Small Business Owners Present an Opportunity for You to Grow Your Business

March 1, 2024 |read icon 10 min read
A small business owner runs her flower shop.

Your existing book of business may have hidden opportunities that you’ve so far overlooked. Chances are, you have small business owner clients that may have personal life insurance for some purpose, but don’t know how life insurance can help protect their business as well. As you explore your client’s protection needs, don’t overlook their business needs if they own a business.

Life insurance can help a small business owner:

  • Ensure a smooth transition or exit from the business.
  • Attract and retain key employees.
  • Reduce the cost of owner and executive bonus programs.
  • Support retirement and estate planning needs.

Selling to your existing customers could be easier than with new clients since you’ve already established a relationship and built trust.

Life insurance can help protect business

While your business owner clients may have thought about who would run their business in their absence, chances are they don’t have a formal business continuation plan in place in the event of their death. Even if they do have a plan, life insurance likely isn’t a part of it.

Buy-sell agreements

A buy-sell agreement is a contract that defines the terms of how a business will be transferred upon the death of an owner, and makes sense for any business entity, including corporations, partnerships, LLCs and even proprietorships. A buy-sell agreement can ward off infighting by family members, co-owners and spouses and help keep the business intact. Life insurance is prominent in many buy-sell agreements. The agreement doesn’t need to be funded with life insurance, but it may help ensure there’s cash available when the time comes. Your clients could wait and pay cash to fund the buy-sell agreement, thinking they have time to save. But a savings plan accumulates funds over time. What if funds are needed tomorrow? They could borrow the funds, but the death of an owner may make it difficult to receive a loan and the person signing for the loan may have to expose personal assets to receive it. Either way, the purchaser will pay dollar for dollar, plus interest if it’s a loan, for the deceased’s outstanding share of the business.

Ameritas can help by providing a Buy-Sell Review. It goes beyond merely telling you what is currently represented in a client’s buy-sell agreement. The team reviews the plan and determines gaps that can be created by time, changing circumstances or business conditions, and then provide options to fill those gaps.

The benefits of life insurance

Using insurance as a funding vehicle:

  • Leverages a limited number of premium payments into a sizeable death benefit.
  • Provides immediate availability of proceeds when death occurs.
  • Pays a death benefit that is generally income-tax free.

Consider the Executive Bonus Buyout

Asking a small business owner how they want their business to continue once they’re no longer a part of it may cause some anxiety. A key executive is often the most qualified to take over and continue the business. However, they may lack the capital needed to purchase the business. The Executive Bonus Buyout concept helps solve this problem.

Once the business owner and the executive have identified an interest in the executive continuing the business, the executive can raise the funds through an executive bonus. An executive bonus uses permanent life insurance to enable the executive to leverage tax-deferred cash growth, receive income-tax free money in retirement and provide an income-tax free death benefit for beneficiaries.1 The business pays the bonus through the policy premiums and should be able to deduct these bonus amounts as a reasonable and ordinary expense.2 The executive includes any premium payments paid by the business owner as taxable income. The key to the executive bonus concept as it relates to the Executive Bonus Buyout is its structure. In traditional executive bonus plans, the executive is the owner of the life insurance policy and the insured. With an Executive Bonus Buyout, the executive is the owner and beneficiary of the policy while the business owner is the insured.

The Executive Bonus Buyout can also be used to help a key executive purchase the business when the owner retires. It provides the executive flexibility in acquiring funding and can be used in combination with traditional methods. For instance, the life insurance cash value is used by many lending institutions as collateral for obtaining a loan. Cash value through loans and/or withdrawals can be used as a down payment.3

Business continuation planning continues to revolve around a willing seller and buyer coming to an agreement on the value of the business. It eliminates the need for a quick sale that falls below fair market value after an owner’s unexpected death. The Executive Bonus Buyout identifies a willing buyer who is legally obligated to purchase the business and deterred from walking away. It gives the business owner solace in the fact their heirs are protected. As for living buyout options, the Executive Bonus Buyout offers flexibility for the willing buyer to obtain the needed capital to buy the business. Consider the Executive Bonus Buyout when looking to solve business continuation needs in a simple, easy to administer fashion.

Business valuation

Having a business valuation is a crucial first step in assuring the survivability of a business. It lies at the heart of successful business planning. It strengthens the brand’s credibility and values, facilitating a smooth transition to the next generation or assisting with financial matters such as potential sales or business expansion financing.

To produce a complete, objective valuation, the assistance of an independent, accredited firm is needed. Often, this process can be confusing, time-consuming and expensive. This does not need to be the case. Ameritas has a variety of options to help you and your clients through the process.

Family-owned businesses

Few people have more planning issues to deal with than a family business owner. Life insurance can play a part in helping your client make sure their business carries on after they are gone. The death benefit will provide cash to your client’s heirs to:

  • Buy the business from the surviving spouse so they are financially secure.
  • Pay estate taxes at the parents’ deaths without having to liquidate any business assets.
  • Treat family members not involved in the business equitably.

Consider a Family Limited Partnership

Family Limited Partnerships represent a powerful tool for families seeking to optimize their estate planning strategies, protect their assets and facilitate intergenerational wealth transfer. By leveraging the tax advantages, asset protection mechanisms and succession planning opportunities afforded by FLPs, families can effectively preserve their legacy and ensure the long-term prosperity of their entrepreneurial endeavors. However, it is essential to approach the establishment of an FLP with careful consideration, professional guidance and a thorough understanding of the potential benefits and drawbacks. By doing so, families can harness the full potential of FLPs to achieve their financial and legacy planning goals.

Key person loss

Talented employees are one of the most valuable resources for many businesses. Key person insurance helps your clients protect against the financial loss associated with the premature death of key employees.

Life insurance can help attract and retain key employees

To recruit and retain valuable employees, employers often need to offer more than just a basic benefits package. At the same time, employees are looking for ways to protect their family and maintain their standard of living during retirement. Executive bonus plans allow employers to pay a bonus exempt from IRS approval to any employee(s) of their choosing. The bonus can then be used to fund life insurance coverage for the employee and their family.

Non-qualified deferred compensation plans

Nonqualified deferred compensation plans (NQDC) allow employees to set aside a portion of their income with the expectation of receiving a payment or benefits at some point down the road. Life insurance can be appropriate for this strategy because of the death benefit protection it provides—along with the cash value accumulation that can be accessed for future needs.3

NQDC plans are not subject to ERISA’s strict requirements for qualified plans. They are most often used as an incentive to attract and retain key employees, and, with a vesting schedule, these plans can be an excellent employee retention tool. To provide the employee with some certainty that the plan will pay out as promised, employers may choose to informally fund their NQDC plans by purchasing taxable investments or by purchasing life insurance.

Split dollar plans

Split dollar plans have been used since the 1950s to split the costs and benefits of needed permanent life insurance for both owners and key employees. Recent IRS rulings now make plan requirements very clear regarding the taxation and design of these plans. Split dollar agreements can be structured as either loans or as an economic benefit taxed to the executive at term rates.

Life insurance provides advantages to both types of plans:

  • Life insurance provides a pre-retirement death benefit to protect the employee’s family.
  • At retirement, policy cash values may be used to supplement the employee’s retirement income.3
  • Life insurance provides post-retirement death benefits to help maximize and protect the employee’s estate.
  • If the policy includes a total disability rider, the policy will provide benefits even if the employee becomes disabled.

Small business owners present a significant opportunity for expanding your business, with many potential avenues for growth often overlooked within your existing client base. By recognizing the diverse needs of small business owners and understanding the role life insurance can play in protecting their business interests, you can provide invaluable support in ensuring a smooth transition, attracting key talent, and planning for retirement and estate needs. For more information about business planning and the resources available, contact Ameritas Advanced Markets at 800-319-6903, option 2.

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Sources and References:

1With respect to a §162 Executive Bonus Plan, the employer should consult with and rely on independent legal and tax advisors regarding whether any executive bonus plan may be considered a welfare benefit plan under ERISA and if so, what requirements must be met.

2For the Executive Bonus Buyout the agreed upon life insurance death benefit should be enough to pay the purchase price in the event of the owner’s death.

3Tax law permits a policy owner to withdraw life insurance policy cash values up to the policy owner’s basis or investment in the contract without income-tax consequences. Withdrawals and loans will reduce the available death benefit. Withdrawals beyond basis may be taxable income. Excess and unpaid loans will reduce policy value and may cause the policy to lapse. If a policy lapses, unpaid loans are treated as distributions for tax purposes. For more information about the tax results of life insurance, consult your attorney or tax advisor.

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