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Business Life Insurance

You may be more familiar with buying life insurance for yourself or a family member as death benefit protection, but are you aware of the role it can play in business planning? Whether you’re an entrepreneur thinking about how to protect your share of the business or are looking for ways to reward your top employees – vital to your company – life insurance could be a strategy.

Business owners can leverage life insurance policies during their lives, adding another layer of protection to the business.

Some common ways that life insurance is used in the corporate world are through buy-sell agreements, key-person insurance, executive bonus, and succession planning, just to name a few.  Business policies are remarkably flexible, builds cash on the company balance sheet and the owner can drive the design of a policy.

Not sure how to make sense of it all? Here are some common questions about using life insurance for business planning.

Can I Buy Life Insurance on My Business Partner?

Can I Buy Life Insurance on My Business Partner?

Yes! It is very common for life insurance to be used in a business partnership. This process of buying life insurance on a business partner is typically used to fund a buy-sell agreement. In this type of situation, each partner buys a policy on one another. If one partner passes away, the life insurance policy’s death benefit can be used to buy the other person’s share of the business. In a case like this, the family of the deceased gets to turn their business interest into monetary value, and the remaining partner gets to keep working in the business they helped to create. Without it, how is the buy-out funded when the liquidity to do so is most needed?

What Type of Life Insurance Can Be Used for a Buy-sell Agreement?

A buy-sell agreement can utilize several different types of life insurance—including term, universal life, or indexed universal life insurance (IUL).  We will assist in the selection and design of a plan that fits your unique situation.

Can Life Insurance Be Used in Succession Planning?

Can Life Insurance Be Used in Succession Planning?

Yes, in cases where a family-owned business is being passed down a generation, but other children are not involved in the business, a life insurance policy can be used to help leave a fair inheritance to each family member.  This also referred to as estate equalization.

Here’s a hypothetical example of using life insurance for succession planning. Imagine you have owned a wholesale business for 30 years and are wanting to leave it to your daughter to own and run. Your sons, successfully launched in their own careers,  don’t want to be involved with the business, but you’d like your children to receive equal amounts as an inheritance. You don’t have much in assets besides the business and you would hate for your daughter to have to sell the business in order to provide her brothers with an equal share. A potential strategy is purchasing a permanent life insurance policy on yourself, with a death benefit equal to a multiple of the company’s value, and make your sons the beneficiaries of the policy.

Proactive Planning provides this outcome: Upon your passing, each of them would get an equitable distribution of the inheritance; the boys would split the death benefit equally and your daughter would inherit and run the company business. They are happy. You’re happy.

How Can I Use Life Insurance as an Employee Benefit?

How Can I Use Life Insurance as an Employee Benefit?

Many companies offer life insurance that provides a death benefit equal to or double the employee’s annual salary. But you can also reward top-performing employees with an executive bonus using life insurance. This can be a great addition to a compensation package for invaluable employees looking for out-of-the-box benefits to reward their good work.

Life insurance can do more than you’d expect in a business setting. Are you interested in seeing how you can incorporate life insurance into your business strategy? Talk to us. We will show you. See if it feels right for you.
What is a Key Person?

Key employees – those individuals who are nearly indispensable to your organization – typically provide so much firm value that their loss would be financially detrimental for the firm. In these cases, a high cash value life insurance policy can provide the firm with an economic buffer to weather the troubles that could arise from the loss of such a valued team member.

What is a Buy-Sell Agreement?

Often similar in many respects to a key man strategy, the buy-sell provides a multi-owner business with a means to plan for the loss or exit of an owner by implementing a strategy to insure that the remaining owners can acquire the ownership stake held by the former partner. One of the primary benefits of a buy-sell agreement is that the remaining owners are not forced to search for a new buyer or partner to join the business.

Why Premium Financing for a Buy Sell Agreement in the Business?

Generally relying upon a high cash value life insurance policy these buy-sell agreements can often best be funded using a Leveraged Planning strategy. With this approach, the firm is able to use a commercial loan to put in place a plan for business continuity for a group of owners while maintaining a higher level of liquidity than might otherwise exist if the firm were to pay for premiums directly.
Executive Compensation

In the modern employment environment, high quality executive talent is often most easily recruited and retained when the benefit package includes a strong executive retirement plan.

Funding executive compensation plans can often present a challenge for business owners. High cash value life insurance plans can prove to be an ideal tool for providing corporate leaders with a significant future economic benefit both during their lives – and potentially for their heirs. Premiums for these policies can be expensive, though – that’s where a Leveraged Planning strategy can help.

By using a commercial loan approach, the firm can preserve business asset liquidity while still providing a suitable compensation structure designed to appeal to their executives.

What is Premium Financing?

It is the process of borrowing money from a third party to pay the premiums of a high cash value life insurance policy.

Borrowing the funds to allows you to hold on and retain control of your money so it continues to work for you productively and otherwise avoid liquidating your assets. Why commit substantial personal assets?  Keep those at work for you.

High net-worth individuals and high earning entrepreneurs are typically the best candidates for such a loan arrangement.

Premium financing of life insurance is a tool that creates potential solutions. Careful design and planning may allow potential tax advantaged strategies for business and personal retirement strategies. In addition to covering the cost of premiums here is a partial list of what premium financing can help you pay for:

  • Buy-Sell Arrangements
  • Key Person Financing & Retention
  • Deferred Executive Compensation
  • Business Succession
  • Estate Planning and Liquidity

There is risk in any borrowing arrangement the first of which is rising interest rates. Careful consideration must be given to plan design strategies to fully understand and help mitigate the risks.  From our office in Seattle, WA, we will provide guidance in all phases of the process.

Premium Financing is borrowing money from a third party to pay the policy premiums. Once the policy generates enough surplus cash value in later years, the owner of the policy can then pay back the premium finance loan from policy values.  This type of arrangement is generally only utilized by high net worth individuals, who have assets that are less liquid or illiquid, and who need life insurance coverage with a very large death benefit.  These loans are made at interest.  While the goal is generally to repay the loan with the future cash value there is often no guarantee that the policy’s cash value will grow fast enough to cover the loan and still maintain the life insurance policy.  It is also likely that additional collateral will be needed to secure the loan. This strategy should only be employed by those who qualify for life insurance at a standard or better underwriting classification.  If the insured dies before the loan is paid off, the outstanding loan balance can be paid out of the death benefit but this will reduce the amount received by the beneficiaries. Given the additional complexities of these arrangements it is important to understand all of the possible outcomes and the impact of each before committing to this type of arrangement.

Questions about Business Life Insurance

  • Do you consider your business to be your retirement plan? Do you know it's value? How is this value included in your retirement financial plan?
  • Did you know that life insurance cash values are liquid and may allow tax-advantaged access?
  • Are you aware that life insurance cash values can also offer tax-free retirement income potential?
  • Is your buy-sell agreement funded? Does it mandate life insurance and disability insurance policies on partners?
  • Does your buy-sell agreement include the top 3 mandatory triggers?
  • An effective buy-sell agreement is at the root of successful business transition plan. Does your plan include the top 3 triggers?

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