Business life insurance is usually an important component of a buy-sell agreement and outlines what happens to each owner’s share in a company if one of the owners dies or leaves the business. Scenarios where a buy-sell agreement is appropriate include when partners want to:
- Set a fair price for each share of the business in case there is a dispute among the owners or if one owner wants to be divested of their interest in the business so that the other parties can buy out the exiting share of the business.
- Restrict other owners from selling their shares of the business to a person or entity that might not have the business’s best interest in mind.
- Guarantee that the current owners sell their shares back to the business when they die or become incapacitated.
- Guarantee all remaining owners in the business will buy out all deceased partners’ shares. The terms can include an agreement that co-owners will insure each other to protect the continued ownership and operations of the business. This ensures that if one business partner suddenly leaves the business or dies, the remaining partners will be able to fund any costs that arise as opposed to having all the cash on hand.
A buy and sell agreement that includes insurance can include an entity purchase plan or a cross-purchase agreement for the co-owners. It is often too complicated for the partners to buy life insurance on each other if there are multiple owners. In this case, the partners can use an “entity purchase” agreement where the business buys one policy on each partner. The death benefits can be used to buy the deceased co-owner’s shares.
With a cross-purchase agreement, every partner purchases life insurance on the other partners. If a partner dies, the remaining partners can use the death benefits to buy the deceased partner’s shares in the company.
A buy and sell agreement will only work for these two additional plans if the partners agree to purchase life insurance to buy the shares of the deceased partner. This is called a “funded” buy-sell agreement.
We can help you choose the coverage that is best for you and help you manage the application process.
Key Person/Corporate-Owned Life Insurance
Would your business take a financial hit if a key employee passed away?
It’s a concern for many employers. That’s why for some employers corporate-owned life insurance (COLI) makes a lot of sense. This is life insurance purchased by a company on the life of an employee. When the employee dies, the company receives the death benefits. The company remains the beneficiary even after the insured employee leaves the firm — if the company continues to pay the premiums. COLI also may be written on a group of employees.
COLI protects a business from the unexpected death of executives and other employees who are essential to the business’ operation and whose absence could result in the loss of revenue and profits. It’s also a way for a company to recoup the time and investment it has made in its vital employees. Or it may be used to redeem shares of company stock held by the deceased, such as with a closely held business.
Any money a company receives as the beneficiary is tax-free, as long as the insured employee qualifies as a company director or meets the Internal Revenue Service’s definition of a highly compensated employee. Another financial benefit is that an employer can withdraw some or all of the built-up cash value or borrow against it to purchase employee benefit plans. Plans can be non-qualified executive health plans or deferred compensation plans. An employer also can take out loans through the policy for non-benefit related items.
Qualified and Non-qualified Deferred Compensation
When considering retirement plans, the many options — not to mention complicated tax rules — can leave employers uncertain about the best plan for their company.
One of the basic decisions employers face, is whether to offer qualified or non-qualified retirement plans, or some combination of both.
Qualified retirement plans are employer-sponsored retirement plans that “qualify” participants for certain tax benefits by meeting requirements under federal law for coverage, participation, funding and vesting. There are two main types of qualified plans: defined benefit plans, which are funded by company contributions to meet a preset annual retirement payout, and defined contribution plans, such as profit-sharing plans, which give employers flexibility in choosing how much to contribute each year. Plans must cover at least 70 percent of non-highly compensated employees and employers must generally offer them to all full-time employees on the same terms. The major attraction of qualified plans is tax breaks.
Non-qualified plans are employer-sponsored plans designed to benefit a select group of executive or key employees. If the plan is properly structured, the employer can include only those employees it chooses — without having to abide by the anti-discrimination, participation or vesting rules that qualified plans must follow.
Although non-qualified plans are subject to fewer government regulations, they receive fewer tax benefits. Any earnings in the plan are taxable to the employer and taxable to the employee when distributed as benefits. However, the employer can take a tax deduction at the time of distribution. And since non-qualified plan contributions are not held in a separate trust, employees receive no guarantee that benefits will be there when they retire — and any assets set aside for future payouts are subject to claims by employers’ creditors.
One way to reduce the potential financial risk to non-qualified benefits is by setting up an IRS-approved irrevocable trust into which the employer contributes the plan assets, which are managed and distributed by the trustee. Although these trusts do not protect the assets against creditors’ claims in case of company insolvency, they generally offer protection in the event of a corporate takeover, change in management or other event that could threaten the availability of benefits.