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Life Insurance Solutions for Business Problems

Life Insurance Solutions for BusinessmenAs a business person, would you like to...

  • Double or triple the value you receive for the dollars you spend?
  • Assure you are not forced into business with your business partner's spouse or heirs if your partner dies or becomes disabled?
  • Take advantage of preferential tax law that may enable you to get interest-free loans from your company?

Using life insurance and proper planning, just such assurances and leverage are possible in the areas of retirement, business succession, and estate planning.

If you are ready, our qualified life insurance specialists are prepared to assist you. Call us toll free at (800) 930-6162 or e-mail us at info@lifeinsurancetoday.com

One way to make life insurance premiums tax deductible
Using an IRS Section 162 Bonus Plan, an employer can use tax-deductible dollars to provide life insurance to employees on a discriminatory basis. The employer may benefit further by coupling an employee's benefits to contractual terms known commonly as golden handcuffs.

Employee benefits include ownership of policy cash value and insurance coverage paid largely, if not wholly, by the corporation. The employee is taxed on the bonus as ordinary income, but often receives a bonus on the bonus to pay the tax.

Key person insurance
Whether to own key person insurance is a business decision. A business owns the insurance, pays the premium and is the beneficiary. The insured is a highly valued key employee. If the employee dies, a death benefit is paid to the business.

What corporation would let a star employee vacation for 2 years? Few, because the subordinates would be less likely to earn the profits the key employee earned the business. Also, there is a cost besides lost profits. Subordinates often make expensive mistakes learning to fill the key employee's position.

Typical business benefits of key person insurance include:

  • Corporate redemption of stock owned by key person
  • Indemnify lost corporate profits
  • Recoup expenses from subordinates' training mistakes
  • Pay outstanding obligations
  • Increased working capital

Typical executive benefits of key person insurance include
Where the right type and amount of insurance is used, key person insurance can also include informal funding of a key person's death, disability, or retirement benefits. Premiums are not included in a key persons income and are not deductible. Proceeds at death are tax free.

Buy/Sell Agreements
Buy/Sell Agreements state the terms by which surviving owners, or a business entity itself, can purchase a deceased owner's interest cleanly and equitably. Such agreements preserve continuity of ownership and designate value in a predetermined, unemotional way.

Funding a buy-sell agreement occurs most often in one of five ways.

  1. It can be done out of current cash flow or from business assets. This option may cause a critical drain on business working capital or profits.
  2. The creation of a sinking fund, which in essence is self insurance. Most businesses cannot afford to accumulate enough money to do this.
  3. By borrowing, which after an owner's death, may be more expensive or difficult to qualify for loans.
  4. The purchase of insurance.
  5. A combination of 1-4.

The insurance advantages are assurance of capital when needed to purchase an interest per the buy-sell agreement. Life insurance generally is cost effective compared to other methods. Life insurance is administratively simple compared to the other methods.

Two ways to fund a buy-sell agreement with insurance
There are two ways to fund with life insurance. One is a cross-purchase method. The other is an entity purchase or stock redemption method, depending upon whether the business form is a partnership or corporation, respectively.

Cross-purchase
Protect your business partner with life insurance.Each partner buys life insurance on each of the other partners. Premiums are not deductible and the proceeds are not taxable. When a partner dies, the surviving partner(s) collects on the policy(ies) owned on the deceased and buys the deceased partner's interest per the agreement. Doing so, the surviving partners increase their ownership and the deceased partner's heirs receive cash in exchange for their business interest.

The result can be cumbersome administratively if numerous owners require numerous policies. Also, where a great difference in age of insureds exists, the premiums paid by some partners will be disproportionate if like coverage is desired.

Entity-purchase
Here, the partnership entity and the partners enter into a buy-sell agreement. The entity buys a life insurance policy on each of the partners. When one partner dies, the partnership collects on the policy owned on the deceased and buys the deceased partner's equity interest per the agreement. Thereafter, the surviving partners own an increased portion of the partnership entity and the deceased partner's heirs receive cash from the sale of their equity interest.

Tax consequences, including possible alternative minimum tax and income tax basis issues, of a buy/sell agreement vary depending on the form of business entity and the terms of the agreement. Using an attorney with specificity of knowledge is prudent in this area.

Split dollar life insurance funding
Split dollar is not an insurance policy but rather a method for funding a life insurance policy. A typical use for split dollar funding occurs when a business owner wants the benefits of personal life insurance cover, and wants the business pay for it.

With split dollar a business can pay a portion of the premium and be reimbursed from either the death benefit or perhaps from policy cash values. Where an employee dies, an employer can recoup the premiums it paid from a death benefit. Where an employee lives or switches employers, the employee by agreement may be required to reimburse an employer for premium payments. If enough cash value exists, reimbursement may be accomplished by borrowing against the insurance policy's cash value.

Split dollar funding may utilize either the collateral assignment method or the endorsement method. There is even such a thing as reverse split dollar.

An employee owned policy using collateral assignment
With collateral assignment an employee owns the policy but assigns to the employer a claim against both the death benefit and the cash value equal to premiums paid by the employer. The balance is received by the employee's beneficiaries.

An employer owned policy using the endorsement method
With the endorsement method the employer owns the policy but provides, by endorsement, the right for an employee to designate beneficiaries for a specific amount of death benefit.

Please allow one of our qualified life insurance specialists to assist you in obtaining the information you want so you can make an informed decision. With one free phone call or an e-mail you can take the first step toward seeing if using life insurance is a good way for you to solve some of your business problems.

Using modern technology and traditional service we provide you with all the information you need to make the right decision for you. So call us Toll Free at 800-930-6162 or e-mail us at info@lifeinsurancetodaylifeinsurancetoday.com

Or, to learn more about how life insurance can provide complete financial security for your family, protect your business, pay off your mortgage, or even pay your estate taxes, please visit Family Protection, Business Ins., Mortgage Ins. or Estate Plans.

 

 

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