5 Questions to Answer About Insurance for Business Owners

Proper insurance for business owners helps safeguard the success of your business tomorrow and in the next generation.

You’ve done a great job making your business a success today. However, your focus on day-to-day operations leaves you little time to focus on hidden business risks. Proper business planning can help answer the following crucial questions about the future of your business.

Will my business survive?

Having the proper insurance for business owners helps answer the question: what is the importance of succession planning in a business? It helps ensure that when the time is right, or if the unexpected happens, you can leave your company on your terms. And your successor is ready, willing and able to continue your business. A buy-sell agreement fully funded with life insurance greatly increases a company’s ongoing survival after an owner’s death, disability or retirement.

In a small business, the owner is not the only stakeholder. Co-owners, employees and clients may be affected when an owner retires, becomes disabled or dies. Knowing what the importance of succession planning in a business is and putting a plan in place lets you know how your business will continue when you’re no longer a part of it.

A buy-sell agreement—a formal agreement that arranges for the purchase of the business when certain events— is often a good strategy to avoid business risks associated with business continuation. A well-thought-out, adequately valued and funded buy-sell agreement can:

• Assure a buyer for your business.
• Assure the business owner’s family receives fair value for the business while reducing the costs and delays of probate.
• Reduce the risk of a proposed assessment from an IRS *
• Spell out the terms of the buyout, which can be funded with life insurance.
• Supply a smooth transition of complete control and ownership.
• Assure business continuity.

* For estate tax purposes, the IRS will usually accept valuation from an arms-length negotiated buy-sell agreement.

Will my best employees stay loyal to me?

Your key employees are one of your most important assets and can be critical to the success of your business. In today’s workforce, it’s not only becoming more and more important to hire the best employees, but it’s also crucial to keep them. Providing employees with an extra benefit to supplement retirement savings can go a long way in rewarding and keeping your top talent.

The total cost of employee turnover for businesses is high. It takes a toll on company profits and organizational performance. As competition for employees intensifies, put a plan in place to keep your best employees and help avoid the business risks associated with employee turnover.

Nonqualified deferred compensation
Informally funded with corporate-owned life insurance, nonqualified deferred compensation (NQDC) plans allow key employees to set aside money over and above qualified retirement plan limits and are not required to meet the stringent qualified plan nondiscrimination rules. In other words, they enable you to supply a retirement plan for yourself and other key employees without including lower-level employees in the plan.

A NQDC plan can supply added benefits for key employees who are making the maximum contribution to a qualified retirement plan, such as a 401(k). Or, if you have no qualified retirement plan in place, a NQDC can supply benefits to a limited group of key employees, including the owner. A vesting schedule may tie benefits to years of service, helping improve employee retention. Life insurance serves as a funding vehicle for the agreement1 through which the cash value grows on a tax deferred basis^2.

Executive bonus plans
An executive bonus plan, also known as a Section 162 bonus plan, is a cash value life insurance policy that you, as the business owner, provide to your key employees. You can either pay premiums directly or give your employee a cash bonus to pay the policy premium themself.

The employee owns the life insurance policy even though it’s funded by you. They name the beneficiary and may access other benefits, such as the cash value and accelerated benefits. The plan has all the same benefits as an individually owned life insurance policy and offers you a way to reward your key employees:

• The plan provides key employees with pre-retirement death benefit coverage to protect the employee’s family.
• The cash value in the policy grows tax deferred and can provide the employee with supplemental retirement income or cash for other future income needs.³
• Life insurance supplies post-retirement death benefits to protect the employee’s estate.

Executive bonus plans are exempt from IRS approval and participation can be limited to selected employees. Additionally, premiums are fully deductible, provided they represent “reasonable” compensation under I.R.C. Section 162.

What if I become disabled and can’t work?

If you suffer a disability and can’t work, you need a way to keep your business afloat. Disability income insurance for business owners can supply the cash to help your business survive if disability occurs.

Disability is unpredictable and can happen to anyone at any age. In fact, according to the Council for Disability Awareness, just over 1-in-4 of today’s 20-year-olds will become disabled before reaching retirement age. Planning for these business risks is crucial:

To your business
If you suffer a disability and can’t work, your revenue-producing abilities are gone, but your business expenses continue. You need a way to meet expenses such as rent, utilities and employee wages to keep your business afloat. Disability income insurance for business owners can supply cash needed to help your business survive.

To you and your family
Personal expenses often go up, not down, during a time of recovery. The last thing you want to do is take added money out of your business. Your financial picture may drastically change if you haven’t planned adequately for a disability. Disability income insurance can support your family if you become too sick or hurt to work.

Learn more about disability insurance protection from Ameritas.

Can I retire when I’m ready?

Many small business owners are so busy growing their businesses that they put off planning for retirement. But losing sight of your retirement goals can be costly. Make sure when you’re answering the question what is the importance of succession planning in a business, that you include a strategy for your own personal financial success, so you’ll be able to retire when you’re ready.

Many business owners have no retirement savings plans in place. Too often, small business owners are over-reliant on the value of their business as their main retirement funding source. Those who rely on the sale of their businesses for retirement income are setting themselves up for potential trouble. The reality is that not all businesses can be sold at a significant profit. Other reasons business owners face the business risks of not being prepared for retirement:

• Just surviving takes priority over saving.
• They think the business will provide for their needs.
• Setting up a company savings account appears daunting.
• They don’t consider retirement.

Consider your options
As a business owner, you do have a wide array of retirement plan options. There are qualified plans available, such as a SEP or SIMPLE IRA. Or, if you’re looking for a plan that you can limit participation to a few key employees and is also simple to administer with minimal costs, you can consider a Nonqualified Deferred Compensation Plan or an Executive Bonus Plan. While these plans can be valuable tools in recruiting and keeping top talent for your business, they can also be powerful by supplying valuable retirement and death benefits.

What will I leave behind?

Few people have more business issues to deal with than a family business owner. Life insurance for business owners can play a part in helping you make sure your business carries on after you’re gone. The death benefit will supply cash to your heirs to:

• Buy the business from your spouse so they’re financially secure.
• Pay estate taxes after both you and your spouse have passed away, without having to liquidate any business assets.
• Treat family members not involved in the business equitably.

Many family-owned businesses do not stay in the family when the initial owner is no longer involved. Again, knowing what the importance of succession planning in a business is will help ensure you and your loved ones get the full value of your business when it comes time to sell.

If you’re like some family business owners, your children may not be interested in going into the family business. If you’re lucky enough to have a key employee interested in continuing the business once you’re no longer able to, the question often becomes affordability. Does your key employee have enough cash to buy your business for a fair price?

A key person buy-sell agreement can supply an answer. The business owner and the key employee enter into an agreement requiring the owner’s estate to sell the business and the key employee to buy the business upon the owner’s death. The key employee buys a life insurance policy on your life in an amount equal to the value of the business and pays the premium. When you die, the key employee can provide your estate with the purchase price from the life insurance proceeds.

Insurance for business owners encompasses a lot of different needs and covers many business risks. It can be a little overwhelming to figure out where to start. Find a financial professional today to help you start the business planning process by helping you find business risks and decide which strategies may be most important to implement.

Sources and References: ¹Internal Revenue Code 101(j) requires that when a business purchases a life insurance policy on an employee’s life, the employee must be notified that a policy on the employee’s life will be owned by the business and the employee must give consent to have the employer own the policy. If this notice and consent requirement is not met, most of the death benefit will be subject to federal income tax. ²Benefits must conform to the requirements of the Pension Protection Act of 2006 and may be subject to the Alternative Minimum Tax. ³Tax law permits a policy owner to withdraw life insurance policy cash values up to the policy owner’s basis or investment in the contract without income tax consequences. Withdrawals and loans will reduce the available death benefit. Withdrawals beyond basis may be taxable income. Excess and unpaid loans will reduce policy value and may cause the policy to lapse. If a policy lapses, unpaid loans are treated as distributions for tax purposes. For more information about the tax results of life insurance, consult your attorney or tax advisor.