Life insurance plays a number of important roles in the business world, benefiting business owners, employees, and family members. Three categories to consider are Business Continuation, Retirement Planning, and Estate and Survivor Financial Planning.
The loss of a business owner or a key employee can seriously damage a small business or even result in the business closing its doors. Advance planning, including the use of life insurance to fund these unfortunate and unforeseen events, can help cushion the financial impact they cause.
- Death of a business owner: If a business owner dies, a buy-sell agreement can provide a smooth transition of total ownership and control to those who will keep the business going. For a corporation, a stock-redemption agreement may be used to ease the transfer of the deceased owner’s shares to the surviving shareholders. Life insurance is the best means to fund these types of agreements.
- Key employee insurance: Life insurance on the life of a key employee helps to cover the costs of finding and training a replacement, as well as meeting any monetary obligations to the deceased employee’s survivors.
There are a number of ways in which life insurance is used in accumulating funds for retirement.
- A fully-insured defined benefit retirement plan allows for the use of life insurance annuities and/or life insurance policies to fund retirement.
- Life insurance inside qualified retirement plans: Federal income tax law allows defined benefit retirement plans and certain types of defined contribution retirement plans to allocate a portion of the funds contributed each year to life insurance as a retirement funding vehicle.
- Non-qualified deferred compensation: These arrangements allow selected employees (the employer can pick and choose) to defer receipt of a portion of their compensation until a later date. A company can use life insurance to informally fund such arrangements.
- ESOP Repurchase Obligation: In an Employee Stock Ownership Plan (ESOP) the company is required to repurchase the shares owned by any employee who retires, is terminated, or dies. Life insurance is one of the best ways to fund these share-repurchase obligations.
Estate and Survivor Financial Needs Planning
Life insurance also plays a significant role in estate and survivor needs planning.
- Group term life insurance: Group term life insurance can be provided to the employees of a business, with premiums generally much lower than individual term life policies. Generally, the first $50,000 of such coverage is tax-free to the employee.
- Executive life insurance: An employer can help fund employee-owned, individual life insurance policies for selected executive or key employees through a bonus plan.
- Death benefit only plan: A Death Benefit Only (DBO) plan is a form of deferred compensation plan. In a DBO plan an employee defers a portion of his or her compensation. No benefits are payable during the employee’s lifetime. At the employee’s death, the deferred compensation is paid to the employee’s named beneficiary.
Global Investment Strategies Can Help
Correctly used, life insurance is a highly flexible and useful tool in the business world. However, careful attention must be paid to federal, state, and local law to ensure that all legal and tax requirements are met. If you have questions or just want to explore options, let us know. We can help.