VUL is a Swiss Army knife for small-business owners

Balancing cash flows with costs has always been a challenge for small businesses. But stubborn inflation and turmoil in the banking industry now are making it more difficult for entrepreneurs to access money when they need it most. And as small-business bank loan approvals continue to plunge, business leaders will need another way to keep their coffers full.

Many small-business owners have faced this financial dilemma before and have come out the other side. Take the visionary Walt Disney: When he struggled to nab financing for Disneyland, he became his own banker by borrowing against his life insurance policy. The rest is history.

Today, both small-business owners and financial professionals can take a page out of Disney’s book and explore the benefits of purchasing and leveraging a permanent cash value life insurance policy, such as variable universal life insurance. Let’s explore how financial professionals can communicate the value of VUL insurance to small-business clients looking to tough out this uncertain economic climate and even grow their businesses — and what they need to know before leveraging their policies.

VUL insurance is versatile and valuable

When it comes to a small-business owner’s “financial toolbox,” VUL insurance is the Swiss Army knife — more versatile and valuable than many realize.

VUL policies are cash value life insurance policies, meaning they provide income benefits that are generally tax-deferred to loved ones or businesses after the policyholder’s death. This is commonly known as a death benefit. Given how critical small-business owners are to their companies, an injection of capital at this crucial moment can help keep their business afloat and even financially support their successor. Consider the death benefit the “knife” of the policy — the primary function of the Swiss Army knife, but not the only one.

Like the Swiss Army knife’s corkscrew or scissors, VUL policies have other useful functions that can be exercised during the policyholder’s lifetime. These functions, known as living benefits, can provide small-business owners with generally tax-deferred income at any point in life — be it through policy loans or withdrawals on the cash surrender value the policy has accumulated to date.

With a properly designed life insurance policy, withdrawals from the policy’s accumulated cash value can be made for any reason and without a penalty imposed by the insurance company. As a result, VUL withdrawals can be used to finance a new project, expand a business or even cover essential expenses such as payroll and overhead during a difficult time.

Three considerations before borrowing against life insurance

Although a VUL insurance policy can offer critical living and death benefits to a small-business owner, there are important considerations that can determine whether policy loans or withdrawals best suit that owner’s needs. Here are three important things financial professionals should discuss with their clients before leveraging a VUL insurance policy to support their businesses.

1) Small-business owners should keep the big picture in mind

VUL insurance can provide substantial living benefits, but its ultimate purpose is to provide protection for a business in the form of death benefits.

Taking tax-deferred distributions will reduce a policy’s cash value and face amount, which can result in higher premiums to ensure the policy stays in force. Should small-business owners fail to meet those premiums, they could lose their death benefits and put their businesses at risk.

2) Small-business owners must have a plan for the future

To have capital at the ready when they need it most, small-business owners must enroll in a VUL insurance policy well in advance. Within these policies, there is a wide range of equity, fixed-income and asset allocation investment options that can generate faster growth through tax-deferred compound interest than can paying taxes annually on growth.

However, VUL insurance policies are still subject to market fluctuations, including possible loss of principal invested, and they can take years to accumulate sufficient capital before withdrawal is possible.

Small-business owners also should incorporate their VUL insurance policies into their businesses’ long-term financial management strategies from the get-go. As with any other financial tool or insurance policy, periodically reviewing the coverage and weighing its advantages can ensure small-business owners’ companies remain resilient and prepared for any challenge.

3) Working with a financial professional is crucial

VUL insurance policies are real financial instruments, so there’s no one-size-fits-all approach to how they can best support a small business. That’s why working closely with a financial professional is essential to effectively leveraging the policy — including accounting for the big picture and future plans.

Financial professionals can help by analyzing an individual’s needs, recommending the right policy, ensuring loans are paid back, preventing costly lapses in coverage and helping manage the risks associated with VUL insurance policies that fluctuate with market performance.

VUL insurance is just one tool in a small-business owner’s financial toolbox. But like witha Swiss Army knife, knowing all its different functions can prove useful when it’s needed most. For financial professionals, knowing how to effectively communicate the importance of VUL insurance policies for solving a variety of key business needs can help small-business owners make the right decisions for their businesses.

Please note, outstanding loans accrue interest. Income-tax-free treatment also assumes the loan will eventually be satisfied from income-tax-free death benefit proceeds. If the policy lapses, is surrendered or becomes a MEC, the loan balance at such time would generally be viewed as distributed and taxable under the general rules for distribution of policy cash values. And may be subject to a 10% IRS penalty prior for owners under age 59 1/2

There are fees and charges associated with variable life insurance contracts including mortality and risk charges, administrative fees, investment management fees, front end load, surrender charges and charges for optional riders. 

Variable life insurance is sold by prospectus only that contains more complete information about the product, including investment objectives, risks, charges and expenses. Please read the prospectus and consider the information carefully before purchasing a policy or sending money. You should contact your Equitable Distributors representative for a copy of the current prospectus.

Life insurance products are issued by Equitable Financial Life Insurance Company (New York, NY) or Equitable Financial Life Insurance Company of America, an Arizona stock corporation and are co-distributed by Equitable Network, LLC (Equitable Network Insurance Agency of California in CA; Equitable Network Insurance Agency of Utah in UT; Equitable Network of Puerto Rico, Inc. in PR), and Equitable Distributors, LLC. Variable products are co-distributed by Equitable Advisors, LLC (Member FINRA, SIPC)(Equitable Financial Advisors in MI and TN) and Equitable Distributors, LLC. When sold by New York based (i.e. domiciled) Equitable Advisors financial professionals life insurance products are issued by Equitable Financial Life Insurance Company, (NY, NY).

References to Equitable in this brochure represent both Equitable Financial Life Insurance Company and Equitable Financial Life Insurance Company of America, which are affiliated companies.  Overall, Equitable is the brand name of the retirement and protection subsidiaries of Equitable Holdings, Inc., including Equitable Financial Life Insurance Company (NY, NY), Equitable Financial Life Insurance Company of America, an AZ stock company and Equitable Distributors, LLC.  Equitable Advisors is the brand name of Equitable Advisors, LLC (member FINRA, SIPC) (Equitable Financial Advisors in MI and TN). GE-5762172.1  (10/23) (Exp 10/25)