Business Owner Strategies

For business owners, life insurance provides strategies for succession planning, business continuity, employee retention, and executive compensation. It can fund agreements that protect surviving partners, provide liquidity to cover debts, and create a tax-efficient retirement savings vehicle.

Key person insurance

This strategy protects the business from the financial loss that would occur from the death or disability of a critical employee, such as an owner or top salesperson.

• How it works: The business purchases a life insurance policy on the "key person," pays the premiums, and is the beneficiary.

• Benefits: The death benefit provides a financial cushion to cover lost revenue, recruit and train a replacement, pay off debts, and maintain stability during the transition.

Equalize inheritance

For business owners with multiple children, some of whom are not involved in the business, life insurance can help create a fair distribution of assets.

• How it works: The owner can use a life insurance policy to provide a financial inheritance to the children not involved in the company, while the business itself is passed on to the children who work there.

• Benefits: This prevents family conflicts and avoids placing a financial burden on the successor to buy out the non-business heirs.

Executive compensation and employee benefits

Executive bonus plans

Also known as a Section 162 plan, this strategy helps attract and retain top talent by offering a life insurance policy as a key benefit.

• How it works: The company pays the premium on a life insurance policy that the key employee owns. The premium is an immediate tax-deductible expense for the business and is considered a bonus to the employee.

• Benefits: The employee gains a life insurance policy with a death benefit for their family, and if the policy has cash value, they can use it for supplemental retirement income.

Non-qualified deferred compensation (NQDC) plans

These plans allow a business to provide extra retirement benefits to key executives beyond standard 401(k) limits.

• How it works: The business purchases life insurance policies on each key employee and uses the policy's cash value to fund a future income stream for the employee. The employee can contribute as well.

• Benefits: NQDC plans offer a tax-efficient way to provide additional compensation and create a powerful incentive for key employees to remain with the company.

Personal wealth and retirement strategies

Personal and family protection

A personal life insurance policy, separate from any business-related policies, is a core strategy for business owners.

• How it works: The policy provides a death benefit to the owner's family to cover personal debts, replace lost income, and fund future expenses.

• Benefits: This ensures the family's financial security is separate from the business's fate, providing peace of mind.

Supplemental retirement income

Permanent life insurance policies, such as whole life or universal life, accumulate cash value on a tax-deferred basis.

• How it works: In retirement, the owner can take tax-free policy loans or withdrawals from the cash value to supplement their retirement income.

• Benefits: This provides a tax-advantaged source of retirement income and helps diversify retirement savings.

Disclaimer: Life insurance strategies for business owners can have complex tax and legal implications. It is essential to consult with qualified legal and financial professionals to determine the best approach for your specific situation.