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Business continuity

Planning for the future of a business also includes a plan for the unexpected. When a business owner dies, key employees may undoubtedly be concerned about the future of the business.

Retaining key employees can help ensure a smooth transition to new ownership, maintain business integrity and preserve the business’s value.

Another business continuity protection strategy is when a business purchases a life insurance policy insuring a key employee. It can provide a death benefit that helps businesses replace lost sales, lower earnings and cover added costs for hiring and training a replacement.

Business continuity tools

The BOLD resources make business operations planning simple with ready-to-recommend strategies for clients.

Stay bonus

A stay bonus is an agreement that can help retain key employees in the event of the death of an owner of a business.

Three valuable features

  1. Easy to implement and administer
  2. Provides a source of funds to pay the bonus to key employees if the business owner dies
  3. Offers flexibility for other business solutions, as well as estate planning

Key employee life insurance

Key employee life insurance is a business protection strategy in which a business purchases a life insurance policy insuring a key employee. It can provide a death benefit that helps businesses replace lost sales, lower earnings and cover added costs for hiring and training a replacement, should a key person die.

Three valuable features

  1. The business is the beneficiary of a life insurance policy.
  2. Accumulated cash value in a permanent policy may be used for business expenses.
  3. Policy may be transferred if a key employee leaves the company.

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Life insurance products contain fees, such as mortality and expense charges, (which may increase over time) and may contain restrictions, such as surrender periods.

Please keep in mind that the primary reason for purchasing life insurance is the death benefit.

Additional agreements may be available. Agreements may be subject to additional costs and restrictions. Agreements may not be available in all states or may exist under a different name in various states and may not be available in combination with other agreements.

Policy loans and withdrawals may create an adverse tax result in the event of lapse or policy surrender and will reduce both the surrender value and death benefit. Withdrawals may be subject to taxation within the first fifteen years of the contract. Clients should consult their tax advisor when considering taking a policy loan or withdrawal.

The Policy Design chosen may impact the tax status of the policy. If too much premium is paid, the policy could become a modified endowment contract (MEC). Distributions from a MEC may be taxable and if the taxpayer is under the age of 59 ½ may also be subject to an additional 10% penalty tax.    

An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Please consult a tax advisor for specific information. There are charges and expenses associated with annuities, such as surrender charges (deferred sales charges) for early withdrawals.

This information may contain a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.

For financial professional use only. Not for use with the public. This material may not be reproduced in any form where it is accessible to the general public.

DOFU 10-2022