The size of a business is not the determinant factor for a business needs to have life insurance as a funding source. Whether you are a one-person band, a family partnership, a two-person partnership, or a multi-person partnership and the business is an incorporated entity and the owner/partner is a W2 employee your business possibly qualify for some of the tax advantages that could be gained by the implementation of business strategies by thriving larger business that is yearly adding an employee to the payroll.
An Executive Bonus plan can be provided to key executives as a bonus to purchase additional life insurance. The company “bonuses” the executive an amount equal to the premium and tax liabilities because the executive owns the life insurance policy and pays the premiums. The policy’s cash value can be used to supplement their retirement funds or for other purposes. Additional leverage is that if the executive dies during employment, the policy’s death benefits would be paid to the insured’s family typically income tax-free. NOTE: IT IS IMPERATIVE TO REALIZE THAT A ONE-PERSON INCORPORATED BUSINESS AS A W2 EMPLOYEE; YOU ARE THE “KEY EXECUTIVE”.
Businesses with multiple owners need to plan how their portion of ownership will be transferred at their death. Many use buy-sell agreements to accomplish this. One of the ways these agreements can be funded is with life insurance. Each owner would purchase a policy on the other. In the event of death, the benefit is used to purchase the deceased’s share.
To hear it called Succession Planning might leave you wondering what in the world is being referred to, but call it a buy-sell agreement and you begin to get a concrete mental vision of what is being said. Again, using a life insurance policy as a funding source for a business need can be instrumental to ensure funds are available for businesses with multiple owners that have a buy-sell agreement to successfully transfer the ownership portion of the business upon a co-owner’s death to the other partner(s).
Let’s consider the use of life insurance death value while you are alive to secure financing, etc…. Because you are looking to expand and need to finance the project, the bank or other financial institution you are working with may require the owner to buy a life insurance policy on themselves and name the bank as the beneficiary. This will secure the funding bay-back should the owner pass away.
Additionally, whether collateralizing a financing agreement or not, newer policies such as Index Universal Life, and IUL, have the potential for higher returns than traditional whole life insurance guaranteed cash value accumulations. This is because the credited interest is based on the performance of an equity index, such as the S&P 500. Some insurance carriers’ IUL policies include Living Benefits Life Insurance provisions, sometimes without added costs, which go beyond traditional whole life insurance. These leverages add additional coverage for Catastrophic Health Events to use Accelerated Death Benefits (ADB) and allow the insured to obtain and use a portion of the policy death benefit fund/money, to be used at the discretion of the insured, in the event the insured is diagnosed with certain catastrophic health conditions of Terminal, Critical, or Chronic illnesses.