When its owner for more than four decades passed away suddenly, Troy Belting and Supply Co. in Watervliet, N.Y., could have collapsed, as do many family businesses that lose their leaders. Instead, the company continued to operate and grow, partly thanks to a succession plan funded by life Insurance.
“We were able to keep operating the company and retain every one of our workers because my father had the foresight to put a succession plan in place that protected not only his family but also the livelihoods of all of our employees,” said Jason Smith, who succeeded his late father in 2003. “Whole life insurance was a critical part of that plan.”
Whole Life Insurance and Business Succession
Most business owners realize that they will be forced to deal with issues such as business succession at some point, which is why they want to have a guaranteed plan to be there when needed. The versatility guarantees and permanence of whole life insurance can help solve some of these inevitable challenges. Whole life insurance can, for example:
· Protect a business or business owner from financial loss – including the loss of control of a part of the business – as a result of the death of a partner or co-owner. As part of a buy-sell agreement, the policy’s death benefit can be used to help purchase the deceased partner’s shares from their estate.
· Protect a business from loss as a result of the death of a key employee. The policy’s death benefit can provide a cushion that enables the company to continue operating while seeking a replacement.
· Be used as a highly valued employee benefit for key personnel whose loved ones can benefit from permanent, guaranteed coverage in the event of the employee’s death. In addition, the employee may be able to draw upon the policy’s cash value through loans to help supplement income in retirement.
Financial Flexibility
Furthermore, as long as the policy is kept in force, the cash value of a whole life insurance policy can give businesses the flexibility to manage through the ups and downs of the business life cycle by providing funds to respond to expected and unexpected challenges and opportunities. A whole life insurance policy’s cash value can be used as:
- A source of cash when credit is tight for circumstantial or external reasons.
- A source of emergency funds to pay for replacement or temporary talent if a key employee leaves, becomes disabled or retires.
- A “bookable” asset on the company’s balance sheet and it’s not an all-or-nothing decision. Many smaller or younger businesses may opt for quality, convertible term life insurance so that as they grow and additional cash becomes available, they can bridge to the broader benefits of whole life.
Distributions under the policy – including cash dividends and partial/full surrenders- are not subject to taxation up to the amount paid into the policy (cost basis). If the policy is a “modified endowment contract,” policy loans and/or distributions are taxable to the extent of gain and are subject to a 10 percent tax penalty. While the policy allows for loans, you should know that there may be little to no cash value available for loans in the policy’s early years; Access to cash values through borrowing or partial surrenders reduces the policy’s cash value and death benefit, increase the chance the policy will lapse and may result in a tax liability if the policy terminates before the death of the insured.
