Ben Nguyen 
An Introduction to Business-Owned Universal Life Insurance
As a business owner, protecting your company’s future is one of your top priorities. You may already have general liability and property insurance, but have you considered business-owned life insurance?
Purchasing a universal life insurance policy for your company can provide financial stability, growth potential, and income tax advantages. With its flexible premiums and accessibility to cash value, universal life insurance adapts as your business evolves.
This guide will explain everything Canadian business owners need to know about universal life insurance. We’ll cover how it works, costs, pros and cons, and how to purchase the right policy for your company.
What is Business-Owned Universal Life Insurance?
Universal life insurance is a form of permanent life insurance designed to provide lifelong protection. It has two key components – an insurance element that pays out a tax-free death benefit and an investment element that allows cash value to accumulate on a tax-deferred basis.
With business-owned universal life insurance, The death benefit can provide liquidity to continue business operations if a key person passes away.
Here are some of the main features and benefits of business-owned universal life insurance:
- Flexible premiums – You can adjust premium payments according to your budget as long as they stay within a minimum and maximum range. Missed payments can be caught up later.
- Cash value accumulation – Money you don’t use for insurance costs grows tax-deferred in your choice of investment accounts.
- Policy loans and withdrawals – Access a portion of your policy’s cash value for any business purpose if needed. Loans accrue interest but don’t reduce the death benefit.
- Customizable death benefit – Select an amount to help replace lost revenue from the death of an owner or key employee.
- Tax advantages – Premiums are not tax deductible for corporations, but policy loans and withdrawals may be taxable. Death benefits are income tax-free.
Compared to term life insurance, universal life for businesses offer permanent coverage that can adapt as your business grows and changes over time.
Why Businesses Need Universal Life Insurance
There are several important reasons for small, medium and large corporations to consider investing in permanent universal life insurance coverage:
Protection As Your Business Evolves
With guaranteed lifetime coverage, universal life insurance ensures your business will have financial stability long into the future. Term life insurance for business, on the other hand, expires after 10 to 30 years.
You can increase or decrease your universal life-death benefit as your business grows or changes. This flexibility helps maintain adequate protection.
Accessing Cash Value for Opportunities
The money accumulating in your policy’s cash value isn’t just for insurance. You can use these funds for any business purpose via withdrawals and policy loans.
This gives you accessible capital to jump on opportunities like expanding locations, purchasing equipment, or smoothing out financial slow periods. It can also provide supplemental retirement income for owner-operators.
Tax-Advantaged Growth Potential
Universal life insurance offers unparalleled tax advantages for your business:
- Growth of cash value is 100% tax-deferred
- You can take tax-free loans against cash value
- Death benefit payouts are income tax-free
This tax-free compounding outpaces taxable investment accounts over the long term.
The table below summarizes the financial benefits that make universal life insurance a strategic asset for Canadian businesses:
| Benefits | Description |
|---|---|
| Lifelong protection | Guaranteed insurance component covers your business permanently |
| Liquidity | Cash value funds accessible via loans and withdrawals |
| Diversification | Non-correlated asset that cushions market volatility |
| Tax advantages | Tax-deferred and tax-free growth opportunities |
How Business-Owned Universal Life Insurance Works
Now that we’ve covered the basics of universal life insurance let’s look at how it functions on a practical level for business owners.
Paying Premiums
You’ll start by choosing your initial death benefit amount and premium payments. Typically, there is flexibility in paying anywhere between a defined minimum and maximum premium each year.
The portion of your premiums needed to cover the monthly insurance costs is deducted first. The remainder gets deposited into your choice of investment accounts to accumulate as cash value.
If you ever miss a premium, the policy will automatically take withdrawals from cash value to keep the insurance active. This flexibility helps you adapt payments to business budget cycles.
Tax-Deferred Growth
The cash value in your universal life policy grows tax-deferred. You won’t pay taxes on any gains until you access the funds. This enables faster growth compared to taxable investment accounts.
Your business can usually choose from a selection of accounts like guaranteed interest, indexed options, or variable investment funds. Your advisor can help select accounts aligned with your risk tolerance and growth goals.
Accessing Cash Value
As your cash value grows, you have options to access a portion of the funds if needed for business purposes. Here are two methods:
- Withdrawals – Your business receives the net cash value amount withdrawn. This reduces the death benefit, but withdrawals are taxable income.
- Policy loans – You can borrow against the policy with interest charged. The death benefit remains intact, and loans are tax-free up to your cost basis.
Withdrawals are simpler, but policy loans avoid taxes and insurance reductions. Your advisor can explain the pros and cons of each approach.
Payout to the Beneficiary
In the unfortunate event that your insured employee passes away, the named beneficiary (your business) receives the death benefit income tax-free. This tax-free payout can help fund operating expenses, debt repayment, leadership transition costs or other business continuity needs.
As you can see, business-owned universal life insurance is uniquely equipped to provide lifelong protection, tax-advantaged investing, and liquidity when you need it most.
The Pros of Business-Owned Universal Life Insurance
There are many beneficial features that make universal life insurance worth considering for your company.
Adjustable Premiums and Coverage
With flexible premium payments, you can increase or decrease universal life costs to accommodate business budget changes. You can also adjust the death benefit amount up or down when insurance needs to evolve.
This adaptability ensures you always have adequately customized protection. Term life insurance for business locks you into preset premiums and coverage limits.
Tax-Deferred Growth Potential
The cash value in your universal life policy grows tax-deferred. You won’t pay taxes on any gains until you access the funds. This enables faster growth compared to taxable investment accounts.
Your business can usually choose from a selection of accounts like guaranteed interest, indexed options, or variable investment funds. Your advisor can help select accounts aligned with your risk tolerance and growth goals.
Access to Cash Value
Being able to withdraw or borrow from cash value provides your business with a source of liquidity for any purpose. It’s like having a high-yield savings account available for opportunities or emergencies.
This gives you options beyond cutting expenses or acquiring financing when you need operating capital. The funds are yours to use as needed.
For growing companies, universal life insurance provides strategic adaptability and control over your financial picture.
The Cons of Business-Owned Universal Life Insurance
While universal life insurance has many strengths, there are also a few drawbacks to consider:
Costs More Than Business-Owned Term Life Insurance
Business-owned universal life insurance carries higher premium costs than Business-owned term insurance in most cases. The investment component increases long-term value but also increases initial expenses.
For very young or financially constrained businesses, term may be the more budget-friendly option. Universal life makes more sense for established companies with some discretionary income.
Fees and Charges Apply
Insurers levy certain fees and costs for universal life coverage, such as:
- Monthly expense charges
- Mortality and expense risk charges
- Surrender charges if you cancel the policy
These expenses make universal life more costly than some other permanent insurance options. However, the advantages often make the fees worthwhile.
Less Guarantees Than Whole Life Insurance
With guaranteed cash value growth and dividends, whole life insurance offers stronger stability and predictability. Universal life leaves room for investment losses, which could reduce your cash accumulation and death benefit over time.
Businesses wanting ironclad guarantees may favour whole life, while those willing to accept some volatility can benefit from universal life’s flexibility.
Overall the pros tend to overshadow the cons for most business owners. A licensed insurance advisor can help assess if universal life insurance suits your specific situation.
What Does Business-Owned Universal Life Insurance Cost?
The exact cost of universal life insurance for your business depends on several variables. Some key factors impacting your premiums include:
- Company size – Overhead expenses and revenue factor into the amount of coverage you need. Larger companies often require more substantial policies.
- Industry and risk classification – Businesses in higher-risk fields like construction often pay more than administrative or retail companies.
- Financial health – Insurers look at your company’s financial statements and credit profile when underwriting.
- Employee age and health – Premiums are based on the insured individual’s age, medical exam results, and family history.
On average, a healthy 40-year-old business owner may pay around $500 annually for $250,000 of coverage. A 60-year-old executive may pay $2,500 annually for the same amount. Monthly premiums scale up or down according to how much coverage you select.
Working with an independent insurance broker who can shop quotes from multiple carriers is key to finding an affordable universal life insurance plan for your corporation.
How Businesses Can Buy Universal Life Insurance
Purchasing the right business-owned universal life insurance policy takes some due diligence. Here are the steps for buying coverage:
Work With a Commercial Insurance Advisor
A knowledgeable broker understands the range of options and can provide guidance on structuring your policy. They’ll explain variables like target death benefit, premium flexibility, investment accounts, and riders.
Analyze Your Business Insurance Needs
Review your existing coverage and determine if there are any gaps universal life insurance can fill. Factor in long-term business continuity needs and how much cash value you may want to accumulate.
Select Investments Suitable for Your Company
Learn about the types of investment accounts offered with the policy. Choose a conservative or aggressive asset allocation depending on your risk appetite and growth objectives.
Apply and Undergo Medical Underwriting
The insured employee will complete an application detailing medical history. Insurers may request medical exams and records to evaluate overall health.
Once approved, you’ll finalize policy details and set up premium payments. Be sure to name your business as the owner and beneficiary.
Where Businesses Can Buy Universal Life Insurance
Many of Canada’s top insurance companies offer business-owned univeCanada’se insurance policies. Some major providers to consider include:
- Canada Life – Market leader with a wide range of universal life products. Widely recognized for financial strength.
- Manulife – Competitive options from one of Canada’s largest insurers. Strong history and reputation.
- Sun Life – Flexible universal life plans with a solid investment lineup. Digital tools available.
- RBC Insurance – Top financial brand providing personalized service and support.
- BMO Insurance – Options from a leading bank-owned insurance provider.
An experienced broker will present products from multiple insurers to help you find the right fit based on your priorities, such as budget, growth potential, and ease of management.
Claiming a Business-Owned Universal Life Insurance Benefit
In the unfortunate event of an insured employee’s passing, here is the process for your business to claim the death benefit:
- Gather documentation, including the policy contract, records of premium payments, and the death certificate.
- Submit a claim form and documentation to the insurance company. This starts the claims assessment process.
- The insurer will request any additional medical history information needed to validate the claim.
- Once approved, the tax-free lump sum death benefit is paid out to your business as the named beneficiary.
- Funds are available within 1-2 weeks to provide rapid financial support during a difficult transition.
Your insurance broker can assist with efficiently filing a claim and securing a prompt payout to protect your business.
Comparing Business-Owned Universal Life vs. Business-Owned Participating Life Insurance
Business-Owned Universal Life Insurance
As described above, universal life combines flexible premiums and adjustable coverage with tax-deferred cash value growth. You can select investment account options from the insurance company.
It’s an affordable form of permanent life insurance for small businesses, with transparent costs and the ability to modify the policy as needed. However, universal life does carry some investment risk.
Business-Owned Participating Life Insurance
Participating life insurance also accumulates cash value, but features guaranteed premiums and death benefit amounts. Your cash value earns dividends, which are interest payments determined annually by the insurance company.
Participating life insurance is lower risk but offers less flexibility than universal life. It can provide stable value for large corporations funding executive benefits packages.
In general, universal life is better suited for businesses that want customization and control over their coverage. Participating in life protects companies from volatility, especially those that prioritize guarantees.
Read more: Business-Owned Participating Life Insurance in Canada
Conclusion: Business-Owned Universal Life Insurance Offers Adaptability
Business-owned Universal life insurance is one form of Corporate-owned Life Insurance and can be an invaluable tool for corporations seeking lifelong coverage, tax efficiencies, and balance sheet funding.
While not the least expensive option, the advantages often make the premium costs justifiable – especially for established companies with complex planning needs.
With the flexibility to modify coverage and access cash value, universal life insurance aligns with the ever-changing needs of successful growing businesses. It provides stability when you need it most.
Consulting with a commercial insurance specialist is the best next step to implement a policy structured for your specific situation. They can answer any outstanding questions we’llnsure your business is adequately protected.
At LifeBuzz, our independent brokers have the expertise to secure your optimal universal life insurance that adapts as your business evolves. Request a free quote consultation, and we’ll find a customized solution for your company.
Frequently Asked Questions (FAQs) About Business-Owned Universal Life Insurance
What types of investment accounts are available in a business-owned universal life insurance policy?
Common investment account options include guaranteed interest accounts, indexed interest accounts, and variable investment accounts holding stocks, bonds, and money markets.
How can business-owned universal life insurance help fund buy-sell agreements?
The tax-free death benefit can provide liquidity for surviving owners to purchase a deceased partner's share per a buy-sell agreement.
Why might a business choose business-owned universal life insurance over term insurance?
Reasons to choose universal life over term include permanent lifetime coverage, cash accumulation potential, tax benefits, and the ability to adjust the policy to evolving needs.
How does the cost of business-owned universal life insurance compare to other permanent policies?
Universal life typically costs less than whole life but more than variable or indexed universal life insurance in terms of annual premiums.
What expenses are associated with a business-owned universal life insurance policy?
Common expenses include monthly administrative fees, mortality charges, investment management fees, surrender charges if cancelled early, and potential loan interest.
How soon can a business access cash value from a business-owned universal life insurance policy?
The cash value account starts accumulating value immediately as premiums are credited. However, the minimal cash value may limit withdrawals or policy loans in the early years.
Does payment frequency impact the cost of business-owned universal life insurance?
Yes, more frequent payments like monthly premiums generally result in lower overall costs compared to annual premiums.
What are the tax implications if a business surrenders a business-owned universal life insurance policy?
Surrendering a policy may result in taxable income for amounts received above the cost basis, especially in early years when surrender charges apply.
Can a business use business-owned universal life insurance to fund a deferred compensation plan?
Yes, the death benefit and any accumulated cash value could be designated to fund deferred compensation for an executive per a written agreement.
How does the health of employees impact the cost of business-owned universal life insurance?
Better health lowers cost, while medical conditions, family history, dangerous hobbies, or tobacco use could result in higher premiums or declined coverage.
What happens to business-owned universal life insurance if an insured employee leaves the company?
Options may include transferring the policy to the departing employee, exchanging it for a personal policy, surrendering it, or continuing it to cover a replacement hire.
Can loan interest on a business-owned universal life insurance policy be waived?
Some policies offer provisions to waive loan interest charges if using the funds for an approved purpose like starting a new business venture.
How could business-owned universal life insurance cover estate taxes or succession planning?
The tax-free death benefit could be used by successors of a closely-held business to cover estate taxes so operations can continue uninterrupted.
What are the main factors that determine the cost of business-owned universal life insurance?
Major factors include the age and health of the insured employee, death benefit amount, policy customization, investment options, and business financial profile.
Can the death benefit amount ever decrease on a business-owned universal life insurance policy?
Yes, certain withdrawals and unpaid loans could potentially decrease the death benefit over time. This emphasizes the impact of proper management and planning.
How can a business determine the right amount for business-owned universal life insurance?
A financial advisor can help analyze factors like lost revenue, debts, expenses, goals, and needs to calculate an adequate and justified death benefit amount.
Who should be the beneficiary of business-owned universal life insurance?
The policy owner's business should be named as a primary beneficiary so the tax-free death benefit payout goes directly to the company.
What documentation does a business beneficiary need to claim a business-owned universal life insurance death benefit?
Typical documents include a certified death certificate, corporate meeting minutes, policy contracts, payment records, medical history authorization, and a completed claim form.
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