Tag Archive for: Succession Planning

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The Acumen Team

Top Six Reasons Why Smart Business Owners Use Life Insurance

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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.
The Acumen Team

Succession Planning Amidst the Great Resignation

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Reviewing Forbes’ “Struggling to Keep Employees Amid the Great Resignation? Look to Succession Planning.”

At Acumen Insurance Solutions, one of our core services is business succession planning. For this reason, Forbes article titled, “Struggling to Keep Employees Amid the Great Resignation? Look to Succession Planning” stuck out to us like a sore thumb.

Read on for a little context on business succession planning at Acumen. Then, we’re handing over the reins to Forbes to talk about how succession planning can help boost employee retention during this time.

The Importance of Business Succession Planning

At Acumen, we do our fair share of business succession planning for clients. Most commonly, life insurance is utilized by business owners as a mechanism to:

  1. Protect their families in case they are no longer there to provide income
  2. Protect their businesses in case a key person dies
  3. Provide the liquidity needed to redeem shares when an owner leaves the company or passes away
  4. Provide non-equity compensation to fund executive incentive and retention programs 

There are, however, additional succession planning elements that can increase employee retention during the Great Resignation.

Interested in learning what they are? Continue reading for the full Forbes article.

Struggling to Keep Employees Amid the Great Resignation? Look to Succession Planning.

The Great Resignation has been prevalent for some time now, and unfortunately for businesses, the search for greener pastures is still picking up pace. Nearly 4.3 million people left their jobs in January 2022. In February, another 4.4 million people called it quits. An estimated 44% of workers said they actively looked for new jobs at the end of 2021 or planned to find new employment at the beginning of 2022, so these numbers could continue to jump for the foreseeable future.

Needless to say, employee retention has become a top priority. Some companies have chosen to go the monetary route, using compensation increases to attract and retain employees. Others have given more perks to reengage their teams, offering greater flexibility, remote work options, and paid parental leave. These solutions can work in some instances, but they don’t truly address the root cause of the Great Resignation problem.

The pandemic gave people time to step back, reassess their lives, and unlearn the old ways of working. Many people have realized that life’s too short to stay in jobs that aren’t fulfilling, especially when staying doesn’t allow them to grow. An increasing number of employees now want future-oriented job opportunities, so a solution to the Great Resignation can be found in the unlikeliest of sources: succession planning.

Succession planning is often just thought of as a means for identifying and developing future company leaders. Though that’s certainly true, succession planning is also vital for every other area of a business—especially employee retention.

Establishing a companywide succession plan

Although no two succession plans will look the same, certain elements have proven to be most successful when retaining and attracting talent. The following should be part of your succession planning process:

1. Create a mentorship program.

It’s no secret that mentorship programs benefit employers and employees alike. Such initiatives can support career development, strengthen onboarding efforts, reduce training costs, and even help nurture a culture of learning. Mentoring is also essential to succession planning and talent retention, as it develops your future leaders and can even increase the momentum of a mentee’s growth within your company.

How you go about establishing a mentorship program is entirely up to you. Vince Dawkins, president and CEO of Enertia Software, suggests a systematic approach: “Assess your workforce and ask yourself where you see each person fitting within your operations. Then, carefully pair junior employees with more seasoned team members.”

“For your mentorship program to work, however, don’t forget to set mentoring goals,” Dawkins writes. “Each pairing will have different objectives, and participants should revisit these objectives regularly to keep knowledge transfers on track and ensure ownership among the team.” Once mentors and mentees are paired and goals are set, it becomes much easier to measure the program’s success across both development and business objectives.

2. Employ individual self-selection.

In many organizations, one of the biggest issues in succession planning—and leadership development in general—can be attributed to the selection process. Though logic would tell you to evaluate team members and select the worthiest candidates based on a mix of performance and potential, such an approach leaves room for biases. It’s akin to the unconscious biases seen in certain recruitment practices where “like hires like.”

Although evaluation will always play a role in succession planning for specific positions within your company, a much better approach is self-selection. It’s simply more inclusive. And according to Janice Burns, chief people officer at Degreed, “This creates a pipeline of unexpected (and otherwise hidden) talent committed to proving their success and, therefore, more likely to remain at the company.”

Allow team members to nominate themselves for development opportunities that put them on track for leadership roles. Ask interested individuals to provide a business case for the investment and then monitor their progress. You might be surprised at the hidden talent within your organization.

3. Prioritize organizational culture.

Culture impacts all aspects of a business. Everything from engagement and productivity to collaboration and decision-making can be traced back to the health of your organization’s culture. The time is now to review your mission, values, goals, and expectations, as they collectively serve as a North Star to guide teams and motivate employees to do their best possible work.

Culture is a living, breathing organism, so it can change when left unchecked. That change might be gradual but is still consequential to your company. So, make a habit of seeking feedback from employees. Ask your team where they might need support, resources, and so on. Invest in them, and they’ll invest in you. As writer Kat Boogaard explains, “Regularly asking employees what you can do to support them and implementing that feedback can reduce your organization’s attrition, which is even more important during ‘The Great Resignation.’”

What’s more, your efforts will create a pool of devoted employees, all with a greater understanding and appreciation for your organization’s mission, vision, and values. Each one could be a future leader.

4. Practice transparency.

Individual aspirations can take an employee only so far. Sometimes, people need to hear where leadership sees them progressing within operations to truly find the right career development paths. Therefore, schedule time with each employee to discuss your plans for their future growth. And be sure to open the floor for their input. Maybe you see a sharp and talented customer service representative moving into management, but that person’s interests don’t match your vision.

The ultimate goal is twofold: identify the ideal development opportunities to keep employees happy, engaged, and content to stay at your organization and develop a succession plan for all operational roles. If you haven’t taken the time to discuss a team member’s future, you could miss out on a great leader—and you might lose the person to another company in the process.

Succession planning won’t necessarily be a cure-all for your talent woes. Recognition, respect, autonomy, and communication all contribute to whether a given employee will pull up stakes. Still, succession planning can serve as a solid foundation to build up future talent retention and acquisition efforts within your organization. It demonstrates a commitment to and an investment in your employees’ futures, which can go a long way toward keeping them engaged at your company for the long run.

Infographic of Succession Planning Amidst the Great Resignation

What We Do

Working with owners of successful businesses also requires coordination with their estate plans; our team at Acumen is uniquely positioned to design flexible life insurance plans with both goals in mind.

Interested in learning more? Read on to hear us answer the question, “Can I Change My Life Insurance?”