A long time ago I learned that the way you demonstrate the need for life insurance is to look for the potential loss. That certainly applies to what is usually the most important financial event in one’s life the sale of a business.
Whether you plan to sell the business this year or much later in the life of the business, planning for your future sale should be a constant. Part of this planning examines the possible risk exposures and makes sure they are covered.
It certainly makes sense to have life insurance on the seller to protect his family and business should something happen to them before or during the sale process. What is the business worth without the owner?
The buyer may also need life insurance to protect his family and business. This life insurance can provide for his family, keep the business afloat, pay off loans and fund a buy-sell agreement that would continue the business with a designated successor.
A life insurance policy will also work to protect the business from the loss of a key employee before, during and after the sale of a business. It is important that your business have a plan to retain and motivate valuable employees. An employer may use cash value life insurance that is incorporated in an executive bonus plan or a deferred compensation plan. Not only can this planning help retain and motivate valuable employees, it can also protect their families and accumulate tax-favored money the key employees can use for retirement. You need those top employees to be on board should you plan to sell the company.
Once you sell the business, you may then have assets over the unified credit, which is the amount an individual can pass to their heirs free of federal estate tax. For the year 2009, this amount is $3.5 million if single or $7 million for a married couple. Assets over these amounts can be taxed at a 45 percent estate tax rate by the federal government. Planning can help you avoid some of these expenses and provide your heirs with the needed capital to pay the remaining taxes.
Life insurance may also be useful if you have accumulated a large sum in your retirement plan. Withdrawals from plans such as IRAs and 401(k)s are subject to income taxes and estate taxes, so consider a planning technique that can leave more to your heirs from your qualified plan.
For example, once you exit your business you could withdraw a portion from your qualified plan, pay income tax on it and then use the remainder to pay a life insurance premium. This policy can be in a special trust that can supplement the qualified plan assets while avoiding most of the income tax and estate tax burden on your heirs.
In closing, be certain to fully investigate the financial integrity of the insurance company you plan to do business with. You should also seek an agent who is experienced in working with business owners and knows how to best serve you and your family.
Stan Goodin, CLU, ChFC,AEP, LUTCF is a member agent of The Nautilus Group which is a service of New York Life Insurance Company, located in Reno at 245 E. Liberty, Suite 405.
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