Guaranteed Universal Life Policies can be more expensive than traditional term policies, but they offer a ton of flexibility for business use. They are so powerful because a properly structured GUL can offer 4 different exit strategies.
The basics of a GUL are simple. It is a universal life policy that is structured with a rider that guarantees the death benefit for a certain amount of time. Most commonly this is until age 95 through 121. You can read more about these policies on our guaranteed universal life policy post.
The four main exit strategies are death, illness, key person benefit, or living buy-out. Let’s jump in!
Death of The Insured
Often GULs are used for key-person or buy/sell agreements. Death of the insured is the primary reason for getting the policy. If the insured passes away, it provides the benefit to the beneficiary to move forward. For key-person policies it is capital to help in transition. In buy/sell agreements it is the ability to buy out the deceased’s interest in the business.
Critical Illness / Terminal Illness / Chronic Illness
If you are putting the money into a GUL for business, you should make sure the policy includes Critical Illness, Terminal Illness, and Chronic Illness riders (also known as living benefit riders or accelerated death benefit riders). Not all living benefit riders are designed the same. For more information about this option, check out our living benefit post.
This is a huge deal for this reason: When a person becomes seriously sick, it can take some time to decide what will happen with that person’s position or stake in the business. Even if the person remains involved, they may need time off for healing, family obligations, treatment, or reduced hours.
Here’s a hypothetical. Let’s say Jim and Steve are business owners. They have $500,000 GULs on each-other and Jim gets cancer. He doesn’t know how long he has left.
Option #1: After some discussion, Jim and Steve agree that Jim will remain on with the business. Despite this, Jim wants to take some time off with his family and to start training a replacement. Jim’s sudden time off affects business and causes the company to loose $50,000 and they need another $50,000 in unexpected salary allocations. Steve exercises a $100,000 advance from the GUL to cover these expenses and leave the rest of the $400,000 in the policy for when Jim passes to help fund Jim’s buyout when he passes.
Option #2: Jim decides to leave the company all together and wants his buy-out money to fund his final days. Steve chooses to exercise the full death benefit to buy Jim out and hire a replacement.
As you can see, because of the flexibility, it pays to have a healthy GUL to pull from. If we’ve all learned something from the TV show Breaking Bad it is that critical illness does not always mean that a person will stop working immediately. GULs offer the flexibility to allow multiple exit strategies.
Key-man coverage is the name given to coverage for a person who is a key employee. This is typically a person who’s death would have significant affect on the financial well-being of the business. This affect could be in lost income as well as cost of hiring and training a replacement. This policy can do double duty.
If you take out a GUL on a key-person or key-man in the business, it might be nice to provided the extended coverage as a benefit to the employee after they leave. Promising a benefit like this can be an inexpensive way to provide a tangible benefit to an employee that can cause them to stay longer. If you hire a key person and they stay on board for 20 years to obtain the benefit, you can provide them the policy completely paid up.
That’s right! I said paid up. You can structure a GUL to be paid up early just like a whole life policy. You can structure payments over 20 years or even less if you’d like. That way when they key person retires from the business, they will have a paid up policy that can provide coverage through the age you determined ( for example, age 95, 100, 110, or even 121).
The policy provides the needed coverage while your key person is working and a supplemental benefit at retirement.
The best of the best GUL policies include return of premium riders. These riders return a certain percentage of your premium that varies based on when they are cashed out. Usually you can exercise these riders after 15, 20, and 25 years.
Here’s the concept: let’s say you and your partner start a business as 50/50 partners. You have a productive 20 years and are ready to cash out. You and your business partners were smart and had GUL policies on each other. So far you haven’t needed them. Your partner is able to cash in the policy, collect the premium back, and use it to fund a full or partial buyout.
The amount you can collect in returned premium will be spelled out in the policy so you can plan for your future needs.
The main point here is: options! A GUL will be more expensive than a bare-bones term policy, but the extra funds go to providing added security. Consider how these solutions can provide more security to your business.
The magic of this policy is not in the individual elements. This is the reason that companies are starting to get rid of traditional return of premium policies. Can you take the money you would put into life insurance and try to invest it in your business? Certainly you you could. Maybe, when you get 20 years down the road, what is most important may not be return of premium. The options are the magic. It is disbursing the risk of health. This is exactly where life insurance does beat out investments.
A small investment now provides the right options no matter what comes in the future.