One of the first things any business owner needs to consider is how to protect against events that may threaten the future of the business, like the death of a proprietor, partner or key employee.
Here are several components of business continuation plans that can protect family and partners from unwanted debts and responsibilities when an owner dies:
Life Insurance
Many small business owners take out loans to help grow their businesses, and often secure these loans with personal assets. If you have business loans and were to pass away before they were paid off, you might think your family could sell or liquidate the business to cover the debts and provide financial security for them. In reality, this rarely happens.
When the family is forced to sell the business quickly, they may have to sell at a discount or during market conditions that make the business less attractive. In other cases, the business may be worth very little without the proprietor or partner.
Individual life insurance can protect your family by providing funds to cover debts, ongoing living expenses, and future plans in the event that something happens to you.
Buy / Sell Agreements
You might think that if you die, your family could maintain their income by running the business themselves or by hiring someone to handle the day-to-day management. The fact is, your loved ones may not have the skills or the desire for the job, and your co-owners may not welcome the idea of an unintended partner.
A buy-sell agreement is an agreement between owners to buy out a deceased owner's share of the business in the event of the co-owner's retirement, disability or death. Buy-sell agreements are typically funded by a life insurance benefit sufficient to buy out the deceased's share, thus providing financial security for the surviving family. The amount is usually specified in a contract created with the help of an attorney.
You can enter into a buy-sell agreement at any time, but it often makes sense to do so when a business is formed or when new owners are brought into the business. Because business values can fluctuate, it's important to review the contract with your accountant at least once per year or to include a calculation method in the agreement. Also be sure the insurance coverage funding the agreement is up to date.
Though not as common as insuring against death, business owners can also insure against the risk of becoming disabled and unable to work. In this case, disability income buyout insurance would fund the buy-sell agreement, allowing the disabled owners to be bought out, typically after a one-year waiting period.
Key Person Insurance
In a small business, there are often certain employees who have a particularly critical impact on the bottom line. Key person insurance is life or disability income insurance purchased by the business on the life of such an employee and payable to the business. The death benefit can help make up for lost sales or earnings or cover the cost of finding and training a replacement.
Executive Benefits
Rewarding Your Top Executives
In today's competitive environment, attracting and retaining top executives is more difficult than ever, and demands creative solutions. Executive benefits may offer your best employees a higher level of benefits and compensation along with significant tax advantages. They also compensate for the fact that most 401(Mk) programs restrict the ability of executives to accumulate enough money on a tax-favored basis to fund the retirement lifestyle they desire.
Here are a few types of executive benefits that can help separate your company from the competition.
Traditional Deferred Compensation Plans (including SERPs).
In a deferred compensation plan, the executive defers a portion of his or her present compensation until retirement.
In a Selective Executive Retirement Plan, the employer will provide funding for a defined benefit or defined contribution plan for a select few people. Under a properly designed plan, no taxes are due on the money until it is received.
Some plans also promise to pay the executive's spouse a benefit if the executive dies before retirement. Others will pay the executive a certain amount in the event of disability.
Often life and disability income insurance policies are used to help informally fund the payments.
Section 162 Plans.
Often called "Executive Bonus Plans," section 162 plans are a simple way to reward your top people.
Under this type of plan, the employee purchases a permanent life insurance policy on his or her life. The company bonuses the employee the premium, which is usually considered taxable income to the employee and tax-deductible to the employer. The employee controls the policy, including the death benefit and the cash value, which accumulates tax-free until it is withdrawn.
Supplemental Disability Income Insurance.
Most group long-term disability policies provide roughly 60 percent of an employee's income, up to a stated maximum. For most employees, two-thirds of their income won't exceed the employer's maximum benefit. But for highly compensated executives, the maximum benefit may amount to less than 50 percent of their take-home pay in the event of a disability. To address this problem, employers often purchase additional individual disability income policies on these executives to bring their total benefit, on a percentage basis, up to the same level of all other employees.
For learn more about Insurance basics for Business Owners, visit LIFE, The Life and Health Insurance Foundation for Education, a non-profit organization dedicated to addressing the public's growing need for information and education about life, health, disability and long-term care insurance.
