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Life insurance can be used to cover costs, pay employees, and ensure that there are funds available to keep the business afloat if the owner dies.
Life insurance can also be used as a tool to attract and retain top talent by providing financial protection for their loved ones.
In this article, we will discuss the 4 best ways that one can use life insurance for business planning.
4 Ways To Use Life Insurance For Business Planning
1. Buy-sell Funding
Every successful business needs a succession plan to ensure that it continues even after an owner’s disability or death. Buy-sell agreements are contracts that spell out who owns the business and what happens to their shares if there is a sudden departure, disability, or death.
Life insurance is commonly used to fund a buy-sell agreement so that the surviving owner or entity can use the life insurance proceeds to purchase shares of the deceased owner(s) and ensure a smooth transition. This is also important so that the business remains under the control of who it was intended for and reduces conflict among various parties.
There are two main ways a life insurance policy can fund a buy-sell agreement:
Entity plan – The business entity (eg. LLC) purchases the deceased business owner’s shares. Aka stock redemption plan.
Cross-purchase plan – The surviving owner purchases the deceased business owner’s shares.
2. Key Person Coverage
Key person insurance is especially important for businesses that rely heavily on particular employees whose contributions are key to the business’ success.
If that key employee dies, the life insurance proceeds will hopefully:
Offset any financial losses like a decrease in sales.
Cover any administration costs of finding a replacement.
Example of how much key person insurance costs. Source: Baily Insurance
The business owns, pays for, and is the beneficiary of the key person’s life policy.
3. Executive Bonus Plan
Companies can choose to pay employees bonuses by paying for the employee’s policy life insurance premiums. Aka Section 162 bonus plan, an executive bonus plan is a non-qualified employee benefit arrangement that allows bonuses paid to life insurance policies to be tax-deductible to the employer. #winwin
This is a great way to attract and retain talent as the employee is essentially getting their life insurance paid for with the bonus and can build up cash value (depending on the type of insurance) that can be accessed in retirement.
Note that the employee is the owner of the policy and the bonus is included in their gross income. Death proceeds are free of income tax.
4. Deferred Compensation Plan
In a deferred compensation plan, the employer agrees to pay an employee a set amount of income during retirement instead of paying the money now.
To attract and retain employees, employers can purchase life insurance to fund a deferred compensation plan for employees. This is nice as deferred money is not taxable now for the employee and hopefully the employee will be in the lower tax bracket when they retire. In return, the employee agrees to work for a period of time – typically until retirement.
How it can play out…
If the employee leaves before the contracted period, the deferred compensation benefit is forfeited.
If the employee dies before retirement, the deferred compensation benefits will be paid to the employee’s beneficiary with proceeds from the life insurance policy.
How to Get Life Insurance For Business Planning?
The best way to get life insurance for business planning is to reach out to an independent insurance agent that is not tied to any insurance company. This is important so that you can get quotes from multiple companies and choose the best one that fits your goals and objectives. If you have a financial advisor, it may be wise to rope them in too so that they can help you plan around your needs and financial plan holistically.
To learn more about how an independent agent can educate and help you with selecting the right life insurance policies for business planning, please contact Delandus O’Neal at IMC Financial Consulting (not sponsored) who is literally the best in the business!
Final Thoughts
Life insurance can be a great tool in business planning for businesses of all sizes. Business owners can use life insurance to protect stakeholder interests and ensure that the company can continue running smoothly if they die. In a dog-eat-dog world where companies compete for talent, businesses can also use life insurance benefits to attract and retain top talent as it provides them some form of financial stability and peace of mind.
This post may contain affiliate links. We may receive compensation when you click on links to those products at no additional cost to you. Read our full disclosure here.
