In last week’s blog post, we discussed the myths perpetuated about life insurance and small businesses. In reality, life insurance can be a boon to any business, no matter the size. Now that we’ve addressed the myths, it’s time to dive into the application. If you’ve been wondering how to boost your business with life insurance, here are 5 ways you can implement a life insurance strategy.
How to Boost Your Business with Life Insurance
1. Strategizing for the Future
Whole life insurance is one of the best assets for long-term planning. First, because it reinforces lifelong savings habits. Second, because it is protected from loss, which can help support other, less certain assets.
Here are a few ways that life insurance can help with long-term strategy.
Succession Planning
Life insurance acts as the cornerstone to many business succession plans. The life insurance is used to fund a buy-sell agreement, allowing surviving business partners to purchase the deceased partner’s share of the business. This way, surviving spouses and heirs can receive their share of the business, while the living partners can maintain control of the business. We believe that this method reduces conflict and allows operations to run more smoothly.
The cash value of the policy can also help one partner buy out another partner’s interest in the business, if the two parties agree.
Key Employee Policies
Businesses wouldn’t dream of not insuring their buildings and equipment. So why wouldn’t they insure one of their greatest assets? If an employee’s skills, knowledge, and assets are essential to business operation, insurance makes sense!
These policies, designed to insure hard-to-replace employees, could cover:
- A company manager
- Head chef of a restaurant
- The top salesperson
- A highly trained employee
Key Person insurance is ideal for employees whose absence would cause a disruption in the operation of your business. The death benefit can compensate the family and aid in the training of a new employee. A waiver of premium rider can ensure that in the event of a disability, the life insurance company will pay the premiums. And this type of insurance can provide additional liquidity to the company, which can aid in employee benefit packages or emergencies. Lastly, Key Person insurance can allow for pension maximization.
Estate Equalization
Business owners often have children with different levels of interest and involvement in the family business. With estate planning, and the question of inheritance, parents can be put in a tricky spot. Life insurance acts as an additional asset to be used in the multi-generational balancing act.
2. Tax Optimization
The tax-free growth of the cash value is one of the more attractive aspects of whole life insurance. Tax benefits are a big reason banks and other big corporations fund insurance policies in the first place.
Leveraging that cash value is also tax-free, unless the loan is not paid back, at which point it is considered income. Furthermore, the death benefit is passed on to beneficiaries tax-free. These advantages provide greater liquidity, and often a greater rate of return than insurance’s taxable counterparts.
Sometimes, life insurance premiums may even be deductible, though it’s important to consult a professional advisor and/or accountant for help.
3. Cash Flow Management
Emergencies AND Opportunities
A key feature of whole life insurance is the ability to leverage your cash value in lean times, for emergencies, or even for opportunities (our favorite). Too often, small businesses with low overhead assume that they don’t need a large savings. Yet, any company can run into cash flow issues life:
- Product recalls
- Late-paying clientele
- Loss of key clients or distributors
- Necessary technological upgrades
- Economic uncertainty (a big concern in 2020)
When COVID-19 put the country on lockdown, many brick-and-mortar businesses had to close, or pivot their business model altogether. Having liquid savings can help your business pivot, make payroll, and weather storms.
And, if a business opportunity “falls into your lap,” you’ll be positioned to take it. After all, “opportunity comes to those with cash.”
Creditworthiness
Life insurance can also improve your cash flow by boosting your creditworthiness. While you’re able to borrow up to about 95% of your cash value at any time (and for any reason), your cash value can also act as leverage. This can help you secure preferred lending rates at banks or other institutions.
Banks view life insurance as a stable asset, and can factor into a favorable lending decision. Sometimes, like loans from the SBA (Small Business Administration) require life insurance, though term can also work in this instance.
4. Financing Capital Expenditures
If you’re in a business that requires significant equipment to operate, whole life insurance can be a huge boon to your business. For example, farmers often pay upwards of 18% for equipment loans. Insurance can help farmers not only insure their income and families, and finance their equipment at better rates.
Here’s the icing on the cake–when business owners want to borrow against their policies, they never have to worry about their credit scores, or justifying their loans. You can apply this same idea to computers, office equipment, and much more.
5. Employee Benefits
One of the top pain points of small businesses is finding (and keeping) quality employees. An attractive benefits package can help a business secure top talent. Here’s how life insurance can help fund these benefits:
Life Insurance Benefits
Executive employees often want higher death benefits, and a split-dollar life insurance policy is an ideal way to offer this. This allows business owners to offer the benefits of a life insurance policy, while recouping some premium outlay.
Unlike a 401(k), you’re able to offer life insurance at your discretion.
Non-Qualified Deferred Compensation and SERPs
Life insurance is often used for deferred compensation plans. NQDC (non-qualified deferred compensation) uses contributions from the employees, while the company often funds SERPs (supplemental executive retirement plans).
As a business owner, this can help you keep your top employees while offering benefits. In fact, life insurance is a compelling reason for employees to stay long term, beyond bonuses, qualified plans, and stock options. Non-qualified plans also have greater flexibility than their counterparts, and can be designed to meet the unique desires of your business and employees.
Is It Time For You to Boost Your Business with Life Insurance?
As you can see, there are plenty of ways that life insurance can support your business, no matter the size! To speak with a Prosperity Economics Advisor, and get more information about how you can implement life insurance strategies, click here.
To get a better sense for how you can utilize life insurance better, check out the book “Live Your Life Insurance,” by Kim Butler. This book is packed with knowledge that’s useful for business owners and individuals alike. Get your free copy here.
