I’ve worked with a lot of business owners over the years. In private practice as an attorney, as a consultant to financial practices, as a marketing attorney for financial institutions – the issues and opportunities that occupy a business owner’s time have been front and center in my professional life. What I’ve found is that, while no two businesses are exactly alike and while no two business owners are exactly alike – they do all share some common concerns. And, I found when I was running my own business I faced these concerns too. Do any of these sound familiar?
- Going home at night but still thinking about what needs to be done at the office the next day.
- Should I expand the business?
- Should I close the business?
- Do I have the right people working with me?
- How do I reward those people for great work and keep those key people motivated?
- Will spending more money actually lead to more profits?
- Am I using my business funds as efficiently as possible – making sure I’m in a position to take care of my family today, tomorrow and all the way into a financially secure retirement?
Those are a lot of concerns to tackle and would be overwhelming if I tried to address them all at once. Right now, I only want to look at one and that’s how do I reward the key people in my business and keep them motivated for future performances?
I think about one particular person who worked with me – not as a full time employee, but as a consultant. Her work was excellent. I knew she had a lot of opportunities to work with other people and businesses – and she did. I wanted to make sure that she was excited about working with my firm and would be available when my business needed her.
When I talked with her about what was working in her financial life, she did talk about what most of us think about – securing her finances for herself and her family today and planning for retirement.
I wanted to help her address her concerns, and by doing so our relationship became more committed. We decided on a strategy that would work for both of us and that was an Executive Bonus strategy.
This strategy would:
- Provide my business with a full tax deduction.
- Allow me the flexibility to bonus different amounts to her each year depending on performance. The bonus amount was paid to a permanent life insurance policy that insured her life.
- The insurance would provide her family with income tax free death benefit protection for her family if something you happen to her.
- If she experienced a qualifying Terminal, Chronic or Critical Illness or Critical Injury, through an optional accelerated benefits rider on her insurance policy, she could accelerate some or all of her death benefit during her lifetime to help cover any cost associated with her illness or injury.
- The life insurance policy also had cash value that grew on a tax deferred basis. If there was sufficient cash value in the policy, she could access it through tax-free policy loans or withdrawals at any time – including using the funds to help pay for her children’s college education and, ultimately – as a source of funds to supplement her retirement.
- She also had the option to use the life insurance cash values in future years to pay the tax due on the bonus each year. This could also be done through loans and withdrawals, depending on if there was sufficient cash value in the policy.
This worked for us. The bonus amount was actually a different amount each year – based on a number of factors that we had worked out together. When I closed that practice to move on to other opportunities – she had the policy and the ability to continue paying into the policy and maintaining it for all the benefits it provided.
The Executive Bonus strategy is one concept out of a whole host of benefit concepts that fall under the “non-qualified benefit” umbrella. The great part about being a business owner is having lots of choices in providing benefits to your key people and to yourself. The great part about being an advisor to business owners is having all those tools to bring to bear to solve a particular problem. If you want to do some research on these ideas – click here to learn more.
The ability of a life insurance contract to accumulate sufficient cash value to meet accumulation goals will be dependent upon the amount of premium paid, and the performance of the contract and is not guaranteed. Policy loans and withdrawals reduce the policy’s cash value and death benefit and may result in a taxable event. Withdrawals up to the basis paid into the contract and loans thereafter will not create an immediate taxable event, but substantial tax ramifications could result upon contract lapse of surrender. If remaining policy values and scheduled premiums are insufficient, additional out-of-pocket payments may be needed to keep the policy inforce. Surrender charges may reduce the policy’s cash value in early years.
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 and may affect your eligibility for public assistance programs. 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. The use of one benefit may reduce or eliminate other policy and rider benefits.