Business owners might think of life insurance as a tool just to protect their family, but life insurance can serve more purposes than just basic protection. Setting up a key-person policy, incorporating life insurance into their buy-sell agreements, or saving for retirement is equally as important as the life insurance death benefit for those who own or operate a business.
The development of competitively structured life insurance products has now made it possible for virtually anyone to enjoy many of the product’s benefits. Here are some examples of how life insurance can be used:
- As a supplement to a tax qualified retirement plan (pensions, profit sharing plans, etc.)
- For business owners to fund a buy-sell agreement.
- To structure a key-person strategy.
But WHY life insurance? Life insurance can serve as a tax-deferred accumulation vehicle (assuming it is structured properly) as well as provide the right amount of money at the right time, through a death benefit. Some of the highlights of life insurance are as follows:
- Tax-deferred cash accumulation
- Income tax-free retirement benefits (when structured correctly)
- Income tax-free survivor benefits
- Unlimited premiums (maximums are based on the amount of death benefit purchased)
- Flexibility at retirement
- Retire when you want without tax penalties
- Liquidity in case of emergencies
- Creditor protection in most states
Now let’s go into more detail about the 3 ways business owners can utilize life insurance:
1. Tax-Advantaged Savings
The problem business owners face is most of them view their business as their retirement plan. Unfortunately, what an owner wants for their business and what they get are rarely the same. If the owner’s business is not structured and protected properly, there may be unforeseen factors that may cause the business to face financial difficulties.
Furthermore, business owners generally have more complicated financial situations than the average individual, meaning traditional savings vehicles may not be ideal for preserving and growing their wealth. With their level of income, business owners may find themselves not able to save enough money with traditional qualified plans in order to maintain their standard of living throughout retirement.
Fortunately, business owners have access to non-qualified plans and strategies, utilizing life insurance, that can be used to save for retirement. For example:
- Split Dollar
- Executive Bonus
- Non-Qualified Deferred Compensation
These strategies not only help the business owner to attract and retain employees with cost-effective benefit plans, but also they give the business owner access to tax-advantaged cash accumulation. If you would like to chat with our team about putting together any of these strategies, follow the link below:
2. Buy-Sell Agreement Funding
A Buy-Sell Agreement is a sort of contract that creates rules for what will happen when a business owner needs to transfer his or her interest in the company or when a business owner ceases to be an owner of the business for any reason, such as death, disability, etc. If more than one person owns a business, those partners should have a buy-sell agreement in place.
For Example, if three individuals own a business, and one individual dies, the other two owners might assume they could purchase their partner’s share of the company and continue operations as usual.
When using life insurance to fund a buy-sell agreement, either the company or the individual co-owners buy life insurance policies on the lives of each co-owner other than themselves. If one owner dies, the company or co-owners receive the death benefits. That money is then used to buy-out the deceased’s portion of the business.
3. Key- Person Coverage
Almost all businesses have a person or a few people in the business that are imperative to the success of the company. If something should happen to these people, the business would suffer. The best question I have heard to get business owners to think about these people is to ask them: “If you were away, who would be at your business to turn the lights on?” Obviously, I’m not referring to the actual lights but who will make sure the business still operates like normal.
All small business owners should consider putting together a key-person strategy. In the simplest terms, in a key-person strategy the business owner/company would purchase a life insurance policy on a key-employee with the company named as the beneficiary. There are two ways in which the business can benefit from this type of strategy.
- The death benefit proceeds can help the company to recoup funds that would otherwise be lost if the key-person died suddenly, and the business could not immediately continue to function properly.
- A cash value life insurance policy, such as an IUL, can serve as a tax-deferred accumulation vehicle. Since the business owner/company owns the policy, they can access funds should they need liquidity in case of emergency or if the key-employee leaves the company.