Business owners face a number of challenges when balancing sustainability, growth, and shielding their families and trusted employees from potential financial hardship. Mel goes over how to protect the longevity of your family and your business through the Emerging, Expansion, Flourishing, and Succession phases.
Today, we’re going to be talking about how to use life insurance to ensure the long-term viability of your business.
What I want to do is start with a story.
There’s a website out there called lifehappens.org, and this is a very powerful story about a small business owner, much like yourself, who started out fairly young, had a very flourishing business right off the bat.?One thing that this business owner, John, was really smart about was planning.?What he did is he met with his advisor very early on and they kind of put the bare minimum in place.?And what that means was John’s most important asset, his family, was taken care of first.
But one of the very important things that this advisor did at that time was actually planted the seed about using life insurance to help with a business plan, a true business plan.
Fast forward a couple years down the road, as John started progressing through the different phases of his business.?He and his advisor re-met and what they did is actually put together some business insurance.?What that means is a succession plan, a lot of different ways to use it, which we’ll get into.?It was a very important meeting because at that point, John’s business had over 100 employees.
Imagine each one of those employees if they were to lose their stream of income or lose their job, it would be very impactful to a lot of people.
So, let’s fast forward to the tragic ending.?Unfortunately, John was diagnosed with melanoma cancer and actually had a very rapid decline, and he passed away in about nine months.?Obviously very sad story, very hard for a lot of people to take.
But the silver lining of the story is that John had the wherewithal to meet with that advisor and protect, number one, his most important asset, his wife and his kids.?They were taken care of first and foremost.
Then his extended family, his employees, some of those people that really looked up to him as that business owner, didn’t really miss a beat.?Of course, they had a time of hardship dealing with the loss of the business owner, but they were able to still go in and clock in every day, which was very important to them to maintaining their own lifestyle.
Again, having that planning in force, meeting with a good advisor is very important.
And the purpose of today’s conversation is to discuss the different ways business people are putting insurance in place to really protect their business.
Typically two things are going to happen.
Number one, you’re going to realize that, “Hey, maybe I need some more insurance on myself, personal insurance.”
Number two, “Hey, it’s time to start planning for my business right now in the event a tragedy happens, like, unfortunately, John’s situation.”
With that said, let’s talk about a couple questions you want to ask yourself as a business owner.
Let?s discuss the different phases of business planning.
Phase 1: Emerging
Phase one, we’ll call the emerging phase.
What we’re going to do right here is kind of like John did, put the bare minimum in place on your family and your business.
A really good way to do that is with term insurance.
One key word that you see here is we don’t do just any kind of term because a typical term, you’re paying the least amount of premium for the most amount of death benefit for a specific time.
What we want is convertible term.
What that means is that anytime during that term period, you can make it a permanent policy.
It extends to all the different phases of your life, and then also progresses with your business here as well.
You want it on yourself, and at this point, if you have any key employees, it’s a great time to have some good, cheap term in place right then in there.
Okay, that’s phase one, the emerging phase.
Phase 2: Expansion
Let’s talk about phase two, your expansion phase.
At this point, your business is really starting to bring in some revenue, debt’s reducing.
You may have some freed up capital to start converting some of that term that we mentioned to permanent life insurance.
One thing that we always recommend doing is progressing more and more as your business goes, have a business valuation.
If your business has doubled in size at this point, double your insurance.
One type of permanent insurance is a cash value life insurance policy.
There are a lot of different ways to use it.
Typically, what a business is going to do at this point is have a buy-sell agreement.
Most spouses are going to have their own career and not really have an interest in the business, so there should be a succession plan that would go to the other key people in this business.
At this business stage converting that term and then keeping key people in place is going to be really important because training and turnover is very costly.
One way to do that is with the golden handcuffs policy.
This is with the cash value life insurance policy.
What we do with that is actually put it in force, let the employee be the insured, and the business is the owner.
And at some point, a triggering event, what you can actually do is give that policy right over to your key employee when they retire, they hit the 20-year mark, there’s a lot of different ways to set these up.
So that’s phases one and two.
Phase 3: Flourishing
Let’s go ahead and talk about phase three here, which is really the best part of business, when your business really starts to flourish.
This is where you’ll probably be spending most of the time as a successful business owner.
Hopefully, income is 10x at this point, you’ve got a really good management team in place, and your business has really hit its stride.
Hopefully, you’ll spend a good 20, 25 years in this flourishing phase.
At this point, I would hope all of your insurance is now permanent, you’ve converted everything to a permanent policy that you cannot outlive for yourself and your key people.
We now have a good team of management, so we want to have very out-of-the-box ways for them to plan.
What that means is having an executive bonus plan in place on top of a 401(k), a big cash value life insurance policy.
Work with your management team and see what they want and what they need to make sure that you’re not losing them.
Also, at this point, if your income is much higher, you’re going to need more personal insurance.
And we need to start thinking about an exit strategy when you get to the fourth phase, which is our succession phase.
Phase 4: Succession
At this phase all of your life insurance is going to hopefully be permanent.
We need to start thinking about you as the business owner. What are you going to do when you retire?
If you have one of these cash value life insurance policies in force, you can actually use that cash value for a retirement plan.
A stream of income that goes on top of your tax deferred IRA or 401(k).
We also need to start thinking about an estate plan.
If your business has done really well and you’re worth millions of dollars, hopefully, your beneficiaries may have a substantial tax burden in the event that you pass away.
The death benefit of life insurance would be passed to them tax free.
So, let’s start thinking about your estate and your family.
Then the tough part, what’s going to happen when you want to retire?
A lot of small business owners, or really any business owner…they typically think, “Hey, I’m just going to sell the interest in the business, that’ll be a big chunk of money, and then I’m done. I’m out.”
But if you’ve done a good job planning, and you’ve put all of these policies in force along the way through these four phases, you can’t just walk away that easily.
So, what we need to do is make sure that these plans that we put in place, all the different key people, golden handcuffs, whatever it be, that stays in force during your departure from the business.
This can be a cumbersome process, maybe one to two-year process to make sure everybody’s taken care of.
Then finally, the business continuation.
When you leave the business, are you going to leave it to one of your children?
Let’s say Child A wants to take part of the business, has been part of the business.
You give Child A the business but Child B does not want to be part of the business and never has been.
If you want to treat your children fairly. One way to do that is to put more personal insurance on yourself and name that one child that’s not going to be part of the business moving forward, give that child a larger death benefit from your life insurance policy.
To learn more about business planning contact Mel Samick at 888-839-3536. Lets have a discussion of how you want to insure your future.