Bulletproofing Your Business
First, a riddle: What’s hard to find, difficult to replace, and essential to your competitive edge? The answer: a top-notch, trustworthy, talented executive team. Now, a thought experiment: What would you do if you woke up tomorrow morning and your lead sales person, or your go-to advisor, were to never show up again? Whether they were poached by a competitor or struck by something unexpected, it’s kind of startling to think about, isn’t it?
In fact, 71 percent of business owners said they are very dependent on a few key employees.1 That can create additional stress for a business owner, on top of running the business itself, which is particularly relevant to business owners who tend to cluster in the Ambitious Spenders segment.2
If you want to protect your business, and sleep better at night, you need to safeguard your most vital assets: your top people. A smart way to build your team, retain the top performers, and protect your business all at the same time is through two strategic business concepts rooted in life insurance: executive bonus plans and key employee insurance.
Executive Bonus Strategy
What is it? While you have most likely thought of rewarding your key people with a cash bonus at the end of the year, there is another incentive for those most valuable to you. That’s where an executive bonus plan comes in. In short, it’s a life insurance policy owned by the employee and purchased in place of a cash bonus.
A win for your employees. Executives like these plans for their inherent advantages. First, it provides the employee with death benefit protection. Second, it builds cash value that can be used by the employee.
A win for your business. For businesses, this type of executive bonus plan is a smart recruiting and retention tool that is easy to setup and manage. An added benefit, it is tax deductible for the business. There are little to no out-of-pocket expenses and minimal administration on your part.
Key Employee Insurance
What is it? Particularly for small businesses, the death or disability of a valuable employee can be difficult to bear from both an emotional and financial standpoint. In extreme cases, it can even sink the business. Companies can insulate against the loss of key talent with coverage that gets paid out to the business in the event of an employee death.
The direct benefit. There’s no easy way to talk about it, but if one of your top performers dies, a cash benefit is paid out in a lump sum. This cash can then be applied to the ongoing operations of the business while you recover from the loss.
The indirect benefits. Your business is better positioned in several other ways. First, the policy’s cash value is counted as an asset on your balance sheet and can function like a cash reserve. Second, your creditors and investors can be put at ease just by knowing you have such a strong and clear contingency plan in place. There are also tax advantages for the business.
Exploring Advanced Strategies
Granted, these business strategies are quite advanced. It may help to talk to a financial professional about your options to become a more financially and emotionally confident business owner—in other words, a Confident Planner.
1. NAIC telephone survey: Business & Employee Insurance Issues Among U.S. Small Businesses: A Report on Survey Research Conducted for The National Association of Insurance Commissioners, March 2007
2. Guardian’s Living Confidently survey, 2017
The information regarding business planning techniques is not intended to be tax, legal or investment advice and is provided for general educational purposes only. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.
Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors. The total dividend calculation includes mortality experience and expense management as well as investment results. For a whole life policy that is not a Modified Endowment Contract (MEC), if the amount of dividend payments used to repay the loan principal or interest exceeds the cost basis (cumulative premiums) of the policy, the excess dividend payments may be subject to income taxes. All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.
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