Life insurance for business owners in North Carolina

Three business uses for life insurance

Business owners interact with life insurance in ways that most individuals do not. There are three primary applications:

• 1Key person insurance: The business owns and is the beneficiary of the policy. If a key person dies, the business receives the death benefit to stabilize operations, hire a replacement, or service debt.
• 2Buy-sell agreement funding: Partners own policies on each other. If one partner dies, the surviving partner(s) use the death benefit to purchase the deceased partner's ownership stake from the estate at a pre-agreed price.
• 3Executive bonus (Section 162): The employer pays premiums on a permanent life policy owned by the key employee as a compensation benefit. The employer deducts the premium as a business expense.

Key person insurance in practice

The value of key person coverage is often discussed in abstract terms. In practice, here is what it funds when a key person dies:

• ·Recruiting and training a replacement, which can cost $50,000 to $200,000+ for a senior role
• ·Revenue gap coverage during the transition period
• ·Loan repayment if the business owner personally guaranteed debt
• ·Reassuring clients, lenders, and investors that the business is stable
• ·Orderly wind-down costs if the business cannot continue without that person

Buy-sell agreements: the unfunded risk

Many small business partnerships have a buy-sell agreement drafted by an attorney, a contract that says if a partner dies, the surviving partner can buy out the estate. What many of these agreements lack is funding. The surviving partner may not have the cash to execute the buyout when the time comes.

Life insurance-funded buy-sell agreements solve this. The death benefit arrives exactly when needed, in exactly the amount required, without requiring the surviving partner to liquidate personal assets or take on debt. The premium is usually paid by the business and is often deductible, depending on the structure.

Executive bonus plans

The Section 162 executive bonus is one of the simplest business life insurance structures. The employer pays the premium on a permanent policy owned by the employee. The premium is deducted by the employer as compensation. The employee pays income tax on the premium amount (which the employer can gross up), and owns the policy, the cash value, and names their own beneficiaries.

This structure is frequently used to reward and retain key employees. The cash value that builds inside the policy becomes a supplemental retirement asset owned by the employee, a meaningful benefit that grows with tenure.

Cooper's take

Frequently asked questions