Life insurance is an important feature of many business arrangements. Learn how life insurance fits into your business plan.
Businesses use life insurance in a variety of important ways. For example, life insurance is the preferred method of funding buy-sell agreements. It is also a major component of many employee benefit programs, both group plans, and special carve-out plans for highly compensated employees. Life insurance taken on the life of a key employee can provide cash to finance any losses and expenses that result from the individual's sudden death. Also, life insurance provides a secure source of funding for a company's qualified and non-qualified retirement plans. Life insurance can also be used to guarantee repayment of a business loan, allowing an owner to obtain financing for a new or expanding business.
Using life insurance for business purposes can have significant tax consequences. It's important to understand the issues upfront and to structure the arrangements so as to minimize or eliminate the tax impact.
Funding your buy-sell agreement with life insurance
If you're a party to a buy-sell agreement that obligates you to purchase your partner's business interest if he or she dies, will you have the funds to pay for your partner's share? You'll need to set aside a sizable cash reserve if you expect to fully fund the purchase. If you think you can simply take out a loan if needed, you may find yourself unable to obtain one if your partner's death results in a disruption of business with an accompanying loss of revenue. Life insurance provides an alternate method of funding a buy-sell agreement. If business partners are insurable, it offers relatively low-cost coverage. And its use is not limited to a partner's death. If a permanent cash value insurance policy is purchased, a business can use the accumulated cash value to purchase a partner's share if they retire or become disabled.
Use business life insurance for tax planning
Life insurance is an important feature of many business arrangements. Its most important uses include the following:
Using business life insurance for these purposes presents many tax-planning opportunities. It's important to plan carefully because the tax consequences can be significant enough to spell the difference between a business's success and failure.
Life insurance as an employee benefit
Life insurance is a basic component of many employee benefits packages. As an employer, you may want to consider offering most employees some form of group plan. For highly compensated employees, you can offer individualized coverage through a carve-out plan, such as a split-dollar plan, a reverse split-dollar plan, a death benefit-only plan, or an executive bonus plan. Life insurance provides advantages to both you and your employees. Your employees can receive death benefit coverage at minimal or no cost since you pay some or all of the premiums, and, if your company is a C corporation, you may be able to claim the premiums as a deductible business expense.
Split-dollar life insurance, including nonqualified deferred compensation plans
Are you seeking a low-cost method to attract, motivate, and retain key employees? Are you also interested in finding a way to fund nonqualified deferred compensation plans for them? A split-dollar plan allows you to carve out key employees from your group plan and offer them life insurance while fully securing your cash outlay.
Life insurance coverage on a key employee
As a business owner, the death of a key executive, manager or shareholder can leave you facing a number of cash needs. A replacement must be recruited and trained, inexperienced subordinates may cause mistakes or delays that result in losses, loans may come due, and customers must be assured the business will continue to operate. How will you finance these expenses without jeopardizing your business operations and cash flow? Key employee life insurance can protect your business against financial loss if a key person dies.
Life insurance in qualified plans
In addition to using life insurance to provide a death benefit for your employees, you can also use it to fund your company's qualified retirement plan. Certain legal limits apply in general and according to the type of plan (defined contribution or defined benefit). Using life insurance together with a qualified plan combines the benefits of both while also offering unique advantages to you and your employees.
Business credit life insurance
As the owner of a new or expanding business, you may have difficulty obtaining a loan to finance your business needs. Lenders want assurances that loans will be repaid, even if you die unexpectedly. Business credit life insurance can make it possible--or easier--for you to obtain a business loan by guaranteeing its repayment through a life insurance policy taken on your life.
This is the first in a series of eleven articles around Business Uses of Life Insurance.
The information contained in this article is general in nature, provided for educational purposes only and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney, tax professional and financial advisor. Investing involves risk, including loss of value. Insurance and other financial products and services may be subject to certain terms, conditions and costs not identified within the enclosed material. Any strategies represented are not guarantees of future performance or success, and may not be appropriate for your situation. Please consult your CPA or other tax professional before moving forward with any financial products. Also, do not post any information you do not wish to be shared with others. If you have a matter requiring immediate attention, contact me at [email protected].
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