I avoid using the term, small business owner, because there’s nothing small about the important work we do. Generally, we’re passionate about our business purpose and the people we serve, so I prefer the term, “closely held business owner”. When you give your heart and soul to your business each day, it’s important to protect it’s healthy longevity and yours.
Closely held business owners typically take steps to insure the physical assets of their business. Yet they often neglect to protect themselves from the loss of an even more valuable asset — a key employee.
What’s a solution?
Life insurance can solve this.
How does it work?
First, the business owner determines who the key employees are.
Generally, they are the most highly compensated employees who make substantial contributions to the company’s profitability. Without them, the business would experience financial hardship.
Next, the business owner determines the value of each key employee. How?
Many businesses use a multiple of five to ten times the employee’s annual income.
If a key employee holds an ownership interest, then the appropriate percentage of company’s net income can be added to the key employee income used in this calculation. (Some states, including New York, have specific requirements for an individual to qualify as a key employee.)
Then the business purchases a life insurance policy on the key employee and is the policy owner, premium payer and names itself as beneficiary.
Premiums aren’t deductible for the employer, but upon the death of the key employee the business receives the death benefit income tax-free*.
At retirement, or if the key employee leaves, the business may surrender the policy for cash value, keep the policy until the employee dies, or as a goodwill gesture, offer the policy as a bonus to the departing employee.
What are four advantages of Key Employee Coverage to the business owner?
1. It can offset the cost of training a replacement and provide a hedge against financial loss if the key employee dies or leaves the business.
2. It assures creditors and other business partners that the business will continue after the loss of a key employee.
3. If the life policy accumulates cash value, then it can be accessed for business opportunities or emergencies.
4. If the life policy is term insurance purchased by the business to protect the key employee’s working years (10, 20, 30 years), then upon that employee’s death it will pay the tax-free death benefit to the business*.
What are some benefits of giving ownership of a term life insurance policy to the departing key employee?
If the key employee leaves the business before retirement age, as a goodwill gesture the business owner could allow the employee to become the owner and payor of their term life insurance policy, name their own beneficiaries, and pay their locked-in premium rate for the duration of the original term of the policy.
When the key employee becomes the owner and payor of their term life policy, they also may have the right to convert their term life insurance into permanent life insurance at the same health rating they earned when they qualified for the life insurance policy with the insuring company — regardless of what health issues may have arisen during the term of their protection. Often, no current health questions are asked when the insured converts a term policy into lifetime protection, even if this takes place 20 or more years into the term of the policy, even if a current health condition would make them un-insurable if they had to qualify for coverage today.
I imagine you see how these valuable benefits may help business owners recruit, reward and retain key employees whose vital contributions support the financial longevity and powerful purpose of the business.
And if you want to consider the best type of key employee insurance for your business, and the best protection for yourself and your family, feel free to schedule a complimentary consultation with Anne Morgan. As an advisor for a Fortune 400 company, Anne Morgan loves helping you grow your business, take advantage of the ups and downs in the market and have money when it’s needed most. For more information, call Anne at 630.841.5504 Or visit OakBrookWealthProtection.com
* Death benefit proceeds from a life insurance policy generally are not included in the gross income of the taxpayer/beneficiary (Internal Revenue Code Section 101(a)(1). There are certain exceptions to this general rule, including policies that were transferred for valuable consideration (IRC 101(a)(2)).
And my closely-held business purpose is–
Creating happy, sexy love, health and wealth that lasts,