LIFE INSURANCE FOR YOUR BUSINESS
Life insurance can be a valuable business strategy tool. The death benefit and cash value potential can be used for various purposes such as helping you retain your key employees, rewarding your top executives, ensuring the continuity of your business, and even providing extra income for your retirement. Here is an overview of some ways in which life insurance can be part of your business-planning strategies. For more detailed information, please contact us.
Executive Bonus Plans
Executive bonus plans – which are sometimes called Section 162 plans – allow you to pay a bonus to any employee(s) of your choosing. These plans are flexible and you can start or discontinue an executive bonus plan at any time. You can decide who will receive this benefit, and in what amount. The bonus can then be used to fund life insurance coverage for them and their families, and may serve as a tax deduction for your business if you write it off as employee compensation.
Executive bonus plans can be a great way to attract and retain key employees, and they’re straightforward to set up and administer. They are a valuable benefit because they provide necessary life insurance coverage and a potential source of retirement income for your employee(s), at little or no cost to them. And remember that as a business owner, you can set up an executive bonus plan for yourself, too – so you can enjoy the same tangible benefits as your employees.
Non-qualified Deferred Compensation Plan
Non-qualified deferred compensation plans allow your employees to set aside a portion of their income, with the expectation of receiving a payment or benefits at some point in the future. A properly structured plan allows employees to defer taxation until the benefits are paid.
These plans can be an effective employer retention tool if a vesting schedule applies, because employees will be required to wait for the specified time period to realize the payment and/or benefit offered by the plan.
Non-qualified deferred compensation plans can benefit your employees by potentially reducing their annual income tax liability for as long as they’re participating in the plan. This is because employees won’t pay taxes on any income they defer, until they withdraw it from the plan.
When your business uses life insurance to fund its obligations under a non-qualified deferred compensation plan, there are income-tax benefits for your business. Your business can deduct the plan’s administration costs, but not the premium amount. Non-qualified deferred compensation payments are generally deductible when your business pays them, just like regular wage or salary payments.
Keep in mind that, as business owner, you can also set up – and enjoy the benefits of – a non-qualified deferred compensation plan for yourself.
Key Person Life Insurance
Key person life insurance covers one (or more) of your key employees, with the primary goal of protecting the value and ongoing operations of your business. A “key person” can be any employee whose absence would have an adverse economic impact on your business.
Key person insurance can be the foundation of a succession plan for your business. By offering a death benefit – and in some cases, a cash value account you can access in an emergency – key person insurance can help make sure that, for your business, life will go on. Life insurance can also provide critical coverage that can help protect the value of your business, and help replace family income for you or your employees.
Key person life insurance is cost-effective because you’re paying only for the cost of the insurance – and you may not have to pay taxes on any death benefit proceeds your business receives.
A buy-sell agreement is a legally binding contract that can help ensure the smooth continuation of a business when an owner leaves or dies. Buy-sell agreements funded with life insurance are flexible because they offer several options for continuing your business in a variety of situations. They also create a binding agreement between the buyer and the seller, and lock in a purchase/sale price.
Buy-sell agreements can help the remaining owners keep control of the business, transfer ownership in an orderly fashion, and provide stability for customers, employees, creditors, and investors. All of these factors protect the value of your business.
Before you set up any of these business insurance concepts, you should consult a tax adviser or attorney for guidance on your unique situation.
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