LIFE INSURANCE AND YOUR BUSINESS
Assurance Financial Solutions (205) 578-2097
Whether you’re protecting an owner’s family and employees, a partner or key employee’s interest, rewarding valuable employees or creating tax-deferred options for retirement, life insurance will be a critical aspect of your future planning. Call today to schedule a time to meet with our team of experts.
Life Insurance and Your Business Planning
You insure your family. You insure your home and vehicles. You insure your office or building. So if you’re an owner, why not protect the value of the company or your share of the company if you’re a partner?
As a small-business owner, you’re responsible for two families: the one you have at home, and the one you have through work. No matter what your business, a well-conceived insurance and benefits program is essential. If you die or become disabled, life insurance can help protect your family and your business.
To get a sense of how well you’ve planned for these responsibilities, ask yourself these questions:
- What will happen to my business and family if I die or become disabled?
- What will happen if certain key employees die or become permanently disabled?
- How can I attract and retain the best employees?
- How can I help ensure that my business will be able to weather unforeseen financial hardships?
- What will happen to my business when I retire?
Explore this section to learn more about how insurance can help protect your business while giving you a competitive edge.
One of the first things any business owner needs to consider is how to protect against events that may threaten the future of the business, like the death or disability of a proprietor, partner or key employee.
Life Insurance for Owners/Partners
Let’s start with the worst-case scenario: the death of one of the business owners. What will happen to your business if you were not there tomorrow? Many small-business owners take out loans to help grow their businesses, and often secure these loans with personal assets. If you have business loans and were to die before they were paid off, you might think your family could sell or liquidate the business to cover the debts and provide financial security for them.
In reality, this rarely happens. When the family is forced to sell the business quickly, they may have to sell at a discount or during market conditions that make the business less attractive. In other cases, the business may be worth very little without the proprietor or partner. Individual life insurance can protect your family by providing funds to cover debts, ongoing living expenses and future plans, in the event that something happens to you.
Disability insurance replaces a portion of your income if you were to become sick or injured and unable to work. It’s an important type of insurance coverage that is often overlooked, as few people stop to consider what would happen to their business and their personal income if they were unable to work. In addition, business owners should consider business overhead insurance, which reimburses a business for overhead expenses in the event a business owner becomes totally disabled. A policy typically pays benefits for one to two years and helps cover expenses like salaries, taxes, employee benefits, rent, mortgage, utilities, equipment, malpractice premiums, etc. That could mean the difference between a business surviving or shuttering its doors.
Life insurance also can be structured to fund a buy-sell agreement. This is a contract among owners to buy a deceased owner’s share of the business at a previously agreed upon price in the event of death, disability or retirement.
Why are these agreements so important? You might think that if you die, your family could maintain their income by running the business themselves or by hiring someone to handle the day-to-day management. The fact is, your loved ones may not have the skills or the desire for the job, and your co-owners may not welcome the idea of an unintended partner. With a properly structured and funded buy-sell agreement, your business partners won’t have to scramble to come up with the money to buy out your share of the business, and you’ll be guaranteed that your survivors will be compensated fairly and promptly.
Buy-sell agreements are typically funded by life insurance policies purchased on the lives of each of the business owners. The amount is usually specified in a contract created with the help of an attorney. You can enter into a buy-sell agreement at any time, but it often makes sense to do so when a business is formed or when new owners are brought into the business. Because business values can fluctuate, it’s important to review the contract with your accountant at least once per year or to include a calculation method in the agreement. Also be sure the insurance coverage funding the agreement is up to date.
Business owners can also insure against the risk of becoming disabled and unable to work. In this case, disability income buyout insurance would fund the buy-sell agreement, allowing the disabled owners to be bought out, typically after a one-year waiting period.
Key Person Insurance
Key person insurance is another essential component of a smart business continuation plan. Key person insurance is life or disability insurance purchased by the business on such an employee and payable to the business. When a key person dies or becomes disabled, insurance can help make up for lost sales or earnings or cover the cost of finding or training a replacement.
SOLUTIONS FOR LEVERAGING YOUR BUSINESS FOR MORE RETIREMENT INCOME
Executive benefits help you offer your best employees a higher level of benefits and compensation, along with significant tax advantages. They also compensate for the fact that most 401(k) programs restrict the ability of executives to accumulate enough money on a tax-favored basis to fund the retirement lifestyle they desire.
Here are a few types of executive benefits that can help separate your company from the competition:
Deferred Compensation Plans (including SERPs)
This is a selective employee benefit that allows business owners to help key employees defer income and the taxes due on that income until a later date, usually retirement. The plan can also be used to provide executives with additional life and disability benefits in addition to the basic coverage that all employees receive.
One option is a supplemental executive retirement plan. A SERP is a non-qualified deferred compensation agreement between a company and select key employees in which the business agrees to provide a specified benefit amount at retirement, or should the employee die, become disabled or terminate employment. When paid, the benefit becomes taxable as income for the executive and tax deductible for the company. Some plans also promise to pay the executive’s spouse a benefit if the executive were to die before retirement. Often life and disability policies are used to help fund the payments.
Section 162 Plan
Often called “Executive Bonus Plans,” section 162 plans are a simple way to reward your top people. Under this type of plan, the employee purchases a permanent life insurance policy on his or her life. The company pays the executive a bonus equal to the premium, which is usually considered taxable income to the employee and tax-deductible to the employer. The employee controls the policy, including the death benefit and the cash value, which accumulates tax-free until it is withdrawn.
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