Many small or medium sized business owners don’t know how beneficial a whole life insurance policy can be to a successful company. The truth is, regardless of size, all business owners need whole life insurance. It can help businesses break free from traditional bank loans, benefit their employees, and earn tax advantages.
Big Business Lessons for Small Businesses
Between 2008 and 2009 Wells Fargo increased their whole life insurance holdings from $5 billion to $20 billion. Many other companies, like General Electric and Wal-Mart have done the same. Why do these companies have whole life policies? Here are a few reasons why business owners need whole life insurance:
Whole life insurance is an ideal place for business capital
As a contractual owner of the insurance policy, the business owner has first rights to its cash value. When business expenses arise, the owner can use a policy loan to cover business costs. Capital is then funneled back to the life insurance company so funds will be available again for future business expenses.
Instead of paying high interest rates to a bank, the business owner finances their expenses in a way that allows them to recapture the cost of interest. Business owners need whole life insurance because it’s the ideal place to store business capital.
Whole life insurance can be used to attract and retain employees
When an insurance company issues a policy, they do so because it is determined that the owner of the policy will incur a financial loss when the insured passes away. The insurance industry calls it “insurable interest.” Because a business owner will incur a financial loss when an employee dies, insurance companies generally let business owners have an insurable interest over their employees.
This gives business owners a very unique way to use life insurance as an employee benefit. Instead of paying an “employer match” into a 401k plan (that is inherently subject to market risk), employers may open a life insurance policy on their employees. The business owner receives a tax benefit for paying the insurance premium*, and also has 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 can list their business as the policy beneficiary.
Whole life insurance provides a business secession plan
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 passes away, 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.
Business owners need whole life insurance in the event that one business owner leaves the business due to illness, disability or retirement. When this happens 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 the intellectual capacity of business partners and other employees
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 use policy loans to finance business expenses and future business liabilities. The policy’s 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 associated with whole life insurance, which extend to the cash value growth while the insured is living, as well as to the death benefit after the insured has passed away. Business owners need whole life insurance because, in general terms, whole life insurance provides a place to grow wealth tax free. With careful planning, distributions can also be taken tax free.
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.*
Whole life insurance is an excellent asset that a business owner can utilize, as it provides flexibility, growth and security. Many fortune 100 and 500 companies have utilized the power of whole life insurance for decades. Whether you are a large or small business, owning whole life insurance should be one of your first priorities. To maximize the benefits of whole life insurance for your business, schedule a free consultation with a Wealth Strategist.
Watch: How to Protect Your Policy
*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.