Businesses use life insurance in a variety of important ways. For example, business 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 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. Business owners can use the cash value to repay business loans. The cash value can also help the owner obtain financing for a new or expanding business.
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. Your partner’s death may also result in a disruption of business with an accompanying loss of revenue.
A life policy provides an alternate method of funding a buy-sell agreement. If you and your partner are insurable, it offers relatively low-cost coverage. The benefits are not limited by a partner’s death. When you purchase a permanent cash value policy, you can use the accumulated cash value to purchase your partner’s share if he or she retires or becomes 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:
• Funding buy-sell agreements
• Providing an employee benefit
• Insuring a key employee
• Guaranteeing a business loan
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. It could be 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. Plans such as a split-dollar plan, a reverse split-dollar plan, a death benefit only plan, or an executive bonus plan.
A life insurance policy 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. 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? There are ways of funding your employee’s nonqualified deferred compensation plans.
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.
Group Life Insurance
Many employees have come to expect group life insurance as part of their benefits package. As an employee, group life functions somewhat differently from your individual life insurance plan. It offers a number of important advantages.
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. It will take time and money to hire and train a new employee. An inexperienced subordinate may cause mistakes or delays that result in losses. Various loans may come due. 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.
Death Benefit Only Plans
A death benefit only plan is another form of group carve-out arrangement. As an employer, it allows you to offer key employees an attractive benefit at a reasonable cost. These plans are specifically designed to provide an estate tax advantage by keeping the death benefit out of the employee’s estate at death.
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.
Corporate-Owned Life Insurance (COLI)
How can you assure employees you’ll be able to meet your obligations under a nonqualified deferred compensation plan?
You can use a Corporate-Owned Life Insurance (COLI) to fund your nonqualified deferred compensation plan. COLI provides a source of cash to meet your obligations and assures employees their benefits will be protected from the demands on your cash flow.
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. The lenders will 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 policy taken on your life.
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