Types of Business Insurance Concerns

Buy-Sell Plan/Succession Plan

Creating a structure for transferring a business from one owner to the next is called succession planning. It brings together critical players - the owners, partners, key employees and the advisors.

Succession planning begins with an examination of operational, financial and personal issues. The end result is development of a succession plan.

This process also can:

• Improve operations
• Boost profitability and growth
• Strengthen relationships among everyone involved

The buy-sell agreement is at the heart of succession planning. Properly designed and funded, this plan can determine who will take over the business and at what value. It can transfer ownership to those who will remain active in the business and make sure you and your heirs receive a fair price for your business interests.

Partnerships or corporations can set up a buy-sell agreement in the form of:

• A cross purchase, in which the estate of the deceased owner sells the business interest to a surviving business associate
• An entity purchase, in which the estate sells the business interest to the business entity

Funding a buy-sell agreement

Funding with life insurance ensures that your family or estate is paid fair market value in cash at the time when it is most needed.

If the business is sold to a surviving owner, life insurance provides the cash needed to buy your interest, thereby assuring a smooth, complete transition of management and control.

Compensation Programs

Compensation programs should be based on the unique needs of your business and its employees.

• Do you offer competitive salaries and bonuses?
• Do you provide adequate life insurance and disability benefits?
• Can you afford retiree benefits?

Deferred Compensation

By purchasing a life insurance policy and placing it in a non-qualified deferred compensation plan, an employee can defer taxable income. Both the employer and employee have flexibility because non-qualified plans are not subject to ERISA contribution limits nor are they subject to discrimination tests in terms of who must be included in the plan. Thus, an employer could fund this benefit for only himself/herself or include other top members of the firm. This kind of plan is often added when an employer who already has a tax qualified 401(k) plan or another non-qualified deferred compensation plan wishes to do more.

Current taxable income is reduced by the amount being deferred. Funds deposited in a deferred compensation plan can accumulate without current income tax to the individual. Taxes are due when the funds are withdrawn, at the current income tax rate which may be lower than the individual's current tax bracket.

Deferred compensation plans can be constructed to include owner- employees, key employees or all employees of a firm.

Key Employees

Key employees literally hold the key to continued success of a business. They are your most valuable asset. By developing strategies for retaining key people, you lay the foundation for a profitable and secure future. Foremost among strategies should be a review of your compensation and benefit programs. A strong benefit program is essential for attracting and keeping key employees who will play a critical role in your company's future profitability and success.

Split Dollar

A plan to purchase needed personal life insurance at a lower cost through the sharing of premiums by an employer and employee. Helps the employer retain key employees with a fringe benefit that has minimal effect on cash flow and surplus account of the business. The employer can recover its contributions to premium payments when the policy is surrendered or as the result of a death claim.

Advantages:

• Taxes may be saved by using corporate dollars
• The employee receives life insurance coverage that is needed
• The employer recovers its premiums paid to the policy

Split Dollar may have estate tax advantages, especially with the use of an irrevocable trust.