Business Strategies

Small business owners are increasingly recognizing the importance of safeguarding their businesses, but many are unaware of the potential benefits of life insurance as a valuable tool in protecting their life's work.

There are around 31.7 million small businesses in the United States, making up 99.9% of all businesses in the country and employing 41.7% of the private workforce.

Key Employee Life Insurance

Key employees who are instrumental in the financial success of a business can significantly affect the business's ability to thrive. To safeguard against the potential loss of a key employee's contributions and expertise, a business can opt to invest in life insurance for that employee.

How It Works

• When a business purchases employer-owned life insurance on a key employee
• There are several methods for determining the face amount, including evaluating the employee's effect on earnings and replacement cost
• The business then pays the premiums and becomes the beneficiary

Benefits For The Small Business

• The policy death benefit provides financial assistance to the business in the event of the key employee's death, helping with the costs associated with recruiting and training a new key employee
• It is possible for the business to access the cash value while the employee is still living
• If the business meets IRS guidelines, the death benefit proceeds received by the employee will not be taxed, and the business will receive them free of income tax

Executive Benefits

Businesses can use life insurance policies to attract, retain, or reward critical employees. This is particularly important as over half of U.S. employees are actively looking for new job opportunities.

How It Works

• The company provides a bonus to certain employees, which can then be used to buy life insurance as an additional benefit to their existing qualified plan and group term offerings
• Double bonus arrangements can help to offset the employee's income tax liability
• The employee is the policy owner and has the authority to name the beneficiary

Benefits For The Small Business

• The purpose of bonuses is to cover the cost of premiums and they can be deducted as a business expense
• Approval from the IRS, disclosure, and annual reporting are not required
• Since this plan is not qualified, there are no annual administrative costs and the business has the freedom to select which employees will be offered the benefit

Buy-Sell Agreements

A lack of succession planning can have a major negative impact on various parties, including the business. Surprisingly, only 12% of small businesses make it to the third generation. However, there are many different types of buy-sell agreements available that offer flexible and customizable solutions. These agreements can provide certainty, reduce conflict, and make the ownership transition smoother.

How It Works

• Buy-sell agreements are legally enforceable contracts that outline the terms for an owner to sell their business interest to the remaining owners or the business itself in the event of a triggering event
• Life insurance can be bought to provide financial support in the event of a triggering occurrence
• The type of buy-sell agreement you choose will determine the policy ownership, number of policies, and tax considerations. It's important to have these details drafted by a qualified professional

Benefits For The Small Business

• Sufficient funds are readily available to meet the requirements of the agreement when necessary
• The policy owner has the ability to access the cash value of their permanent life insurance
• Policy features, like riders, have the ability to offer extra benefits throughout the duration of the policy