There are six key ways in which life insurance may benefit your business
- Business Transfer: Businesses or business owners can execute a buy-sell agreement and fund it with life insurance. A buy-sell agreement is an arrangement for a business to continue in the event of the owner’s death, disability, retirement or early withdrawal from the business. Life insurance, through the death benefit or cash values (if a permanent policy is used), can help provide the funds for the surviving business or new owner(s) to purchase the business interest.
- Key Employee Protection: The loss of a key employee can severely affect the financial health of a business in several ways: lost sales, costs of recruiting and training a replacement, costs to continue the salary to the employee or the family, or loss of credit. Life insurance can provide the business with funds to temporarily replace lost profits as a result of a key employee’s death, strengthen the business’s working capital, and provide funds that may be used to recruit and train a suitable replacement.
- Non-Qualified Deferred Compensation (NQDQ) Plans: NQDC plans funded with life insurance can help attract and retain key employees. Such plans are contracts between employers and key employees to pay future compensation for work performed now. Most NQDC plans provide for a stream of payments to be made to the employee following retirement. The payments typically come from the cash value of a permanent (rather than term) life insurance policy. The employee is not taxed on the money until it is received.
- Executive Bonus Plans: Another way to provide an extra benefit to key employees is through an executive bonus plan. With this plan, the employer gives a bonus to a key employee who then pays taxes on the money and uses the remainder to purchase a life insurance policy. The employee has all ownership rights in the policy, such as access to the cash value and the power to designate beneficiaries, while the employer receives a tax deduction for the bonus.
- Supplemental Executive Retirement Plans (SERPs): SERPs provide key employees with supplemental retirement income generated by the cash value of a life insurance policy. Qualified defined contribution plans are limited to considering only the first $230,000 of compensation when arranging retirement benefits for highly compensated employees ($245,000 in 2009). SERPs layer in on top of such defined contribution plans, giving key employees a more robust total retirement plan package.
- Debt Coverage: Life insurance proceeds can provide a business with funds to help pay off business debts in the event of the owner’s premature death. A life insurance policy is taken out on the life of the owner when the debt is first incurred.