No matter the size of your company, as a business owner, you have a responsibility to care for your employees, partners, and customers. The inherent flexibility of life insurance makes it an excellent tool for handling many problems that small business owners often face, such as employee retention, succession planning, and even deferred compensation.
Protect your business
Let’s say you have an employee who is of particular importance to a company. Maybe they are a designer for a clothing line and their good eye for style has made the company very successful. Or perhaps, they’re a technical person who understands systems within your company and without that person’s expertise; operations would come to a screeching halt. These types of people are extremely valuable to companies and, their untimely sudden removal can cause catastrophic financial loss to companies without proper protection.
Key-Person Coverage is purchased on a “key” employee to recoup the financial loss the business would incur upon the employee’s death. Key-Person insurance is owned and paid for by the company. This coverage can provide crucial business stability.
A typical business owner can often relate to phrases such as “asset rich” and “cash poor”, meaning they typically reinvest personal earnings into their business to build it up to sell later in life as a large part of a retirement plan. The problem arises when a business partner dies unexpectedly and their portion of the company is owed to their beneficiaries. Many times, the equity is tied up in other business assets and is completely inaccessible without selling large portions of the company, thus causing considerable financial loss to the surviving business partner(s).
How can life insurance help? By providing the much needed cash to a spouse or other beneficiaries to buy out the interest in a business without having to liquidate company assets. This is called a buy-sell agreement. In a nutshell, it is a legal contract restricting the right to dispose of a business interest to specified parties according to specified terms, and is most easily executed by life insurance.
Executive Bonuses and Deferred Compensation via Life Insurance
Sometimes called a section 162 plan, an executive bonus arrangement is a private, non-qualified means of rewarding select employees with permanent, cash value life insurance for the beneficiaries of the executive as well as potential for cash value accumulation. In essence, the executive takes out a life insurance policy on themselves, and the company bonuses the premiums paid by the employee. This bonus is a tax write-off for the company, and can be added to the cash value of the policy, and grown for the owner of the life policy, the employee.
This same process can be done as a deferred compensation program, whereby the company, not the employee, owns the life insurance policy and the premiums are paid outright by the company. This gives the company more control over the life insurance, but it still acts as a cash bonus to the executive.
Advantages to Cash Value Life Insurance as a Benefit to Employees.
- Provides valuable benefit to employee(s) at little or no expense.
- Flexibility: The business has discretion with regard to who will be covered and to what extent, unlike 401(k)’s. As opposed to traditional 401(k) plans where all employees must be able to contribute, in a 162 plan the business owner has flexibility to decide who receives the plan and can use this as a reward for higher earning employees.
- Extremely high contribution potential: Often, based on earnings, age, and other factors, employees can contribute tens of thousands of dollars into plans.
- Portable to employee.
- Potential future supplemental income: Because of the nature of the life insurance investments that are inside of section 162 plans, they are often provide more flexible and sustainable income streams as opposed to traditional 401(k) plans.