The Types of Life Insurance That Can Help a Business Owner
Life insurance isn’t just for families anymore. If you own a business, and you don’t have life insurance, you may be missing out on some important coverage. Life insurance is a financial tool used to transfer risk away from you and onto an insurance company. Being in business is inherently risky. Here’s how life insurance may help you mitigate some of that risk.
Group Life Insurance
Your employees are important. If one of them dies, it could seriously impact your bottom line. More than that, employees want (and need) to feel appreciated. Group life insurance may be just what you need. A group policy provides coverage for all of your employees while potentially giving you a tax deduction on at least part of the premium payments you or your employees make.
Like other forms of term insurance, your employees receive a guaranteed death benefit and premium payments are guaranteed to remain level for a set number of years. Most term policies provide coverage for either 10, 20, or 30 years, though the exact term of the policy depends entirely on the issuing insurer.
While group life insurance provides benefits for all employees, there may be times when you want to be more discriminating in regards to who you offer coverage to. With group life, you generally have to provide coverage options for all employees. With individual coverage, you can pick and choose whom you insure.
Whole life policy is one popular choice when you want to provide a benefit to your executives (or to yourself). The policy premiums are paid by the corporation. Sometimes, the policy is owned jointly by the company and the employee, while other times the policy is owned by the employee and a special contract dictates what the employee can do with it.
This arrangement is referred to as an “executive bonus plan” or “162 bonus plan” – referring to the IRS code section permitting this type of arrangement. As a business owner, you receive a tax deduction on all premiums paid on the policy, while the employee must claim all premiums as income. However, you may opt to pay the taxes for the employee – an arrangement referred to as a “162 double bonus.”
When these plans are established, it is usually done as a supplemental retirement benefit. Whole life insurance provides a guaranteed death benefit, guaranteed cash value accumulation, and may offer generous policy loan provisions for the employee during retirement.
In layman’s terms, it means that you may be able to accumulate a substantial cash value inside of the whole life policy and use this money to supplement your other retirement income. Because you access money via policy loans, there is no income tax due on distributions as long as the policy remains in-force until your death.
Policy loans do not need to be repaid until death and, when you die, any outstanding loan amounts are deducted from the death benefit. The rest is paid to your beneficiary.
Another use for whole life insurance is providing coverage for key employees. This is called “key person life insurance.” The policy taken out on the life of your most valued employees. When they die, the policy pays a death benefit to the corporation so that you can find and hire a replacement.
During the life of the covered employee, the company may use the cash value in the policy for any reason.
Universal Life Insurance
Universal life insurance is another type of cash value policy that is sometimes used as a source of supplemental retirement income or for key person insurance coverage. This policy offers more flexibility in regards to how premiums are paid (i.e. they can be raised or lowered at any time) and how the death benefit is structured (i.e. it can be increased or decreased after the policy is issued – increasing the death benefit may require prior approval from the insurer).
