This is what we heard in 1978! We were told there would be no more deduction for policy loan interest.
It’s easy to fall into the naysayer’s pit of despair. Often our clients want to tell us what they have heard, wanting our assurances that the world is changing but not coming to an end. To be clear, there is still no other financial tool that has the business applications of permanent life insurance. Whether it be for funding buy/sell agreements or creating deferred compensation to act as “golden handcuffs” for valued employees-permanent life insurance continues to be a solid solution with flexible applicability.
Simply stated, there’s more to business life insurance than the claims it pays. Today’s life insurance policies cover myriad risks and offer financial advantages that other contracts cannot duplicate. Businesses own life insurance to cover obligations such as deferred compensation, to pay off debt and to indemnify the loss of key employees. Many businesses benefit from the tax, accounting, and cash flow advantages of the product, and own multiple policies on multiple executives. These needs will continue regardless of proposed business tax law changes. To learn more about business tax laws look here.
I believe that variable life insurance is a tool that many of us, as producers, have not used as a focus for the business market. Many of us have overlooked the use of variable life insurance as the perfect solution to myriad business problems. For the situations that require a guaranteed death benefit, guaranteed VUL products make a better solution than guaranteed UL because it offers some cash value flexibility down the road and is still cost effective from contract inception. Most of the true COLI products are based on a variable chassis today because of the carrier pricing rules that make them more efficient for accumulating cash value and also maintaining the needed death benefit. The newer COLI hybrid products are also primarily variable-based for the same reasons. With the addition of index sub-accounts, the options to use these products in a corporate setting are almost endless.
If we will look at all the costs, an accumulation VUL product can provide both the needed death benefit and significant cash value accumulation. For a preferred male between 40 and 55 years of age, the total average annual cost can be less than the total average annual cost of a variable annuity over the same life expectancy.* The annual after-tax investment return is competitive with most other registered and non-registered products, but with a transparency that isn’t available from fixed or indexed products. If there is a premature death, the IRR is obviously significantly higher than that of an investment-only account. With proper positioning, VUL products can have a huge impact on the long-term cash flow planning of any business.
Historically, every time we have seen these products come out of favor, fully funded VUL products end up outperforming our expectations. This is due in great part to the fear and uncertainty that lead to short-term market timing efforts. Today, the new subaccount options and pricing structures built into current VUL products lead to risk mitigation in a down market but continue to have more after-tax growth potential than any other financial asset in the corporate setting. Businesses could get a tax lawyer, to ensure that they are still aligned with the tax laws, new and old, and by using legal advice, businesses could start saving more money. Using companies like sambrotman.com could help to guide businesses in the correct direction when it comes to paying tax, gaining tax returns, and more.
While the Trump administration has promised a “significant” business tax cut, the use of life insurance and specifically VUL as a business planning tool will continue to provide benefits that aren’t available in other products. At the same time, those changes promised for corporate America will lead to a continued increase in earnings, economic recovery and valuation for the equity markets. If the business owner has confidence in economic expansion, VUL will be the most appropriate product for his needs. However, if they are not convinced that the economy will grow, it is even more reason why they should be turning to the guarantees provided exclusively by life insurance.
The one thing we know for sure is that business and personal income taxes and the economy will continue to change. As a result, business owners, employees, and executives will continue to need access to the benefits exclusively available from permanent, cash value life insurance. That need can only be satisfied by life insurance professionals that are willing to help them look for new ways to use the tools that only we can deliver.
*This is based on a hypothetical illustration for a 40-year-old male, preferred non-smoker, 5-pay $20,000 premium with $500,000 face amount. Authorized for broker use only, not to be distributed to the public. The data shown is taken from an illustration, the purpose of which is to show how the performance of the underlying investment accounts could affect the policy cash value and death benet. It assumes a hypothetical rate of return and/or current interest crediting rate and may not be used to project or predict investment results. Unless indicated otherwise, these values are not guaranteed. The illustration for this hypothetical example was run at a gross seven percent, net 6.69 percent return. The underlying sub-account portfolio used in the illustration had a cost of .31 percent and consisted of four index funds and one specialty fund. Compared to an investment only variable annuity with equal premiums, sub-account weightings and return assumptions.