5 Ways to Use Life Insurance to Achieve Business Goals

life-insurance-to-achieve-business-goalsBusinesses and their owners are simultaneously unique and alike. While operations, market challenges and financials vary widely, most share at least five similar concerns:

1. Protecting the business from unexpected events
2. Protecting the value and continuity of the business
3. Attracting and retaining competent employees
4. Accumulating financial assets
5. Safeguarding assets for heirs

As an insurance professional, you may have addressed several of these concerns by recommending property and casualty coverages, but there’s one more solution you may have overlooked: life insurance.

Yes, businesses and business owners can achieve all five goals with life insurance. Have your doubts? Let’s look at how each of these very real concerns can be addressed with permanent life insurance.

Protecting the business from unexpected events

Many businesses have struggled to survive after the death of a partner or key employee. Beyond the emotional loss of a colleague and friend, the surviving business also loses expertise, valuable client relationships, and specialized knowledge. While these contributions may never be fully replaced, the success of the business may depend on finding others to fill the gaps. This is the essence of succession planning. A plan that provides direction for future ownership and leadership along with the financial freedom to accomplish the transition. The cash cushion provided by a key-person life insurance death benefit will ease the financial impact to the business during the search for a new partner or key employee. In many ways, insuring a key-employee is like insuring intellectual property. It’s a safeguard for when something unique to a business (and hard to replace) is lost.

The downturn of market conditions or the economy can be challenging for business owners. New competitors and investment in new technologies necessary to compete can strain business capital. A permanent life insurance policy can provide relief here as well. Policy cash value can be borrowed, withdrawn or surrendered to provide the additional capital and with all the tax advantages unique to life insurance.

Protecting the value and continuity of the business

The value of a business is built over years. Many family finances depend on the income from the business. If or when the time comes to sell the business, the obvious goal is to reach an agreed sale price that is commensurate with the value of the business.

However, in some cases, the death of the owner, may impose an urgency to sell the business, placing that value at risk. Family members that rely on the income for living expenses may force a quick sale or transfer of ownership. Time for negotiations becomes a luxury. Market conditions may not be favorable to sell, resulting in a below market sale price. But if a life insurance policy is in place, the death benefit provides the cash to pay the family. The business may not have to be sold at all or the timing of the sale can be delayed to take advantage of better market conditions. A Buy-Sell agreement, funded with a life insurance policy, is another business succession planning tool accomplished by the unique value and benefits of life insurance.

Attracting and retaining employees

In the years following the Great Recession, unemployment rates have improved. Salaries did not. Payroll has stagnated. Fortunately, the tide is beginning to turn. It has been recently reported that employers are responding to the pressure of the labor market at or near full employment, by increasing salaries. Employees, especially millennials, are lured by more than just increased salaries. Long-term compensation perks that offer financial stability are highly valued. Once again, life insurance provides a relatively inexpensive (and usually deductible) vehicle to supplement compensation for the highly compensated—all with the tax advantages only life insurance can offer. The compensation plan and objectives may vary. Here are four ways to achieve different ends all using life insurance.

1. Executive bonus (section 162) – The employee purchases and owns life insurance on themselves; the employer provides the employee an annual bonus intended to pay the premium. In most cases the premium is tax-deductible to the employer. The bonus is taxable to the employee though. Some plans allow for the bonus amount to be sufficient to cover the additional tax liability.

2. Funding deferred compensation plan – An employer may use cash value life insurance to fund a deferred compensation arrangement. The employer owns life insurance on the employee. When the deferred compensation is due, rather than drawing down company cash assets, the employer borrows or withdraws from the cash value of a life insurance policy, an amount equal to the compensation plan. The employer retains ownership of the policy. If the employee dies prematurely, the employer will receive the death benefit.

3. Additional contributions to retirement plan – Contributions to a 401(k) retirement plans are limited to the IRS maximum contribution level. The 2017 contribution limit is $18,000 plus and additional $6,000 for those who are age 50 or older. Contributions to a life insurance policy in the form of a premium payment are not subject to the IRS limit, but the cash value from the life insurance policy can be used to supplement retirement income. In this case the employer pays the policy premium; the employee owns the policy.

4. Supplement employee benefit package – When life insurance is part of an employee benefit package the death benefit is typically a function of salary, often two times income. Adding employer paid supplemental life insurance is another way to enhance the benefit package for well-paid employees. This may be a group supplemental policy or an individual policy.

Accumulating financial assets

The personal finances of business owners may have complications that can be helped by life insurance. Perhaps only one child is expected to inherit the business. To equalize the inheritance, the owner could use the death benefit from life insurance naming non-inheriting children as the beneficiaries.

The same limits to retirement plan contributions apply to business owners. Just as described above for employees, the owner may benefit by including life insurance as part of a complete retirement plan. Review an earlier article describing life insurance as a retirement asset.

How Brokers Central helps you offer broader counsel to your clients

You don’t have to be a life insurance broker to offer clients this added value. In fact, your expertise may be in other lines of insurance such as personal lines, health insurance, or commercial lines. Regardless of your specialty, you can bring additional value to the relationship you have with your client by addressing these common business concerns.

As a Brokers Central partner agent, rely on us for the details of a Buy-Sell agreement, or Executive Bonus plan. Count on us to explain the many tax advantages only life insurance offers. Brokers Central always respects the relationship you have developed with your client. Consider us another in-house expert. We are here to help you prepare for client meetings. Call us at 845-495-5000 to learn how to add life insurance to your sales repertoire and click here to learn more about how we help P&C agencies grow.

As the Founding President of Brokers Central, Yoel Bodek has an innate understanding of how financial products work together to solve clients’ business, financial security and wealth accumulation goals. View Yoel’s Bio. Email Yoel.