You have spent years building your business from the ground up. Your investment of time, training and money has paid off with success. There’s a good chance that you have already taken the steps to insure your physical business assets. Yet, if you’re like most business owners, you may have overlooked one of the most important assets your business has – your employees and your partners.
Have you thought about what would happen if one of your key employees or your partner were to die unexpectedly? Would your business be able to continue without serious financial consequences? These are questions many businesses only ask once it is way too late. We routinely assist companies help mitigate risk, be ready to best face adversity and position properly for when partners or key employees need to transition from the business.
Life insurance can play an important role in protecting your business if you were to lose a key employee. Here’s how it works:
• First, determine who your key employees are. These individuals are generally highly compensated employees who make a substantial contribution to the company’s profitability. Without them, your business may experience a financial hardship.
• Next, determine the value of the key employee: – Many businesses simply use a multiple of the employee’s annual income, generally five to ten times the amount – You can also determine the value by estimating the employee’s contribution to the company’s profit and the cost of replacing the employee – If any loans would come due as a result of the employee’s death, you may also want to include those amounts when determining the value.
• Once the value is determined, the business purchases a cash value life insurance policy on the life of the employee and names itself as the owner and the beneficiary.
• The business pays the premiums for the policy.
• In the event of the key employee’s death, the business receives the death benefit income tax-free*.
• If the key employee leaves the company or retires, the business can either surrender the policy and receive the cash surrender value, continue the policy and receive the death benefit at the former employee’s death, or offer the policy as a bonus to the employee (at it’s present value)
Let’s re-cap the Benefits of a Solid Business Continuation Plan:
Protection Against Financial Loss - The death benefit helps offset the cost of recruiting, hiring and training a replacement and also helps make up for any financial loss.
Security for Creditors - Strengthens the business’s credit by assuring creditors the business can continue financially even after the loss of a key employee. Sometimes required for types of loans – but always excellent as a ace in the hole to secure funding.
Access to Cash Accumulation - Provides the company with a cash value*** which can be easily accessed for business opportunities or emergencies.
Life insurance can play an important part in ensuring that your business can continue successfully even without a key employee. Take the time to put a plan in place today. Contact us and we can help walk you through the process and find the right plans for you.
* Employer Owned Life Insurance (EOLI) – Failure to satisfy IRC Section 101(j) notice and consent requirements, as well as the reporting requirements contained in the federal regulations, may result in the loss of the income tax free treatment of the life insurance policy’s death benefit.
*** The amount that may be available through loans or withdrawals
Dan Isaacson, age 45, is a skilled architect who has been employed by Davis Construction for 18 years. Dan has played a significant role in building the business.
As the owner and founder of Davis Construction, Alex Davis understands how important it is to plan for the unexpected, especially when it affects the success of his business. Alex decides to purchase a cash value life insurance policy in case Dan dies unexpectedly. Dan is currently earning $100,000 annually and Alex has determined that it will take five times Dan’s current income to replace him and recover any lost business costs in the event of Dan’s unexpected death.
After spending three years training his replacement, Dan is ready to retire at age 65. Davis Construction chooses to surrender the policy and receives the surrender value of $130,736. Considering that Davis Construction has paid $125,480 in cumulative premiums over the 20 years the policy was in force, the net cost of this policy would be $0 and they would receive over $5,000 of taxable income**.
**This illustration is for example purposes only