Key Person Insurance

Key person insurance is a type of life insurance policy that protects businesses in the event of the death of a key employee or owner. The business takes out the policy, and the employee or owner is the insured party. If the key person were to pass away, the policy would pay out a lump sum to the business, which can be used to cover the costs of hiring and training a replacement, paying off debts, or other expenses.

This type of insurance is particularly important for small businesses that rely heavily on the expertise and experience of a key employee or owner. Losing a key person can be detrimental to the business’s success, and key person insurance can provide the necessary funds to ensure the business can continue operations smoothly.

Buy-Sell Agreements

A buy-sell agreement is a legal contract that stipulates what happens to a business partner’s ownership if he or she were to die. The surviving owners or business typically purchase the deceased owner’s share. Life insurance can be used to fund the purchase of the deceased owner’s share

Buy-sell agreements can stabilize your business in the event of your death or retirement. A properly structured agreement can guarantee a buyer for your business interest, establish the taxable value of the business, create liquidity for estate taxes, improve the business’s creditworthiness, and help maintain the business’s legal status.

There are two main types of buy-sell agreements. 1. Entity-Purchase Agreement – the business itself buys the interest. The business buys and owns the insurance on each owner to fund the purchase. 2. Cross-Purchase Agreement – each owner buys the decedent’s interest in the business. In this case, each owner buys life insurance on every other owner to fund the purchase.

Executive Bonus Plans

An executive bonus arrangement is an easy-to-implement employee benefit that allows employers to selectively reward hand-picked employees with individual life insurance protection, supplementing broad-based group term life plans that may be in place. 

Executive bonus arrangements are simple and easy to explain to employees. Also, there are no burdensome reporting requirements or anti-discrimination rules imposed by the IRS. 

The employee applies for and owns a life insurance policy on his or her life and names a personal beneficiary. The employer pays an annual bonus to the employee, either in cash or indirectly as a premium on the life insurance policy. 

The result is employer-provided, employee-owned life insurance that ultimately benefits the employee’s chosen beneficiaries. Employers use it to reward selected key employees for significant contributions to the company’s bottom line. (The arrangement is generally not recommended for S corporation owners or partners, since those businesses are not separate tax-paying entities.) 

An executive bonus arrangement provides employers with an opportunity to recognize and reward executives and other key employees on a selective basis with employer-financed, personal life insurance. It is easy to implement and administer, with few restrictions or reporting requirements. The employer can tailor each policy with a face amount designed to effectively encourage the selected employee to remain with the company. 

Deferred Compensation

Nonqualified deferred compensation is an arrangement established by employers to provide retirement income and often death and/or disability benefits to selected managers or highly compensated employees. When it’s properly arranged, the employee can defer income taxation until the benefits are paid. 

Deferred compensation arrangements are “nonqualified,” meaning they don’t have to be preapproved by the IRS, and employers can favor selected employees without risking claims discrimination. Also, they are exempt from nearly all of ERISA’s regulatory requirements when properly arranged. 

A nonqualified deferred compensation arrangement typically provides that an employee will receive a stipulated sum for a fixed period of time—or for life—beginning at a future date, such as the employee’s retirement. If an employee dies after payments have begun, the arrangement may direct that the remaining benefits be paid to the employee’s beneficiary. 

The arrangement may provide that the employee will receive future compensation as a result of a current salary reduction or in lieu of a bonus or salary increase. This is sometimes called a “true deferral arrangement.” 

Collateral Assignment To Secure A Loan

Collateral assignment of life insurance lets you use a life insurance policy as an asset to secure a loan. If you die while the policy is in place and still owe money on the loan, the death benefit goes to pay off the remaining debt. Any money remaining goes to your beneficiaries.

Why go this route? Most people purchase life insurance to protect their loved ones at the time of their death. Using a life insurance product as collateral, you can tap into its value while living. You can use your plan as collateral for various types of loans, including business loan. This provides financial security for the business and ensures its survival in the event of a tragedy. The SBA will often require life insurance as collateral before approving certain loans.