Life insurance can help ensure the continued existence of a company by providing surviving owners with a source of liquidity to buy out a deceased owner's share of the business. In some cases, business owners also have the flexibility to increase or decrease life insurance coverage to keep pace with the value of the business.
Employee incentives can provide you with an opportunity to offer a select group of key employees' retirement and survivor benefits beyond what is provided as part of your company's standard benefits offering. These incentives can make the difference between keeping and losing employees who are critical to your company’s success.
Life insurance, when used as part of an employee incentive plan, can provide a death benefit payable to a beneficiary in the event of the employee's death. In addition, depending on the type of life insurance used, the employee may be able to draw upon the cash value through loans or partial surrenders from the life insurance policy to help supplement his or her retirement.1 While the policy may allow for access to the cash value in the short-term, such as through loans or partial surrenders, these transactions will impact the policy's death benefit if the values are not restored prior to the insured's death. Also, there may be little to no cash value available for loans in the policy's early years.
The simplicity of utilizing life insurance in a plan, the potential income tax deduction for the business, and the degree of control that the business owner gives to the employee, all combine to make life insurance an attractive employee incentive option. 1
Term Life Insurance
Term life insurance provides coverage for a set period of time at a generally lower cost than permanent insurance. Many term life insurance products allow you to convert to a permanent policy, such as whole life insurance. The cost of term life insurance increases over time, so it’s important to understand your short- and long-term needs for financial security when you select a policy.
Permanent Life Insurance
Permanent life insurance provides you with financial protection for your entire life, as long as the policy remains in force. Because of the flexibility permanent life insurance offers, there are a couple types of policies you can purchase.
Whole Life Insurance. The benefits of whole life insurance include guaranteed fixed premiums, a guaranteed death benefit and guaranteed cash value growth. This means that with whole life insurance, your premiums never increase as long as they’re paid, and the policy has “living benefits,” which may enable you to access the cash value of the policy for any purpose while you’re alive.1 One thing to keep in mind when taking a distribution from a whole life insurance policy is that accessing the policy’s cash values will reduce the policy’s cash value and death benefit and increase the chance the policy will lapse.
- Universal Life Insurance. Universal life insurance provides lifetime death benefit protection along with flexibility that gives you choices as your needs and finances change. It offers options such as coverage amounts that may be increased or decreased, and premiums that you can vary based on your finances as long as there is enough money in the account to pay for the monthly insurance and administrative charges.
1 Distributions under the policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10 percent tax penalty if the policyowner is under age 59½.
Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.