bond, yet is not affected by market movements or fixed income yields. A UL policy’s stable yield and  low correlation to the overall bond market – along with the flexibility inherent within most UL policies -- can give an investor peace of mind when markets get rocky, a personal financial situation changes, or when planning how best to settle an illiquid estate.

A UL Cash Value Acts like an Investment

A UL policy performs similarly to how a fixed income investment might perform, paying a fixed rate of return on the cash value each year.  When utilizing a highly rated carrier, we would encourage investors to consider this to be a relatively conservative investment option.

Unlike a bond, however, a UL cash value is unaffected by short term interest rate movements or fluctuations in the overall investment market. Because of its low correlation to fixed income investments, the addition of a UL policy can help an investor weather a rising rate environment and help to diversify the investors overall fixed income exposure.

Has More Flexibility than a Term Life Policy

Unlike term insurance, a UL contract allows a policy holder to gain access to the cash value of the account for liquidity or cash flow needs. This can be done in three ways:

  • Withdrawal of basis. A policy holder can withdraw the premiums that have been paid into the policy (cost basis). This can be beneficial during times of market fluctuation, when an investor may want to keep an investment portfolio intact to avoid capturing losses or realizing capital gains, or during a personal financial rough patch, when access to additional cash flow is needed.  This type of withdrawal is simply a return of basis and policy holders can also take tax-free income via “policy loans” once the cost basis has been withdrawn.  These loans are designed to be very flexible and very low cost, usually costing .25%-.75% annually.
  • Death Benefit. A tax-free, death benefit can be a substantial planning tool for those with heirs responsible for settling a primarily illiquid estate. A death benefit can also be distributed to an heir or used to avoid the need for probate services or used by dependents that rely on the insureds income to provide lifestyle needs.

Comes With Added Benefits

A UL also has a guaranteed minimum crediting rate, or a bottom rate at which a cash value can continue to accumulate. This can be an attractive benefit when yields are low.

Certain distributions, meanwhile – be they a withdrawal of basis, a loan, or a death benefit – are accessed tax-free and without incurring any tax penalties. Also, if a policy holder’s financial situation has changed dramatically, a policy can be scaled back mid-term to create a lower premium commitment and/or death benefit.

A UL policy is flexible enough to benefit those who seek to maximize a death benefit while minimizing access to cash value or, conversely, to maximize the cash value while minimizing the final death benefit.  As income taxes have become a larger and larger drag on fixed income returns while overall interest rates remain at generational lows, UL policies provide wealth managers with one more tool to help a high net worth client plan a cash flow strategy each year, no matter where the client may be in his or her wealth cycle.

This article is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein.

All analyses and projections depicted herein are for illustration only, and are not intended to be representations of performance or expected results. The results achieved by individual clients will vary and will depend on a number of factors including prevailing dividend yields, market liquidity, interest rate levels, market volatilities, and the client's expressed return and risk parameters at the time the service is initiated and during the term. Past performance is not a guarantee of future results.

Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.

The investment services and products mentioned in this document may often have tax consequences; therefore, it is important to bear in mind that First Republic (or FRIM) does not provide tax advice. The levels and bases of taxation can change. Investors' tax affairs are their own responsibility and investors should consult their own attorneys or other tax advisors in order to understand the tax consequences of any products and services mentioned in this document.

©First Republic Investment Management, 2015