Contributed by: Christina Hester Snyder, Associate Partner and Wealth Advisor, Jacob William Advisory
Entrepreneur and political figure Andrew Yang drew an important analogy between parenting and owning a business: “If you knew what it entailed you might not get started. But you’re glad you did.” Like parenting, owning a business involves sleepless nights, cold meals and an unbelievable amount of energy, but it’s also an enriching journey and makes life worth the trip.
Of course, you want to protect your business, which is why business insurance is so important. From the relationships that make the business run to the building it’s housed in, you want to make sure you’re covered – the financial losses and legal consequences can be devastating.
Let’s look at a few of the major life insurance strategies for business owners, and how you can protect your dream.
Uncertainty is a given in life and in business relationships. A buy-sell is a legal agreement between business owners, funded by life insurance to protect surviving partners in the event of untimely death.
Let’s say two business partners start a company, each owning 50% of the shares. The company becomes successful and is one day valued at $10 million. The partners enter into a buy-sell agreement, and the company purchases life insurance on each at 50% of the business value – $5 million.
One dies unexpectedly, and the corporation receives the $5 million payout. As per the buy-sell contract, they then buy out the deceased partner’s heir (his wife). The family is taken care of financially, and they don’t have to worry about running half of the company or selling it to a third party. And the company stays in the hands of the surviving partner, who knows it best.
There can be any number of partners, so there are often more policies involved in a buy-sell agreement. Also, as the business grows in value, the owners should increase the life insurance policy commensurately.
Key Employee Insurance
You probably have a right hand or key employee – someone whose absence could be hugely damaging to the company. If that person died, especially in a small company, how much would that change things? Would production slow down or even stop? Key person insurance is for these situations.
This kind of life insurance covers the untimely death of someone who is invaluable and irreplaceable in the company. If you lose your “right hand,” you’ll be headhunting someone new and training that person, or trying to get your remaining employees to absorb that key person’s duties.
Key person insurance gives you an infusion of cash to get through the transition period of restoring the company after this loss. No matter how you make up for the loss of this employee, the costs involved could be substantial. Key person insurance gives you the capital for the process upfront.
Reward and Retain
What if you want to reward an employee for their instrumental role in the company? In a competitive job market, this strategy could be the difference-maker in retaining that key person. A life insurance contract offered as an Executive Bonus Plan is one strategy to accomplish this.
A company may choose to retain a key employee through bonuses, and one way to do this is to pay that bonus (or part of it) into a life insurance policy. Bonus money is used to pay the premiums on a life insurance policy – usually whole or universal – and the employee is allowed to use that cash value and choose his or her beneficiary to receive the death benefit. The policy could give access to the cash as it grows or at a specific time, such as at retirement.
Unlike other traditional qualified plans an employer might offer, using an Executive Bonus Plan gives the owner control of who they want to provide this benefit to and how much they want to give. Since the bonus is being received by the employee as compensation, they also have some control over how they use the cash value and who will receive the death benefit. It is a win-win for both parties involved.
In the ever-changing landscape of talent acquisition and retention, it might be helpful to look at unique ways to keep that top talent around. It’s a great boost for morale and a gesture toward a positive relationship, telling your people you want them on for the long haul.
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You won’t be in business forever, nor will you live forever. Estate planning is an important part of your overall financial approach and is especially crucial if you are a successful business owner.
A successful entrepreneur with a large hardware store valued at $3 million has three kids, and the oldest is a natural to continue the business. The other children are not interested and have headed in other directions as fast as possible.
The business owner talks with her advisor about estate equalization, a strategy that uses life insurance to assure that her children will receive equal amounts of assets in her estate plan. Put simply, her plan leaves the $3 million company to the interested child, and she then takes out two $3 million life insurance policies on herself, naming the other two kids as beneficiaries. When the owner dies, the business will go to the oldest child, and the insurance payouts will go to the other two children, equalizing the estate.
When the owner retires, the oldest child will take over the business and pay the premiums on the life insurance for his siblings with the proceeds from the business. He is essentially “inheriting” his part of the estate before his parent’s death, and paying the life insurance premiums to contribute to an equal share for his siblings.
This strategy can sidestep some problems with distribution and family dynamics. If the three children were to become three-way owners of the estate, there’s always the danger of a rising tension about who’s not pulling their weight. It also alleviates the issue of Jake not having millions on hand to “buy out” his siblings of their share.
Estate equalization can also allow for more money to be passed on – in this example, rather than $3 million split three ways, each child ends up with $3 million in cash or assets.
Your Business is a Dream Worth Protecting
These are just a few of the insurance needs and strategies available to business owners. Your business most likely started with a dream, and it’s a dream worth protecting. But running the business and eventually passing it on can be complex, emotional situations. Having financial measures like insurance in place can give you confidence.
How can we help you? Our knowledgeable financial advisor team is up to date on business laws and methods for wealth optimization. We also have an insurance team who can review your coverage to assure your business – and your family – are covered and cared for.
Get in touch today for an insurance review for you and your business.
About Christina Hester Snyder
Christina is an associate partner and wealth advisor at Jacob William Advisory with a storied 20-plus year career in financial services. Christina is known for her commitment to her clients and is dedicated to helping them alleviate their financial fears through education and planning that goes far beyond investments. She believes in a comprehensive approach that addresses all facets of planning, including wealth transfer, insurance, taxes, investments, estate and trust planning, retirement, risk management, and business planning. Christina graduated from the University of Baltimore with a Bachelor of Science in Business with an emphasis in international business. She also holds many professional designations, including CERTIFIED FINANCIAL PLANNER™ (CFP®), Chartered Financial Consultant® (ChFC®), Retirement Income Certified Professional® (RIPC®), and Certified IRA Services Professional (CISP™). She is an active member of her community and is involved in many professional and nonprofit groups, including acting as the president of the Maryland chapter of Women in Insurance & Financial Services and serving on the board of a nonprofit that helps Maryland families with financial hardships. To learn more about Christina, please click here.
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