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A Win-Win Approach to Retaining Key People

A Win-Win Approach to Retaining Key People

A Win-Win Approach to Retaining Key People

Your most important business assets are your people — especially owners and other key employees. Without them, the business loses ground, and in many cases, dies. Even the most loyal employee or committed owner may consider a departure. And, every employee will at some point face retirement, disability or death. See how life insurance can help retain employees and protect your business.

Key person replacement insurance may sound familiar to you as a way to protect your business if an especially valuable employee becomes disabled or dies. The policy is an asset on the business balance sheet that can pay for training, temporary staffing and short-term revenue replacement — all valuable benefit to the business. It also can be used to fund a deferred compensation agreement or provide retirement income — valuable ways to attract and retain top talent.

Enhance Employee Benefits to Prevent Departure

The same life insurance policy that can protect your business in the event of a key employee’s death can be used to design an attractive non-qualified benefit package for the key employee. Because it is non-qualified, the benefit can be discriminatory in participation and benefits. In other words, you can offer it to select employees at whatever level you deem appropriate.

As the employer, you retain ownership of the policy. So, if the insured employee still decides to depart, you can use the policy’s benefit to implement a personnel change.

Fill the Retirement Gap for a Highly Compensated Employee

Use a key person insurance policy as an attractive, non-qualified retirement benefit package. It can help you retain, or even attract, highly compensated employees. The employer-owned life insurance policy provides tax-deferred gains, and, at any point in time, the employer can make tax-free withdrawals of amounts equal to the premiums paid. Additionally, the employer has the option to borrow from gains without paying taxes.

When presented as part of a retirement program, you have several options for disposing the policy when a key person departs. Some possibilities include:

  • Transfer policy ownership to the retiring person as a bonus.
  • Using the policy as a down payment to buy-out a key person’s ownership in the business.
  • Withdraw premiums paid to reimburse the employer’s investment then bonus out the balance of the policy to the key person.
  • Retain the policy and the death benefit in the corporation for income tax-free gain.
  • Retain the policy and the death benefit in the corporation to provide funding and/or cost recovery for a key person’s supplemental retirement plan.
  • Annuitize the cash value to provide an income stream.
  • Donate the policy to charity to meet a charitable intent.

Things to Consider When Offering a Key Employee Life Insurance

Unlike other employee benefits, the premium paid into key employee life insurance is not tax deductible, and obtaining the policy may come with some costs as well. However, insurance proceeds are paid tax-free. Keep this in mind when structuring your key employee’s retirement package.

As an employer, you own the life insurance policy, but the insured employee must meet minimum qualification. Sometimes insurance companies will ask the key employee to respond to a lifestyle questionnaire or participate in a health assessment.

Follow Up with Your Financial Professional

Think about the people who are crucial to the success of your business then consult with a financial professional. He or she can help you explore the options available when you use key employee life insurance as an employee benefit or incentive.
 

NOTE: Provided content is for overview and informational purposes only and is not intended as tax, legal, fiduciary, or investment advice. If a life insurance policy lapses with loans outstanding, the loan amount becomes subject to federal income tax to the extent there is a gain in the contract. In addition, outstanding loans at death will reduce the death benefit of the policy.

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