Business Insurance
A closely held business can continue to be successful, if the unthinkable happens.
The success of a business is largely dependent on strategy, planning and - of course - hard work. But there are a few areas that can sometimes get overlooked. For business owners, these areas usually concern protecting and rewarding key employees or successfully transferring a business to surviving family members or partners.
Business insurance can help ensure that all the effort and money invested in a business does not disappear when thing don't go as planned.
The following is a sampling of the types of programs we can help you use to secure your business investment:
Key Employee Life Insurance
Almost every business has key employees who are essential to its overall success. A key employee can be anyone who, among other things, is responsible for management decisions, is highly paid or has a significant impact on sales. If a key employee passes unexpectedly, replacing his or her knowledge, experience and potential loss of earnings can be costly, time-consuming, and sometimes fatal to a business.
Key Employee life insurance is designed to:
- Provide cash to offset the loss of profits due to the death of a key employee.
- Provide funds to recruit and train a qualified replacement.
- Protect the company's credit position by reassuring banks and other creditors that the company will have the resources to honor its obligations, event if it loses a key employee.
- Provide a financial edge against a loss in business value.
- If the employee is also a part owner in the business, death benefit proceeds can be used to buy the employee's interest from the employee's heirs or estate.
- An employer can be selective about which employee to cover.
- The employer may also use Key Employee life insurance as a non-qualified deferred compensation plan. At retirement, the employer may take withdrawals and loans from the policy's cash value to provide taxable retirement income to the employee.
Executive Bonus Plan
Attracting, retaining, and rewarding key employees can be challenging. If you have clients that are business owners, then you may know first hand just how hard it can be to hold on to top employees. But since they are vital to the life of every business, keeping them committed is essential. Loyal employees are hard to come by, and with recruiting and training costs on the rise, keeping reliable, quality employees are more important than ever. A helpful solution to offer your clients is an Executive Bonus arrangement.
- Under an Executive Bonus plan, the employer gives the selected employee a bonus, which the employee uses to buy a life insurance policy. the employee is the insured and owner and names his or her own beneficiary.
- In a Single Bonus arrangement: the employer pays the life insurance premium on the employee's behalf as a bonus. The employee is responsible for the income tax on the bonus.
- In a Double Bonus arrangement, the bonus amount pays the premium, the tax on the premium, and the additional tax created by the bonus to minimize the tax effects for the employee.
- They employer pays the life insurance premium on behalf of the employee.
- They employee's beneficiaries receive death benefit proceeds generally free of federal income tax.
- For the business, the bonus my be a tax-deductible business expense.
- The employee could pay additional premium to grow the policy's cash value and augment the cash value available to help supplement retirement income through withdrawals and policy loans.
Buy-Sell Agreements
A Buy-Sell agreement can help protect your business from the effects of unintended or unwelcome transfers of ownership. It may also help protect the heirs of the deceased owner, by giving them an opportunity to turn shares into cash. It is important for surviving family member or owners to develop a plan to fund the transfer of ownership of the business.
Entity-Purchase Agreement:
- An Entity-Purchase Agreement is an arrangement between the business entity and individual business owners. The business buys a life insurance policy on each of the owners and is the beneficiary.
- The business pays the life insurance premiums.
- The business pays the life insurance premiums. Because the business has an interest in the tax-free death benefit, premium payments are not tax deductible.
- The agreement would be relevant to setting the value of the business interest for federal estate tax purposes.
- Heirs receive a pre-determined price for the deceased's share of the business.
- The business could pay additional premium to grow the life insurance policy's cash value. The business could potentially buy the retiring owner's shares through withdrawals and policy loans from the policy's cash value.
One-Way Buy-Sell Agreement
To close a proprietorship at the death of the owner, the executor must bring the business to a conclusion in order to settle the estate. Without an agreement and the money to continue, the business may have to be sold at a discount in a forced liquidation. Employees may lose their jobs and the sloe proprietor's family may be left with no income. A buyout agreement using a life insurance policy may eliminate these devastating results.
In a One-Way Buy-Sell Agreement, the sole owner and a purchaser agree to transfer the business interest at a certain value (or method for determining value) upon the occurrence of a specified event. The event can include a number of options such as the death of the owner's death, disability or retirement. A One-Way Buy-Sell Agreement is most often used with a Sole Proprietorship, but can also be used effectively with single-owner corporations and Limited Liability Companies (LLCs).