WASHINGTON, August 5, 2013—When it comes to life insurance and business, most people think of it as a benefit that business owners can make available to their employees. While this is a common practice, there are many other ways that business owners can implement life insurance to benefit not only their employees, but their businesses as well.
Business owners that get creative with life insurance use the policies to help secure the long term success of their businesses by protecting them from risks. Here are some examples:
High yielding life insurance policies are commonly found in “golden handcuff” benefit packages that are used to ensure that quality employees stay around for the long term. The idea is that the benefit package is so good that the employee grows to rely on the benefits and leaving the company would be a major setback.
The reason businesses like to incorporate large life insurance policies within the golden handcuff package is that they can provide hundreds of thousands if not millions of dollars in coverage for a small fraction of the cost.
Known in part as the Executive Bonus Plan, Section 162 are the life insurance policies usually found bundled with golden handcuff packages. They are designed to appeal to businesses who want to offer their executives and higher tier employees incentives beyond the 401(k) system which begins to show limits as salaries grow.
There are benefits to both the employee and employer when it comes to Sec. 162 policies. The biggest benefit is that the employee actually owns the policy, which means it will stay active should the company go bankrupt. But because the employer is paying the premiums, the business can experience immediate tax deductions because this falls under the category of salary payments.
Businesses across the nation battle with risks everyday. Up-training employees to executives and beyond takes an immense amount of time and resources, and replacing a key employee can be costly, especially if they’re in a figurehead role and their name is tied directly in with the brand name.
Businesses can take out life insurance policies on these key employees. In case they should die unexpectedly, the life insurance policy can help staunch the loss in revenue and cost of replacing due to their sudden absence. It may sound impersonal, but business decisions rarely are.
Protecting Buy-Sell Agreements
What bigger risk is there to a business than buying or selling one? Okay, so maybe there are a lot, but this one has got to be one of the biggest. These high stake purchases and sales require a lot of capital and potential long term debts that have to be fronted by the CEOs and boards of the businesses involved. Large life insurance policies are a no-brainer in these situations where a death could leave millions of dollars up in the air. The policies used for this purpose can cost large sums of money (when compared to a term life insurance policy) and help perpetuate the misconception that life insurance is only for the wealthy and the elite.
Group Policies for Employees
Then there’s the common form of life insurance found in businesses in which employees can become part of the company’s group policy. These are rarely on par with individual policies, but they be a great secondary insurance. Some offer benefits unrelated to work, while some are based on a percentage of salary and everything in between.
While life insurance is often just regarded as a throw-in benefit for employees, it can serve a much more vital role in a business’ life. From keeping key employees happy and with the company, to protecting risks like buying a competitor, life insurance helps to keep businesses insured and operating at full capacity with creative implementations.
Liran Hirschkorn is the founder of ChooseTerm.com an online national life insurance agency. ChooseTerm helps everyday Americans get the coverage they need, and specialize in helping those with pre-existing conditions get approved for life insurance.
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