By Mike Martinez, CLU, ChFC, AEP, Director, Doeren Mayhew Insurance Group

As a business owner, are you leveraging your assets to ensure the future of your business is protected? While business succession planning may not immediately be on the horizon, there are some creative and practical ways to leverage your current assets, such as deploying them into a high cash value life insurance plan.

A one-way, buy-sell agreement tied to a high cash value life insurance policy is a low-risk method to protect the future of the business while simultaneously increasing the value of the idle cash.

Developing an Insurance Plan

Doeren Mayhew Insurance Group‘s professionals suggest the five steps below to implement an insurance plan for your business:

  1. Identify a key employee. The key employee needs to be competent and have working knowledge of the business. They must also have a desire to be the “owner” of the business someday.
  2. Create a written agreement. The current owner and the key employee must have a written agreement in place. The agreement must stipulate, among other things, that the key employee will purchase the business from the current owners survivor’s at the death of the owner.
  3. Acquire a life insurance policy. The business acquires a life insurance policy on the current owner. The death benefit, in excess of the policy’s cash value, is endorsed to the key employee. The business pays the premium with after-tax dollars while the key employee incurs a small annual tax for receiving the benefit of the insurance.
  4. Use the insurance proceeds. Should the current business owner die, the key employee can then use the insurance proceeds to purchase or make a down payment on the business to the owner’s survivors.
  5. Build value. As long as the current business owner is living, the policy’s cash value stays on the company’s balance sheet and continues to grow on a tax-deferred basis.

Three Key Benefits

As outlined above, leveraging an insurance plan can be a critical asset in your business. Other key benefits of establishing a one-way, buy-sell agreement tied to it includes:

  1. Eliminating the worry by the owner’s survivors of scrambling to find a buyer for the business in the event of the owner’s pre-retirement death.
  2. Providing a net neutral impact to the company’s balance sheet with the use of a high cash value life insurance policy. In addition, all future gains in the cash value are tax-deferred.
  3. Encouraging loyalty and incentive for the key employee to remain with the business.

Case Study Example

Consider this case study example to highlight how an insurance plan can help leverage your idle business assets.

Susan, a 50-year-old business owner, has two big concerns:

  1. Her business traditionally carries approximately $1 million in cash earning 0.5 percent in interest.
  2. She doesn’t have a family member interested in taking over the business if she were to die prior to retirement. She does however have a key employee, Ella, with the skill, experience and desire to take over one day.

With the future in mind, Susan decides to purchase a high cash value life insurance policy and create a succession plan to help ensure the business continues to thrive beyond any unforeseen circumstances.

As outlined above, implementing a high cash value life insurance policy not only protects yourself, but also your family and business. To help determine if this insurance option is the right fit for you, contact our trusted insurance advisors at Doeren Mayhew Insurance Group today.