Life insurance has many uses personally and for business. Personally it can be used as protection against premature death, for tax-free accumulation for retirement, for loans for buying items such as cars, charitable giving to your favorite charity, and many others. From a business standpoint, life insurance is used to secure loans, set up buy-sell arrangements, key-man protection, deferred compensation, and loan money to the business for expansion, etc.
It is important to understand how to use life insurance, so you can maximimize the value to you, your family and your business. The most common use is to buy a term policy that will cover you in the event of your untimely death. This policy can be used to provide income replacement to your family or buy your partner out in a buy-sell arrangement. Term is often used for court ordered life insurance decrees, key-man insurance and to function as a loan guarantee. When you start using cash-value products like whole life and universal life, there are even more creative uses. The internal build up inside of the policy can be used as an incredible supplemental piece to your retirement. The money grows on a tax deferred basis, and can be accessed on a tax-free basis if done correctly. The internal buildup is also a great fund to draw upon as you go to borrow against to buy new cars, invest elsewhere, etc. Cash value life insurance is also commonly used as the mechanism for deferred compensation for companies with its leverage and tax-advantage. There are many other uses that I am not mentioning, but this shows the tremendous flexibility of these products.
Do you have key employees in your business? How big of a hardship to the business would it be to lose that employee? What type of financial loss would there be and what type of fall off in production would there be? Would you have the money and resources to hire someone else from the outside that might be able to stop the proverbial bleeding?
These are all important questions we ask business owners when we meet with them. Good people are what make a great business and it is important to consider what the ramifications would be in losing such a person. Would a windfall of money be helpful with such a loss and transition? The answer would obviously be yes to this question. Basically, this type of policy is taken out on a key employees term life insurance and if anything happens the death benefit goes to the company. This gives the company money to deal with the loss of the individual and money to make an effective transition. The biggest challenge to overcome with business owners often times is that they understate how much a loss would effect them. How will it effect your bottom line and how will it effect other employees?
Usually for a small sum of money, this liability can be covered pretty easily. If this is a valuable employee, you can consider turning over the ownership of the policy to them at some point. Maybe it is some type of incentive for staying on for a period of time. There is no limit of how many employees you can have a key man policy on. Some business may have one or two key people and others may have 5 or 10. This is a great application of life insurance and if you have a business, something to really consider.
Do you own your own business? Do you have employees that are invaluable to the success of your company?
If you do, you may want to consider key man life insurance. Key man is basically taking out a policy that the company owns on a key employee’s life. The company is responsible to pay for the premium as they are the beneficiary. To establish the face amount of the policy, the company and their agent determine what they consider the value of that employee to the business. If something were to happen to this employee, the company would receive a death benefit that would help cover the financial loss to the business.
Key man is not limited to the CEO and the President, as it can be anyone who is valuable to the business and its success. Often times the business will use cash value life insurance to cover the life of the key employee (s). They can use the cash value to loan money to the business along the way. On top of that, they can give the policy at some point to that key employee as an extra perk. Some company’s will simply use term life as it is cheaper and for a period specific. It can also allow a company the ability to purchase even more death benefit with mortality rates at an all time low.
If your business would suffer with the loss of an important employee, you may want to take a look at key man life insurance
