As a business owner you often face unique financial-planning issues. As a result, the insurance industry has designed various products and strategies that not only can help resolve some of these issues, but also support you as a business owner to attain financial and personal goals.
Develop a Succession Plan: Without a plan of action, in the event of a premature death or inability to work because of a disability, your business’ success could be jeopardized. You need to dictate in advance who will manage your business during either of those circumstances by developing a succession plan. This will provide an orderly transfer of management and ownership of your business.
Funded with life-insurance and/or disability-income policies, a properly drafted buy/sell agreement can help create succession plans. Proceeds from these policies can offer piece of mind, assuring you of cash liquidity for stock redemption or the cost incurred in your absence from the business. By using a shared-ownership or split-dollar program, you can use a life-insurance contract to:
1) provide liquidity to keep your business going if you die before retirement, or
2) provide tax-deferred cash-value buildup for a post-retirement benefit.
Provide Key Employee Benefits: Business-based life insurance is a tax-effective tool to fund deferred employee compensation. With tax-free loans provided by life insurance, the cash-value buildup offers an added retirement benefit for key employees to supplement their qualified plans.
Enhance Employee Loyalty: By converting group-term insurance to a split-dollar policy, both the employer and employee can benefit. Because the policy is portable, it provides long-term coverage for the employee, and provides reimbursement for out-of-pocket expenses for the employer.
Purchase Disability-Income Benefits: For business owners and key employees, purchasing disability-income policies protects the incomes of individuals who are most valuable in terms of running the business. If the company deducts the premiums for disability-income policies, the proceeds are taxable to the employee. If they are not deducted, the proceeds are tax-free. Adding this form of protection to a key employee’s benefit package is a wise decision.
Add Convalescent-Care Benefits: For employees who are 50 years old and older, long-term care may be a concern. A portable, long-term-care policy that the company pays for could be a great addition to the benefits package. The company can deduct the premiums while allowing the employee to receive the proceeds free of income tax.
These are just a few of the life-insurance products that have been developed over the years to meet various business and employee needs. However, always use caution when choosing these or any other products. Make sure that the product suits your particular financial needs. A
financial advisor can assist you by providing professional expertise and service in this area.
While the information presented here may answer some questions, it is not intended to be a comprehensive analysis of the topic. You should always consult with your own tax and legal advisors before taking any action that would have tax consequences.
This column is produced by Financial Planning Associates, and is provided by R. Hutton Cobb, a Wachovia Securities financial advisor in Greenville, N.C.