Life Insurance Business Planning Techniques

Business Planning Techniques, Products and Strategies

Small business owners can often have the most need for insurance products.  Not only do they usually have better-than-average incomes, but they are also subject to certain unique risks and have some unique opportunities due to their ownership of a business.

For example, a small business is typically dependent upon a key employee.  What if that employee dies or is disabled?  The business could be crippled due to the loss of that employee’s skill, ability to get things done, expertise, or customer relationships.  The answer – key employee life and disability insurance – is often quite affordable.

Small businesses are often partnerships.  What if one of the partners dies or becomes disabled.  Rachel may be concerned that if Heath dies, besides the fact that Heath is a key employee, she might need to quickly gather funds to buy out his share of the business.  Also, Heath’s heirs might disrupt the business if they don’t like the financial arrangement.  On the other hand, Rachel is concerned that if she dies, Heath might not be able to pay her heirs a fair value for the business, and he may not be able to continue to run the business without her.  Thus, both partners are well served to have a buy/sell and business continuation arrangement in place secured by life and disability insurance.

Small business owners often have two large expenses looming in the future – retirement and estate taxes.  The business owner may consider the business itself to be his retirement plan, but the fact that the owner is also a key employee makes many small businesses nearly worthless at the owner’s retirement.  Plus, very few people want to buy a particular small business, further depressing the value below what the owner would consider fair.  Fortunately, there are a variety of ways that business owners can store considerable money away for their retirement and reduce their income tax bill.  Individual 401(k)’s and SEP-IRA’s are two examples.  On the other hand, preparing for estate taxes may involve setting up a will and trusts, gifting the business to heirs over time, and providing a plan for how the estate taxes will be paid using joint second-to-die life insurance.

Besides planning for retirement on a tax-preferential basis, business owners can sometimes purchase certain benefits with pre-tax dollars.  For example, owners of C-corporations can buy long-term care insurance for themselves on a tax-advantaged basis.  LTC premiums paid by the business are tax-deductible to the business and are not considered taxable income to the employee, yet LTC benefits received are income tax-free to the employee.  A plan like this can be set up where the only covered employee is the business owner.

So, let us help you understand the options that are available to serve small business owners.  Small business owners have unique risks and great opportunities.

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