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In addition to life insurance, retirement income, and investments, your financial
plan should address other financial scenarios as well, including Business Insurance.
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Life insurance is useful in business settings, where it can be used both
to reward key employees and to protect the business from the loss of key
employees.
The Chances
of a Key Employee Dying
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If
you have one Key Employee in his or her 30s,
there is a 24 percent chance that the Key Employee
will not live to age 65.
If you have two Key Employees in their 40s, there is a 30
percent chance that one of them will not live to age 65.
If you have three Key Employees in their 50s, there is a 45
percent chance that one of them will not live to age 65.
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When a business fails, it usually has nothing to do with fires, floods, theft,
or other disasters -- or even with the knowledge of the person or partners to
whom business ownership will be transferred. Instead, it has to do with the
life of your business -- the people who make the business happen and the
financial planning it takes to successfully transfer a business to surviving
family members or partners.
Life insurance can help you protect and extend the life of your business.
Through key employee protection, employee-benefit programs, buy-sell plans
and other unique funding arrangements, life insurance may provide valuable tax
benefits and may retain employees, protect the business from loss, and
ensure that the business is transferred successfully.
Protecting
Your Business
A building may never burn, but every human being will eventually die.
When a key employee (a business owner or an employee who is integral to the
operations of the business) dies, the business immediately loses that person's
business knowledge and experience. Replacing that knowledge and experience can
be costly, time-consuming and sometimes fatal to a business.
KEY EMPLOYEE life insurance is a protection plan...for the
life of your business. A business needs protection from the financial loss
that may result from the death of a key employee, owner, or partner. Life
insurance may provide immediate cash that can be used to offset loss of
profits and to hire a qualified replacement. It also helps protect the
company's credit position; may provide
a financial hedge against a loss in business value; and may allow the employer
to provide additional compensation to the employee.
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Attracting,
Retaining and
Rewarding Key Employees
Attracting, retaining and rewarding key employees can be just as challenging -
and just as important - to the life of your business. When a piece of office
equipment breaks down, you can call a repair person or purchase a replacement.
When a key employee leaves, however, there is no local office supply store with
qualified replacements on the shelves. Interviews and tests must be conducted,
and money must be expended to train the new employee. Even with training, it is
often several years before the new employee gains the same level of knowledge
and expertise in your business.
Recruiting and retaining quality employees is vital to the life of a business,
but with downsizing, mergers, and increased competition, paying the highest
salary is often not a practical solution for many employers.
Two employee-benefit plans can help you meet this challenge: the Executive Bonus
Plan and the Deferred Compensation Plan. Life insurance may play an
important role in each.
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| A Selective Compensation Package for the Life
of Your Business |
The
EXECUTIVE BONUS PLAN is a selective compensation program
designed for the life of your business. As a business-sponsored program, it
may help you attract and retain Key Employees by rewarding them with a bonus
used to purchase a life insurance policy. You can select which employees
receive the bonus - without IRS approval - and the business gets the advantages
of tax-deductible premiums and compensation flexibility.
In addition to the life insurance protection it provides, the policy's
cash value may be used by the executive as a source of retirement funds. Both of
these uses will encourage key employees to join and remain with your
organization.
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| An Incentive Program for the Life of Your
Business |
DEFERRED
COMPENSATION is an incentive program...for the life of your
business. It is designed to provide a benefit to an executive upon his or her
retirement or to survivors at the executive's death. One advantage of
deferred compensation is that the executive may defer compensation until some
future date when the executive's income tax bracket may be lower than
during the executive's peak earning years.
Life insurance may be used as a source of providing benefits under the
deferred-compensation plan:
1) as Key Employee Life Insurance for the business and
2) as part of an incentive program for selected key employees.
As Key Employee Life Insurance, it can be used during an employee's working
years to help replace his or her service in the event of an untimely death. As
a Retirement Incentive Program, it can be used as a reward for service and an
incentive to stay (no benefits are paid if the employee leaves prior to
retirement). Funding a deferred compensation program with life insurance is an
ideal way to simultaneously attract, retain and reward key employees, and
protect a business.
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Transferring
Business Ownership
The death of a partner or owner could mean the death of a business:
Heirs may insist on a job or an active role in management or
demand that dividends be paid.
Employees may feel insecure about their jobs and look for new
ones.
Creditors may tighten up on credit in light of the firm's
weakened condition.
Surviving owners may have no cash for a buy out.
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| A Transfer Plan for the Life of Your Business |
A BUY-SELL plan
can help prevent these and other business transfer problems. A life insurance
policy may help assure that funds are available when needed to purchase the
deceased's business interest. A Buy-Sell agreement can protect and extend the
life of your business.
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Selecting
a Plan
Life insurance can be as significant to the life of your business as the
plan you choose. There is a life insurance strategy that serves both as a
business insurance plan and as a payment method that can be used with
other plans. This strategy is called Split Dollar.
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| Sharing the Cost for the Life of Your
Business |
A
SPLIT DOLLAR arrangement allows you to
share the cost for the life of your business. Through this arrangement, life
insurance premiums, death benefits and, sometimes, cash values are split
between two parties, usually an employer and an employee. Upon the death or
retirement of the employee, the employee's interest in the arrangement,
which is usually equal to the employer's
cumulative premium payments, is paid to the employer. The remaining benefit or
cash value, if any, is paid to the employee's beneficiary.
Split Dollar can be used in a variety of situations
that may benefit from the use of life insurance. Such situations include
deferred compensation, salary continuation, buy-sell agreements, and
estate liquidity.
As this concept demonstrates, it is important to consider life insurance as
part of your overall business plan. Whether it is used to protect a business,
to attract and retain key employees, or to ensure an orderly transfer of
ownership, life insurance can be critical to the life of your business.
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