According to the IRS, business entities can deduct all reasonable expenses including compensation in a given tax year. (IRS tax code section 162 (a)1).
This opens a world of possibilities to employers large and small. Many take advantage of this provision by offering an executive bonus in the form of cash value life insurance for key executives within a company. There are many good articles available online about how this flexible bonus plan can help businesses generally such as this one from Bolicoli.com
As a new entrepreneur I am passionate about small business. Although big businesses often choose to reward key executives without the government oversight and regulations that accompany other more traditional benefits packages, small business owners are more concerned with paying today’s bills and success of their business in the future.
Small business owners are a high risk population, if they die or become disabled the likelihood that the business closes its doors for good increases dramatically. This impacts employees, family, and customers of the business. Additionally if the business falls on hard times like we’ve had recently with the COVID pandemic capital is not available to help a business survive.
Furthermore, if everything goes well and the owner is ready to sell the business and retire, it can be very helpful to have a supplemental tax free income stream in retirement. Or, as is often the case, the business becomes part of the inheritance it is helpful to have liquid (tax free) cash available to apportion inheritance amongst multiple heirs that may or may not wish to continue the business.
Structuring cash value life insurance as an executive bonus plan billed through the business can resolve all 4 issues. If a business owner dies early the death benefit can go to a beneficiary of their choice, generally a spouse. It can also act as a key person benefit to help wind the business down and avoid sudden layoffs and loss from inability to sell the business. If a disaster hits like COVID, the owner can access cash values to help either the business or family survive or both.
On the other hand, if everything goes great, the cash value in an executive bonus life policy can be accessed tax free to help retirement. Then, when the owner passes there is adequate liquid inheritance to divvy up amongst the heirs, without having to liquidate or in any way damage the business.
Some rules of thumb as with all other life insurance is that sooner is better. A 40 year old for example, will be able to get a more affordable policy than a 50 year old all else being equal. However, the principle also applies,” better late than never.”
To find out more about this very powerful tool you’ll want to consult with your personal insurance professional and your accountant or CPA. If you don’t have an insurance advisor, feel free to contact me via the below form or call 719-247-0008.