Universal Life Insurance as an Estate Planning Tool - Who It's Suitable For and How to Leverage It

In the recent Spring Budget on 6^th March, the Chancellor announced shock plans for a large-scale reform to the tax regime for non-doms, legislation which has been largely unchanged for around 200 years. The measures announced included an intention to move to a residence-based regime for inheritance tax, subject to consultation, from as early as 6th April 2025.

A non-dom is an individual who resides in the UK, whose domicile is in another country. For those defined as a non-dom, currently, only UK assets are subject to inheritance tax (presently set at 40%), not their assets held elsewhere in the world. There are approximately 70,000 non-doms in the UK, and the proposed change would have a significant impact on these individuals, who are currently able to keep their domicile of origin with lower rates of tax, as their domicile.

However, regardless of residency or domicile, IHT and estate planning remains one of the most important aspects of an individual’s finances.

One of the most effective strategies

As mentioned, at Enness, we specialise in working with both high-net-worth and ultra high-net-worth clients, who typically have an international aspect to both their personal and business affairs. For those who fall into non-dom status one of the many solutions available to them as a tool for estate planning, is universal life insurance (ULI).  

However, whether you have non-dom status or not, the topic of life insurance is one deserving undivided attention as it can make a significant difference to the financial affairs of the individual covered and / or their loved ones. Often it can be hard to fully understand such a proposition, which is why talking to an expert is always recommended when deciding how best to make provision. But equally its important to do your research beforehand, so here we explore universal life insurance further and it’s various features and benefits. Including how it differs to offer forms of life insurance that high net worth individuals may have already encountered.

A life insurance less ordinary

Over the years various forms of life insurance have been developed and brought to market, each with its own set of unique considerations. But all designed to provide some form of cover to individuals in the various stages of their life. Term life insurance is arguably the most common, it lasts for a specified amount of time and expires at the end of the term. You pay regular premiums (usually monthly), and, in return, the life insurance company promises to pay out a cash sum if you die whilst the policy is active, providing you meet the terms and conditions.

Whole of life insurance is a type of permanent life insurance that provides coverage throughout the life of the insured person. It is guaranteed to be there for you throughout your life, provided your premiums are paid, and it also provides a death benefit to your beneficiaries.

Unlike the above, ULI covers you for the whole of your life, but also has a combined death benefit with a cash value component. The difference is that you can adjust the way premiums are paid and have the option to draw a 5% income from the cash value, allowing more financial freedom and flexibility. As a result, as well as supporting estate planning, it can also support wealth creation and retirement planning.

More about universal life insurance

As touched on previously, ULI is a type of policy which builds a cash value over time and offers more flexibility around payments and death benefit. Simply put, it comes with more benefits than a guaranteed term or whole of life policy.

Policyholders have a choice as to how they pay premiums. For example, they can choose to invest a single lump sum, which is allocated towards covering the cost of the insurance policy and administrative fees, as well as contributing to the cash value. The cash value is then exposed to an index (for example the S&P 500) which provides an opportunity for wealth accumulation within the policy, serving as a useful savings and investment vehicle.

One of the additional benefits of ULI is the option for a policy loan, which is tax-free and does not require any credit checks. Typically interest rates are lower than other secured lending options and serves as an attractive alternative to traditional lending routes.

Adaptable, flexible and versatile

Unlike other forms of life Insurance, this type of insurance is a versatile financial tool that can prove prudent for those interested in their long-term financial planning and looking for a bespoke approach to life insurance. Universal life insurance can be structured according to an individual’s personal tax circumstances, which makes it a very useful estate planning tool. Because it allows policyholders to access the cash value through withdrawals or policy loans, it also offers liquidity for various financial needs during their lifetime, such as cash flow issues or unexpected expenses.

This type of policy appeals to those looking for a more hands-on input into the growth of their life insurance savings, because the cash value within the policy earns interest. This growth is typically tax-deferred and provides policyholders with an opportunity for long-term wealth accumulation.  

In short, this multi-faceted product provides a potential solution to a range of financial goals such as wealth creation, retirement planning and estate planning.

As with all financial products, determining whether universal life insurance is the right fit for an individual requires careful evaluation of their unique financial circumstances and long-term goals. Universal life insurance is particularly well-suited for those with fluctuating or unusual income structures that are looking for flexibility in their premium payments. However, the decision to invest in universal life insurance should be made after a thorough assessment of your financial situation, risk appetite, and long-term objectives.

Getting the cover you need

To summarise, a universal life insurance policy can be a fantastic tool for those with significant assets or wealth but requires careful planning. Policyholders should ensure they have a clear understanding of how the policy works and how overall performance is calculated.

This is where a specialist life insurance broker, with experience of dealing with high-net-worth individuals and non-doms, could prove invaluable. Furthermore, advice from a financial specialist could ensure that your life insurance complements your broader financial planning and circumstances. Another reason why an established broker, with sufficient portfolio breadth, such as Enness could be an ideal partner given their ability to cover the full breadth of required considerations.

As with any life insurance, it’s prudent to make sure you have arrangements in place sooner rather than later. No one likes to think of the worst-case scenario, but it’s wise to consider the financial stability of your loved ones as part of your long-term financial strategy.

For further information on how life insurance can be included as part of a holistic approach to your financial planning, please get in contact.