How Small Business Owners Can Benefit from Buying Life Insurance

Freeway (General)- When to Get Commercial Insurance for Your Small Business

What is life insurance to a business owner? Simply put, life insurance can protect and help a business financially in many ways. It can be used for attracting and retaining key employees, retirement planning, succession planning, or in the event that a business owner passes away unexpectedly, life insurance can ensure that business goes on as usual.

Almost all big companies have life insurance policies in place in order to protect their investments, for them it’s a no-brainer. But when it comes to small business owners, many of them seem to think that it’s too expensive or that they just don’t need it. This is simply not true. What most of them don’t know is that many business owners and companies implement life insurance to benefit not only their employees, but their business as well. They get creative with life insurance policies and make them a win-win situation for everyone involved. Here are some examples:

The Golden Handcuffs Incentive

Golden handcuffs is a collection of financial incentives that are intended to encourage employees to remain with a company. Employers use this as a means of holding onto key employees and to increase employee retention rates. High yielding life insurance policies are usually part of the golden handcuff benefits package. But what most people don’t know is that companies like to incorporate large life insurance policies within the golden handcuffs benefits package because they can provide millions of dollars in life insurance coverage to their employees for a fraction of the cost.

The Executive Bonus Plan

Section 162 of the IRS code states that an employer can deduct certain expenses, including salary and other compensation that are necessary and ordinary business expenses. This is known as the Executive Bonus Plan and is usually bundled with the golden handcuff benefits package. Employers often seek additional incentives to motivate their executives and this type of plan offers incentives beyond the 401(k) system. The Executive Bonus offers benefits to both the employer and the employee. For an employee receiving this benefit, they get to actually own the policy, meaning that should the company one day force to close its doors, the policy will still remain active. As for the employer, since they are paying the premium for the employee, they get a tax deduction since this falls under the category of salary payments.

Corporate Owned Life Insurance

The reason many businesses offer a golden handcuffs benefits package to retain key employees is because training employees to a certain level takes a lot of time, money, and resources. Replacing a key employee can be very costly to a business. Because of this, companies are allowed to take out life insurance policies on certain key employees. In the unfortunate case that this certain individual passes away unexpectedly, the company can then collect from the life insurance policy to help with the cost of hiring a new person, and revenue loss due to their sudden absence.

Protect Your Business with a Buy-Sell Agreement

The purpose of life insurance is to help protect a household from financial hardships following the death of a loved one, but what about protecting a business should the owner suddenly die? This is where a buy-sell agreement comes in. A buy-sell agreement protects a business from disruption in revenue flow, and it is also a legally binding agreement between different entities within a business that governs the situation if the owner or a co-owner dies. These policies are usually pretty pricey (when compared to a term life insurance policy) but when so much revenue and investments are involved, this type of insurance policy is a no-brainer for many businesses.

Life insurance can protect your business in many ways. When used properly, life insurance can be very beneficial to both employers and employees. To find out how you can make life insurance work for your business, talk one of our insurance experts today!