You might be wondering why a business would want to buy life insurance on its owner or employee(s). There are numerous ways life insurance can help a business stay in business in a time of tragedy.
- Key Person Insurance– In the case of any small business, typically the #1 Key Employee is the business owner. Just think of what would happen to a business if the owner suddenly passed away. The value of the business would quickly be dramatically impaired and/or the business would probably fail altogether.This is a tragedy considering all of the time and energy spent on building the business! Purchasing life insurance on the owner provides the family with at least a partial reimbursement to the loss of market value of the business itself that is free of taxes.
The same is true for the other employees who are responsible for generating sales, managing operations or customer service. Buying life insurance on these key team members provides the business with a tax-free source of funds to hire another employee to keep the business operating at peak capacity.
- Business Succession Planning – Successful small business owners should plan ahead for the eventual transfer of the business to another owner. Having a Buy-Sell plan in place ensures the current business owner’s family will receive a fair value for the business without the complication and expense of trying to sell a business during a time of great personal loss. Actually funding the Buy-Sell arrangement is crucial to making the plan work as intended. Buying permanent life insurance is a great way to make sure the funds will be available in the time of need. A formal valuation of the business is usually required.
We work with experienced attorneys who can draft this plan for you efficiently at a reasonable cost. We also work with experienced business valuation experts who can provide and independent estimate for the worth of the business that each party can agree on.
- Executive Benefit Plans– These plans are used by businesses to attract and reward key employees of the business. In an “Executive Bonus” arrangement, the business will pay a bonus to the employee in the form of a premium payment on a permanent life insurance policy that has an increasing cash value. The policy is owned by the employee and they are able to name their own beneficiary. The increasing cash value is a valuable asset that can provide tax-free income to the employee’s family. The policy can also include a long-term rider to cover long-term care expenses on a tax-advantaged basis.
Deferred Compensation Plan – Key executives are often limited on how much they can contribute to their company retirement plan account. In the deferred comp plan, the company purchases a permanent life insurance policy on the executive and makes the contribution to the policy. There is no limit on the amount the company can pay into the policy. The cash value grows tax-deferred. When the benefit is eventually paid out the company is able to expense the amount contributed and the employee pays tax on the benefit received.