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Top Six Reasons Why Smart Business Owners Use Life Insurance

Life insurance is a crucial component of maintaining and growing a successful company

Most smart business owners recognize the importance of using life insurance to protect themselves, their families, and their companies. They use life insurance as a financial tool to solve problems associated with maintaining and growing a successful company, as well as to meet retirement, succession, and estate planning goals.

Succession Planning for Business Owners

Protecting the entity and deciding when and whom to eventually transfer it to, is a critical aspect of succession planning for business owners.

The particular tools and techniques used in a business succession plan will depend on the goals and objectives of the four groups most impacted:

  • The senior generation business owner
  • The junior generation family member involved in the business
  • Key non-family employees, and
  • Family members not involved in the business

Below are the top six reasons why smart business owners use life insurance as a key component in their strategic business succession, retirement, and estate planning.

Infographic for "Why Smart Business Owners Use Life Insurance"

#1: Protect the Business at the Death of an Owner or Key Person

In many small businesses, the owner is also the key person in the company.

Key-person life insurance is purchased on the business owner’s life to protect the company if they unexpectedly die. In fact, the death of a key person in a small company without key-person insurance often results in the immediate shuttering of the company.

With key-person insurance, the company:

  1. Purchases a life insurance policy on the key employee
  2. Pays the premiums, and
  3. Is the beneficiary of the policy

If that key person unexpectedly dies, the company receives the insurance proceeds.

The Benefits of Key-Person Life Insurance

Key-person life insurance for the business owner can provide much-needed stability. If the business owner dies, the business receives the policy proceeds and can use the funds to:

  • Pay expenses while searching for and hiring a capable replacement
  • Retire debts
  • Distribute money to investors
  • Pay severances to employees
  • Explore options other than immediately going out of business, and/or
  • Buy time until the business can be closed, and the assets liquidated

In addition, many family-owned businesses depend on non-family employees for the company’s continued success.

To guard against financial loss due to the death of a key employee and to ensure that the business stays in the family, many privately-held companies acquire key-person life insurance for their key employees.

#2: Protect the Owner’s Family and Ensure the Survival of the Business

A buy-sell agreement is a legally binding contract that states that in the event of an owner’s death, disability, retirement, or separation from the company, the owner’s interest in the company must be sold back to the business or to the remaining owners at agreed-upon terms.

Buy-sell agreements are crucial for small and closely-held companies where, as in many cases, the death or disability of a business owner creates a significant financial burden on the family, the business, and the remaining owners.

A buy-sell agreement guarantees a market and a fair price for the business interests, ensures control over the business by the remaining owners, and can set the value of the business interest for estate tax purposes.

Life insurance for each owner is the best way to provide the cash necessary for the business or the surviving owners to purchase the deceased owner’s share of the business. Death benefits are typically paid as a tax-free lump sum to the entity or surviving owners.

In many instances, the cash surrender value in a permanent life insurance policy can also be accessed tax-free via policy loans and withdrawals to help pay for a lifetime purchase of a business owner’s interest, such as due to retirement or disability.

Depending on the type of buy-sell agreement, the business itself or the individual owners acquire a policy on each owner so that at death or disability, the funds needed to “buy out” the deceased owner’s interest are readily available.

#3: Accumulate Assets for Retirement

In addition to protecting the company, many business owners use cash value life insurance as a diversified vehicle, separate from the performance of the company, to accumulate assets and build future retirement income for themselves and their key employees.

Permanent life insurance policies include a cash value account that grows tax-deferred and can be accessed tax-free via withdrawals and policy loans while the insured is living. The type of life insurance policy depends on the desired objectives and other factors.

In many cases, business owners and key employees earn levels of income that exceed the contribution limits under a 401(k), profit sharing, or other qualified retirement plans. There are no contribution limits on non-qualified, private life insurance-based plans that provide additional retirement income.

Read on to learn more about the difference between term life insurance vs. permanent life insurance.

The Benefits of Properly Structured Life Insurance

Properly structured life insurance in a non-qualified plan is a legitimate option to grow wealth. It can provide members of the senior generation with death, disability, and retirement benefits, especially when the senior members have transitioned the business to the junior members and are no longer receiving compensation.

This combination of tax-advantaged death benefits and cash values makes life insurance the best way to accumulate and grow funds for retirement while simultaneously providing the cash necessary for the business or the surviving owners to purchase a deceased owner’s interest. 

Often referred to as “golden handcuffs,” the same concept is often used as a way to attract and incentivize key employees to remain with the business and perform with the promise of future retirement income from policy cash values. The business is simultaneously protected against the loss of a key person.

#4: Protect Assets from Liabilities and Future Creditors

Businesses assuming the risk of potential environmental contamination (i.e., waste hauling, landfills, chemicals, etc.) are subject to liability under federal and state pollution laws.

Service firms, including the following examples, are often exposed to professional liability claims:

  • Law and accounting firms
  • Physicians’ groups, and
  • Engineering and architectural firms

Moreover, such liability is not limited to the business itself, as the business owners also may be personally liable under such laws. As the business passes to the next generation, so does the potential liability.

Life insurance is ideal in this situation. The business owner can establish an irrevocable life insurance trust (ILIT) to last for the maximum period permitted by state law (in perpetuity for some states).

The ILIT would provide the business owner’s heirs with income and principal as needed for health, education, maintenance, and support.

If properly structured, the assets in the ILIT cannot be reached by the beneficiaries’ creditors. Additionally, in many states, life insurance cash value is protected from creditors making it an especially effective tool for business owners to use to grow their assets.

#5: Prevent a Family Feud

A senior generation business owner can use life insurance and a common legal agreement to transfer assets to other family members with “equitable” treatment.

Leaving the ownership and control of the business to the children who are active and the life insurance proceeds to the children who are inactive equalizes the inheritances among them and creates a family “bank.”

This can prevent arguments about money when the senior generation is no longer there to serve as the peacemaker and allow the family business to continue operations smoothly.

In addition, it avoids the need for active children to purchase the business interests of inactive children, perhaps when the business may not be able to afford it.

Depending on the particular circumstances, the insurance may be owned by an ILIT for the benefit of the inactive children, and the insured may be the business owner, the business owner, and his or her spouse.

#6: Say “Goodbye” to Uncle Sam

Some senior generation business owners wait until death to transfer all or most of their business interests to the junior generation.

If the business owner has a taxable estate, life insurance can provide the recipients of the business with the cash necessary to pay estate taxes. With estate tax exemptions likely decreasing in coming years, many business owners and their families will face increased transfer tax liabilities.

Using life insurance to pay estate taxes is particularly useful for business owners because their equity interests cannot be readily liquidated. The junior generation receiving the business may also need life insurance to pay estate taxes.

Usually, the insurance policy will be owned by an ILIT, as discussed above, so that beneficiaries will receive the death proceeds both income and estate tax-free.

In many cases, most of the business owner’s estate is tied up in the value of the business. Without an effective estate plan, including a business succession plan, the business may have to close or be liquidated to afford estate taxes.

With the proper use of life insurance, a business owner can provide the liquidity needed to pay any estate taxes due at death.

For example, an ILIT can be established for the purposes of owning a life insurance policy on the life of the business owner (or business owners, if married). The trustee of the trust is usually the intended beneficiary. At the owner’s death, the policy proceeds are payable to the trust which can then, at the trustee’s direction, be used to pay any applicable estate taxes.

Read on to learn more about maximizing your legacy using life insurance.

A Final Word

At Acumen Insurance Solutions, we recognize that formulating the perfect succession, estate, and life insurance plans can prove difficult. Contact us today to review such plans.

Then, read on for more information on succession planning amidst the Great Resignation.

*Acumen Insurance Solutions does not provide legal or tax advice, and the information contained herein should not be construed as such; consult your legal and tax professional before making important financial decisions. Life insurance is backed by the claims-paying ability of the carrier and is not FDIC insured. Withdrawals and loans can reduce death benefits and may cause the policy to lapse. See policy illustration for details.

The following federal tax code sections apply to life insurance:

  • IRC §101 (a): Death benefits are income tax-free.
  • IRC §7702 (a), (g): Cash value growth is tax-free.
  • IRC §72(e): Withdrawals of cash value to basis are tax-free.
  • IRC §72 (e)(5): Investment gains in cash value can be borrowed tax-free.
  • IRC §7202 (a): Modified Endowment Contracts (MECs) retain tax-free growth and tax-free death benefit, but gains are taxed first when taking loans and withdrawals.
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Using CUOLI to Fund Section 20 and 21: A Webinar Overview

Today’s current investment environment isn’t promising and is characterized by:

  • Investment return volatility
  • Low interest rates
  • Declining loan demand
  • Concerns about an economic recession

So, what’s the solution for credit unions that are trying to maximize returns? Credit unions must look to investments that minimize volatility, maximize predictability, and maximize flexibility. The solution is using credit union-owned life insurance (“CUOLI” or “COLI”) to fund Sections 20 and 21.

Under Sections 20 and 21 of the call report required by the National Credit Union Administration (NCUA), credit unions are permitted to allocate funds to “otherwise impermissible investments.” This includes credit union-owned life insurance for certain specialized and important purposes.

Let’s talk more about using CUOLI to fund Sections 20 and 21 below.

Section 20

Section 20 of your quarterly call report addresses the types of assets a credit union may use to pre-fund employee benefits (i.e. health insurance and executive compensation plans).

With costs of employee benefits rising, however, using these safe and higher-yielding investment options to offset them allows more of the credit union’s assets to go to member initiatives.

Most state regulators allow credit unions to allocate up to 25% of net worth to pre-fund employee benefit expenses in Section 20.*

Section 21

Charitable giving is at the core of most credit union missions. 

Section 21 addresses the types of assets a credit union may use to fund its charitable donation account (CDA). In most states, credit unions can pre-fund CDAs with up to 5% of net worth under Section 21.*

Therefore, charitable donation accounts give your credit union the ability to give more efficiently.

Using Credit Union-Owned Life Insurance to Fund Section 20 and 21

When looking at these assets, credit union-owned life insurance can offer marked benefits, enhance stability, and provide higher yields when compared to the types of assets that regulators consider “otherwise impermissible,” which include:

  • Life insurance
  • Securities (mutual funds, stocks, ETFs, bonds)
  • Annuities

What is Credit Union-Owned Life Insurance?

For those who are not familiar with credit union-owned life insurance, it’s very similar to what has been used by commercial banks for over 40 years. In fact, 86% of the top 50 banks in the United States use bank-owned life insurance (BOLI) as an asset to offset employee benefit costs.

In addition to pre-funding benefit expenses and mitigating key-person risks, commercial banks have used these types of assets as an investment tool that offers a very competitive rate with strong levels of safety and liquidity.

Funding Section 20 and 21 Using Credit Union-Owned Life Insurance

Most state regulators* allow credit unions to place up to 25% of their net worths in Section 20 assets and up to 5% in Section 21 assets, with a number of specific caveats. One, for example, is that no more than 15% can be allocated to a single life insurance carrier when using CUOLI.

Interested in learning more? We’ve just recently conducted a webinar where we:

  • Compared CUOLI vs. Other Alternatives
  • Walked through FASB ASU 2016-01 and Mark-to-Market accounting impacts
  • Discovered how to restructure existing CUOLI policies to increase yields
  • Discussed the flexibility options and liquidity benefits of institutional life insurance policies

Fill out this contact form for more information on the full “Using CUOLI to Fund Section 20 and 21” webinar. Or, check out this blog post, “Section 20 vs. Section 21: What’s the Difference?

*Check your state’s regulations to verify the CUOLI capacity percentages.

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Liquidity Plus Program

It is a best practice for nonprofit organizations to keep liquid reserves on their balance sheets for unexpected emergencies and opportunities These reserves are typically held in cash at the bank, or invested in CDs, U.S. Treasurys or short-term bonds.

In today’s low interest rate environment, it is difficult to achieve meaningful yields on these assets without taking additional risk or sacrificing liquidity The Liquidity Plus Program provides a solution by doing the following three things well, rather than one thing poorly:

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Improving §457(f) Plans for Credit Union Executives

Competition for key talent has never been more prevalent than it is today

Providing a supplemental executive retirement plan (serp) to key executives significantly enhances an organization’s ability to attract, reward, and retain its most important people.

One of the most popular serp designs used by credit unions is a §457(f) plan. It can be funded with amounts necessary to provide a defined benefit to the executive upon retirement or with periodic contributions over time in agreed-upon amounts.

Upon retirement, the executive is responsible for paying all of the taxes, in a lump sum, at ordinary income rates. In some states, that can mean that more than half of an executive’s retirement benefit will end up going to the government.

Before your organization considers installing a traditional §457(f) or if it already has one in place, please consider the following:

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Ensuring Your Bank is Always Protected in a Life Insurance Premium Financing Transaction

Premium financing creates a unique opportunity for your bank

Properly designed life insurance can be an effective tool for addressing important personal and business planning objectives, including spousal protection, wealth transfer, tax planning, liquidity needs, business succession, key employee retention, and charitable planning.

Financing life insurance premiums can be a great way for a family or business to acquire the amount of insurance they need by borrowing money from a bank to pay the policy premiums.

Premium financing creates a unique opportunity your bank to loan money to strong, established individuals and companies. However, your bank needs to understand how the life insurance polices should be structured to so your bank can protect itself and be fully collateralized at all times, in case things do not work out as anticipated.

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Credit Union Alert FASB Update Now in Effect

What the new rules mean for credit unions and equity securities

Introduction

Utilizing equity securities, like stocks, mutual funds, and exchange-traded funds, has historically been a reasonable way to invest credit union assets. But now, due to updated accounting guidelines, these types of investments may not be as appropriate as they once were.

The financial accounting standards board (fasb) has issued a new guidance that impacts all entities holding financial assets, including credit unions, by changing the standards of an equity security. The guidance forces credit unions to report any losses on stocks, mutual funds, and etfs on their current net income statements, even if those investments are designed to be held for the long-term to meet future obligations like funding executive retirement plans. The guidance came into effect december 15, 2018, and the volatility of equity securities can cause a number of issues for credit unions if they don’t transition their portfolios to more stable and predictable assets soon.

Let’s take a look at what is happening under the fasb’s new guidance, why this change came to pass, and what credit unions can do to ensure that they make the right choices when it comes to equity securities.

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Investment Update, Fourth Quarter 2016

Working from home meant we could vary snack and coffee breaks, change our desks or view, goof off, drink on the job, even spend the day in pajamas, and often meet to gossip or share ideas.

On the other hand, we bossed ourselves around, set impossible goals, and demanded longer hours than office jobs usually entail. It was the ultimate “flextime,” in that it depended on how flexible we felt each day, given deadlines, distractions, and workaholic crescendos.

But on Aristotle’s view, the lives of individual human beings are invariably linked together in a social context. In the Peri PoliV he speculated about the origins of the state, described and assessed the relative merits of various types of government, and listed the obligations of the individual citizen.

Successful people ask better questions.

Aristotle made several efforts to explain how moral conduct contributes to the good life for human agents, including the Eqikh EudaimonhV and the Magna Moralia, but the most complete surviving statement of his views on morality occurs in the Eqikh Nikomacoi.

Working from home meant we could vary snack and coffee breaks, change our desks or view, goof off, drink on the job, even spend the day in pajamas, and often meet to gossip or share ideas. On the other hand, we bossed ourselves around, set impossible goals, and demanded longer hours than office jobs usually entail. It was the ultimate “flextime,” in that it depended on how flexible we felt each day, given deadlines, distractions, and workaholic crescendos.

Aristotle made several efforts to explain how moral conduct contributes to the good life for human agents, including the Eqikh EudaimonhV and the Magna Moralia, but the most complete surviving statement of his views on morality occurs in the Eqikh Nikomacoi.

businessman holding a newspaper that says Business

Four Big Mistakes Your Small Business Is Making

Digital marketing has become paramount in today’s business landscape. If you’re not reaching out to your audience online, then you’re losing the lion’s share in your market to your competitors who are marketing online.

Whether you’re an established small business or a promising startup, there’s no excuse for not having a sustainable digital marketing strategy anymore. Even if you have a marketing plan in place, there’s really no guarantee that your plan works well until after you’ve seriously tested and tweaked everything.

If your digital marketing plan isn’t producing the incredible results you’re expecting, it’s likely that your small business is making the following mistakes right now. Become aware of these issues, and make sure you’re not falling victim to these common mistakes.

1. Your strategy doesn’t resemble a “strategy” at all

Building a website or a Facebook page doesn’t qualify as a strategy in the strictest sense. What matters is how you use these online channels to achieve the goals you’ve set forth with your plan.

When it comes to building a business website, for instance, you need to find a way to use it as a platform to sell your products and services. Aside from creating landing pages for each salable item that you have, you need to find a way to attract an audience who will find interest in the things you’re selling. One way of doing this is to create compelling content that’s worth sharing. This is beneficial for long-term SEO purposes, as well as increasing overall visibility of your brand once your content gets shared on social media.

By increasing your website traffic from your target market, you should expect to convert a fraction of those into customers or clients. Not to mention, a strategy is never a one-and-done thing – you should commit to a strategy for a prolonged period to see the product of your labor come to fruition.

By coming up with sustainable tasks with your website that are focused towards a single goal and are implemented on a consistent basis, you now have a strategy that you can scale and improve so you can increase your conversion rate.

2. You don’t stand out from the rest of the pack

With the thousands, if not millions, of online businesses in your respective niches, you need to be special to make a lasting impression on your audience. If your business doesn’t separate itself from your competitors, then you have a big problem.

The bulk of the issue can be attributed to your inability to identify a unique value proposition for your online business and clearly communicate it through your preferred channels. Does your company compete on price? Maybe your site has specialized knowledge on website builder comparisons or online marketing. To actually identify your value proposition, you need to learn how to do competitive research. This means taking a closer look at the online activities of your best competitors and see the good and the not-so-good things they’re doing.

By getting a better idea of their online habits and what they do to make their audience tick, you will have a greater understanding of what you must do to separate yourself from them.

Most of the data from competitor research is drawn from research tools like BuzzSumo, Ahrefs and others. Using either allows you to uncover the sites linking back to them and how they can do so, among other things. You can also analyze how each of their best-performing pages is constructed so you can replicate their technique and put a twist of your own. By interpreting the data correctly, you will be able to create content that resonates with your target market.

3. You don’t deliver what you promise

While I’ve touched on the importance of consistency, it deserves to be mentioned again. Business owners should be in it for the long haul, which means that their ventures are a marathon and not a sprint. It doesn’t matter how fast you start – what is important is how you finish.

A component of consistency is setting out what you promised to your audience. If you can’t comply with your self-imposed number of blog posts or newsletters in a week, then you risk losing the trust of your readers. The fact that you can’t adhere to your rules is telling of your commitment, not to your business, but to your audience, your inability to comply to your word is indicative of how terrible your business is.

Internally at X3 Digital, to avoid losing the respect of our audience, my design agency makes sure that we practice consistency to temper audience expectation and keep people satisfied with our rate of production. Even if you feel understaffed and overworked, there are ways to work around these obstacles. You can always outsource smartly so you can delegate the menial tasks and focus on gauging the results. You can also look into marketing automation solutions so you can set pieces of your workflow into autopilot and put your mind at ease.

4. Your analytic data is lacking

At the very heart of digital marketing is one’s ability to learn from mistakes. As a business owner, you need to learn how to take failures in stride and learn from them so you can apply them to your next campaign. However, tracking every move you make is another discipline in and of itself.

Private Party Band, a Florida-based corporate and wedding band, had been running new ad campaigns for their business, but had no KPIs or valuable analytics in place to track the success of their ad campaigns. This is an all-too-common mistake small businesses make when launching new set of ads for social media, starting a blog for your company or sending emails to your subscribers.

You need to find a way to measure the performances of each; this way, you can analyze the information into bite-sized data for you to review later on. From here, you can gauge which campaigns worked, which didn’t and why. Understanding what makes for a successful campaign starts with setting up your tracking tools so you can keep learning and get better at promoting business online.

For starters, you need to learn how to use Google Analytics and align your website with your goals. While the tool covers lots of data to help your site succeed, you may need to other analytics tools that let you conduct A/B testing, micro-surveys and heat mapping to name a few.

Month revenue of young couple

9 Resources to Get You Prepared for Tax Season

Don’t let tax season overwhelm you. Utilize these nine resources to help you take the stress out of preparing your taxes for Uncle Sam. April really is the cruelest month. But when British poet T.S. Eliot immortalized those famous words in his literary masterpiece “The Waste Land,” he never could’ve known that they would end up ringing true for business owners and entrepreneurs living in 21st-century America. Getting all of your receipts, financial documents and bank statements in order can be an arduous task. But there are solutions so that you can focus more on running your business and less on sifting through mountains of paperwork. Seeking outside help from a trusted accountant or bookkeeper is a great option, and technology has taken the grunt work out of organizing and preparing your own tax records — making April not seem nearly as cruel as it used to be. We asked nine entrepreneurs from YEC to share the resources they use to simplify things and help get their taxes in order.  

1

Track1099

Issuing 1099s was always a slow, costly process that required a CPA or advanced knowledge of Quickbooks. New online services such as Track1099 make processing your business’ 1099s much easier. These services connect to your accounting program, pull the information from the appropriate recipients of 1099s and take care of all the communication with both the recipient and the IRS. Online and cheap. – Diego Orjuela, Cables & Sensors

2

Mint

Mint is a great way to review your business transactions from the past year. It is a mobile finance app you can link to credit cards, bank accounts and investment funds. Mint will automatically tag and categorize purchases to help you identify donations, gifts and other tax-deductible expenses that you’ve incurred over the year. – Adelyn Zhou, TOPBOTS

3

QuickBooks Self-Employed

Intuit recently launched a new offering called QuickBooks Self-Employed (QBSE), which is perfect for small businesses that aren’t ready to jump into the full-service offering that most are used to seeing advertised. QBSE is great for independent contractors and freelancers as it allows a user to quickly and easily detangle expenses that might be intermingled across personal/business accounts. – Corey Eulas, Factorial Digital

4

Xero

We implemented Xero about two years ago, and it is a great cloud accounting solution with superb integration for other platforms so that you have Xero as the heart of your organization. There’s also lots of customization possibilities due to their open API. We are still using a personal accounting firm, but remotely, we use Xero as a cloud accounting solution. – Philipp Mohr, Hashplay Inc

5

A Bookkeeper

The best way to plan for taxes is not to leave everything until the last second. Hire a good bookkeeper and have them take care of your books year round. I’d recommend having them utilize a widely used system like Quickbooks Online, which will give you real-time access to your financials. This will allow you to focus on growing your business as opposed to spending more time on taxes. – Mitch Gordon, Go Overseas

6

Evernote

I like Evernote because I can put all my files, notes and receipts in one place via a cloud-storage format. It just makes it easy when I’m on the go and can save and upload from anywhere. – John Rampton, Due

7

QuickBooks Online

I absolutely love using QuickBooks Online to help keep me organized and my books reconciled for tax time. It has made my life so much easier, and I love their mobile app for ease of use while I’m traveling or on the go. I can actually run payroll off my smartphone — how cool! – Rachel Beider, Massage Greenpoint, Massage Williamsburg

8

Google Sheets

In addition to many of the other well-known tax software products out there, Google Sheets is definitely going to come in handy. Google Sheets is free to use and nearly identical to Excel — with even more benefits. Access your data from anywhere and also share or convert to a different file type with the click of a button. – Zac Johnson, Blogger

9

An Accountant

Outsource your taxes. It’s not going to be expensive if you use an independent accountant that has your best interests at heart. You can make more money in the time (not to mention avoid the headaches) that you’ll save yourself. – Thomas Smale, FE International