Life insurance is an important feature of many business arrangements. While most business owners are familiar with providing life insurance as an employee benefit, many may not fully appreciate the variety of other business uses that are available. Here are some of the more common ways you can use life insurance to help benefit and solidify your business:
Funding Buy-Sell Agreements. Under a typical buy-sell agreement, business partners agree to purchase each other’s interest if one of them dies. Life insurance can be a cost-effective method of funding this type of agreement provided you and your partner are insurable. And, if you purchase cash value insurance, you can use the accumulated cash value to buy out your partner’s share if he or she retires or becomes disabled. Keep in mind, however, that access to cash values may affect the death benefit and other features of the policy.
Providing an Employee Benefit. Life insurance is a basic component of many employee benefit packages. One good example is a traditional employee group term plan, which generally covers most employees. You can also use life insurance to enhance the benefits of select (key) employees who are vital to the success of your business. In many instances, this death benefit coverage can be provided at little cost to the select employee.
Insuring Key Employees. The death of a key employee can create a number of financial pressures for a business: revenues may be affected; customers must be assured business operations will continue; and a replacement must be recruited and trained. Key person life insurance can provide funds to help meet all these needs without jeopardizing your business operations or cash flow.
Insurance in Qualified Retirement Plans. Life insurance can generally be acquired within a company’s qualified retirement plan. Legal limits apply in general, and some may be specific to whether the plan is a defined contribution plan or a defined benefit plan.
Guaranteeing Business Loans. Owners of new or growing businesses may face difficulty in obtaining business loans. Lenders want to be assured that loans will be repaid, even if you die unexpectedly. Business credit life insurance may make it easier to obtain financing by guaranteeing repayment with a life insurance policy.
Tax Benefits and Consequences. Life insurance presents business owners with many opportunities for tax savings, but has the potential for negative tax consequences. It is important to understand the issues up-front. Careful planning is essential to maximize the tax benefits and minimize—or eliminate—any tax consequences.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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