CYBA

Covering Your Biggest Asset

By Cathy A. Norris CFP^®, CLTC, CRPC^®

As jobs are being trimmed at large corporations, more Americans than ever have taken the plunge and are starting their own businesses. Most who own a business can tell you that being the boss entails a big “to-do” list, and making sure the business and key players in it are properly insured can easily be forgotten. But for most up-and-coming businesses, owners and employees are important assets. How harmful would it be to the business if anything happened to those individuals?

Business insurance is not a matter to be taken lightly. Nothing would be more disruptive to the potential success of an enterprise than to lose a primary contributor due to an unexpected death, extended illness or disability. Fortunately, there are steps that business owners can take to make sure protection is in place if such an event should occur.

Protecting key employees

The future viability of a business can be placed in serious jeopardy if a key person is lost permanently or for an extended period of time. Forward-thinking business owners should implement key person protection to help defray costs associated with losing or replacing that individual. Ideally, a business purchases a policy (life and/or disability insurance) on each key employee and is named as the owner and beneficiary of the policy. Keep in mind that the primary purpose for such a policy is not to benefit the employee whose life is covered but to protect the company.

Business continuation

In circumstances where multiple individuals own a company, it is crucial to have a buy-sell agreement in place, typically funded with life insurance. Such a policy outlines specific triggering events that would result in the buyout of one owner such as death, long-term disability or retirement. It gives surviving owners a way to purchase the interests of the owner who passed away, became disabled or retired from the firm. The goal is to make it financially feasible for remaining owners to pay for the buyout while providing a fair settlement for the interest being sold. Such an agreement is based on a current valuation of the company, so it is important that any buy-sell agreement be regularly updated.

Executive benefits

Additional benefits for owners and other key employees are available as well. Specifically, companies have the option of providing life and/or disability insurance for executives that go beyond what is made available to all employees. This includes funding personal life insurance for individuals. In this instance, the employee is the owner of the policy and can name his or her own beneficiaries. This kind of additional benefit for a key contributor can help a company retain top talent.

Another option in creating such a benefit is to use a “split dollar” approach. In this case, the company pays the premiums, but has an agreement with the covered employee to repay the premium to the company with interest. Those payments are made from life insurance proceeds if the employee dies or from the cash value if the individual’s term with the company ends. The remaining proceeds go to the named beneficiaries such as family members.

Preserving wealth

If all goes well, a business can turn out to be the most valuable family asset. That is why business owners need to pay careful attention to issues surrounding the disposition of a company after they die. While a buy-sell agreement is a critical part of any separation strategy from a company, individual owners also need to consider how best to preserve their estate. Legal documents such as wills and trusts can take on added complexity. If the business has attained significant value, you may want to consider using life insurance to help protect the value of assets being passed on to heirs from estate tax liability.

One of the key advantages that life insurance offers is that it can be used on a selective basis to help protect the business and individual owners to enhance the overall compensation package of key employees. If you own or plan to start a business, consider adding a life insurance review to your “to do” list.

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Cathy A. Norris is a Certified Financial Planner™ in Oldsmar, FL Contact: 813-814-2935.

This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.

Before you purchase, be sure to ask your financial advisor about the life insurance policy’s features, benefits, risks and fees, and whether the life insurance is appropriate for you, based upon your financial situation and objectives. Variable life insurance is a complex investment vehicle that is subject to mark risk, including the potential lost of principal invested.