- Whole Life Insurance provides an Ideal place for Business Capital
Each time that a premium is paid into a whole life insurance policy an increasing percentage of that premium builds cash value. As the contractual owner of the life insurance policy, the business owner has first rights to the cash value. When business expenses arise, the business owner can leverage against the cash value of the policy to satisfy the business expense. Business capital is then redirected back to the life insurance company making those funds available again for future business expenses. Instead of paying high interest rates to a financial institute, this business owner finances their expenses in a way that allows them to recapture an interest cost that they would otherwise pay to someone else. This makes cash value life insurance the ideal place to store business capital.
- Whole Life Insurance provides Business Owners with a tool to Attract and Retain High Quality Employees
Whenever an insurance company issues a policy, they do so because it is determined that the owner of the policy is anticipated to incur a financial loss when the insured passes away. This is what the insurance industry calls “insurable interest.” Therefore, as long as the owner of the policy can prove that they have an “insurable interest” over the insured when the policy is written, the insurance company will issue the policy. Because a business owner will incur a financial loss when an employee dies, insurance companies generally allow that business owners have an insurable interest over their employees. This gives business owners a very unique way to use life insurance as an employee recruitment tool. Instead of paying an “employer match” into a 401k plan that are inherently subject to market risk, employers may choose to open a life insurance policy on their employees. The business owner can then receive a tax benefit for paying the insurance premium*. They also have the right to utilize the cash value of the policy. The business owner may assign the employee’s estate as the beneficiary of the policy or they may choose to list their business as the policy beneficiary. Allowing the employee to designate the beneficiary is a great incentive that employers can provide.
- Whole Life Insurance provides a business secession plan where one owner buys out another
All businesses owners deserve to have a solid exit strategy. A whole life insurance strategy called a “buy-sell agreement” provides for an ideal business exit strategy. In this strategy, a whole life policy is purchased for each business owner. When one business owner leaves the business due to death, the surviving business owner will use the death benefit proceeds of the life insurance policy to buy the deceased business owners portion of the business from their estate. In the event that one business owner leaves the business due to illness, disability or retirement, their life insurance policy contract is simply assigned to the remaining owner(s). The remaining owner(s) now have complete access to cash value and will collect on the death benefit when the departing owner dies.
- Whole Life Insurance Protects against the loss of Business Partners and other Key Employees
Business owners and employees generate a phenomenal amount of revenue to a business. A life insurance strategy called a “Key Person” policy allows for businesses to protect against the lost revenue resulting from the loss of key employees. Business owners are able to fund these policies and leverage the cash value to finance business expenses and future business liabilities. The policy death benefit provides business owners with capital that can be used to off-set the cost of filling voids created by the departure of key employees.
- Whole Life Insurance Provides Business Owners with Unique Tax Benefits
There are several tax benefits that are associated with whole life insurance. These benefits extend to the cash value growth while the insured is living as well as to the death benefit after the insured has passed away. In general terms, whole life insurance provides for a place to grow wealth tax free. With careful planning, distributions can also be taken tax free. Regarding the death benefit, since the IRS considers death benefit proceeds to be inheritance and not income to an estate, they are passed on income tax free. There are estate-planning strategies that ensure that the death benefit proceeds are not included in the estate tax calculation. Additionally, when life insurance premiums are paid into a policy on behalf of an employee, those premiums can be a deductible expense to the employer come tax time.
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*Since Paradigm Life is not an accounting firm or estate-planning attorneys, Paradigm Life encourages you to seek the services of a qualified tax advisor and estate-planning attorney.