We are currently in unprecedented times as a nation, as members of our communities, as individuals, and as small business owners. While we are asked to make sacrifices in our households and in our daily routines, the toll that this has on small business owners across all geographical locations and industry sectors may be unmeasurable.
Each business is facing its own unique challenges. For some businesses who are deemed essential, the challenge is figuring out how best to protect employees and customers and still provide the level of service and maintain the reputation you’ve worked so hard to build. For others, the challenge is to shift from face-to-face services to take-out or curb-side delivery and still maintain a level of sales to support the business staying open and paying employees. While for so many more small business owners who have had to shut their doors, the worry is not only when, but if they’ll be able to reopen the doors, and how to handle the stress and financial woes facing their family and their employees in the interim.
No matter the type of business or situation each business owner may be in, one common question is have they properly managed their business risks to protect against these unforeseen events. One way to manage risk is to insure against the potential loss. Most business owners insure against property risk through property and casualty insurance, and liability risk through liability insurance.
One of the most commonly overlooked and unprotected assets is your key people. What happens to your business if one of your key people can no longer come to work? What happens to your key people if your business is temporarily closed or cash flow is restricted?
Know who your key people are. Don’t forget to include yourself and your other co-owners in this mix. Typically, key people will include those owners or employees who make a significant contribution to the success of the business. Their loss through death, disability, termination or retirement would almost certainly lead to the business suffering financial stress or even loss of the business itself.
With many businesses either currently closed or soon to be closing due to social distancing mandates, the risk of losing these key people is very real.
We have something for you to consider. Just as you insure against property loss and business disruption through property and casualty insurance, you can insure against the loss of a key person. A properly designed life insurance policy can help you protect your family and the business from suffering financial losses due to the loss of a key person. And, the policy itself may do double duty – providing a financial resource for you to use to help out the key person in times such as these.
Here’s how it works:
- The business purchases a life insurance policy on the life of the key person.
- The business pays the premiums and is the beneficiary of the policy.
- While technically a “business expense” the premiums paid are a non-deductible expense to the business.
- If the policy is a permanent life insurance policy, the cash value (if any) is an asset of the business.
Key benefits to the business and how the policy may do double duty:
- Death benefits when received by the business will generally be received income tax free. (Subject to meeting the requirements of IRC Section 101(a) and 101(j).) ¹
- In the event of a qualifying critical, terminal or chronic illness of the insured, the business may be able to access the policy value through the accelerated benefits riders. ²
- In addition, with a properly funded permanent insurance policy, the business may have access to cash value through policy loans and withdrawals ³ to cover unexpected expenses to ensure that the business is able to reopen when the mandates are lifted. The cash value could even be used to help supplement employee wages or retirement benefits during a temporary closure or furlough to help ensure that the key people were able to return to the business once the business reopened.
Now more than ever, key people will be vital to the continued success of small businesses across the country, and they will help promote a smooth transition and the rebuilding in a time of uncertainty and resilience.
1 There are some exceptions to this rule. Please consult a qualified tax professional for advice concerning your individual situation.
2 For policies that include accelerated benefit riders. Payment of Accelerated Benefits will reduce the Cash Value and Death Benefit otherwise payable under the policy. Receipt of Accelerated Benefits may be a taxable event, may affect your eligibility for public assistance programs, and may reduce or eliminate other policy and rider benefits. Please consult your personal tax advisor to determine the tax status of any benefits paid under this rider and with social service agencies concerning how receipt of such a payment will affect you. Riders are supplemental benefits that can be added to a life insurance policy and are not suitable unless you also have a need for life insurance. Riders are optional, may require additional premium and may not be available in all states or on all products. This is not a solicitation of any specific insurance policy.
3 The use of cash value life insurance to provide a resource for emergencies, accumulation goals or retirement assumes that there is first a need for the death benefit protection. The ability of a life insurance contract to accumulate sufficient cash value to help meet accumulation goals will be dependent upon the amount of extra premium paid into the policy, and the performance of the policy, and is not guaranteed. Policy loans and withdrawals reduce the policy’s cash value and death benefit and may result in a taxable event. Surrender charges may reduce the policy’s cash value in early years.