Last week, we started the discussion about the 5 reasons whole life insurance is a good asset to have as a business owner. If you own a business—big or small—you know that there’s a unique problem set that arises financially. You have to think about things you otherwise wouldn’t, and sometimes come up with creative solutions. That’s where insurance comes in… whole life insurance for business owners provides unique solutions.
Two of the major problems business owners face are planning for the future—succession planning, estate planning, key employee replacement, pension, and so on—and tax minimization. This week, we’re rounding out the list with three more problems business owners face that can be solved by whole life insurance.
5 Benefits of Whole Life Insurance for Business Owners, Continued
You can view part one of this discussion here to read benefits 1 and 2.
3. Cash Flow Management
While cash flow management is not a problem unique to business owners, whole life insurance can help ALL who desire even better cash flow management. Whole life insurance provides a place to put aside your excess cash flow so that it’s certain and secure. Plus, it grows!
There are a lot of possible expenses to figure out as a business owner—rent agreements, payroll, taxes, equipment, etc. You also have to pay yourself an income. Then, there’s the excess. What do you do with that? Well, (after working with a tax professional) you’ll probably want that cash flowing in to go somewhere. You can have it sit in a bank account, of course, yet it’s not really doing anything there. Or, you could put it in a CD, yet that’s not very liquid if you need to access the cash.
When you pay premiums to a whole life insurance policy, you’re essentially writing a savings check. Your cash value grows with every premium and also earns interest and dividends. The former is guaranteed, while the latter is highly reliable. As a business owner, you can funnel excess cash flow into whole life insurance and be confident that it’s not just going to sit and languish—it’s going to be put to work.
The best part is, it’s there when you need it. Struggling to make payroll for one month? Have an extra expense that you didn’t anticipate? You can take a policy loan against your cash value to cover these expenses, then pay the loan back on your own terms. This gives you some major flexibility in your business, all while your cash value continues to grow with interest and dividends, never losing the full compounding potential (because you’re not making a withdrawal).
What this means for you is that you don’t have to play catch up in your account. When you withdraw money from a savings account, you only earn interest on the amount remaining. Then, you’ve got to play catch up by putting that money back into the bank. It can take years to get your account back to where you started, let alone beyond that. Whole life insurance allows your dollars to keep earning, no catch-up required.
And, you get the bonus of security and privacy. Your asset isn’t correlated to the stock market, so there’s no threat of losing money. And, your account balance is safe from prying eyes, including the IRS and creditors.
4. Financing Capital Expenditures
What do businesses have? Expenses. And sometimes you’ve got to have some major capital to finance your business expenses. You can go to a bank or a private lender, of course, yet those contracts tend to be rigid and can have high interest rates. Sometimes, you can lease equipment, yet those leases often have hidden stipulations in the contract that aren’t in your favor.
Whole life insurance provides another option: finance your own expenses. After all, your capital is growing and growing, year after year. You can capitalize it, pay the loan, and recapitalize it over your lifetime, again and again. All the while, your pool of money is just getting bigger.
The benefit of the policy loan is flexibility. Because your cash value is the collateral, the life insurance company is willing to give you some wiggle room. That means you can create your own payment schedule, you can combine it with other financing methods, and more. If you lease some equipment and want a year to get profitable before you start repaying the loan in earnest, you can do that by making interest-only payments until you’re ready.
Life insurance is also a great asset to use for collateral elsewhere. Banks love cash value because they use life insurance themselves (BOLI stands for bank-owned life insurance). You can strengthen your loan application with this, and if the banks are offering better interest rates than the life insurance companies, go for it. Especially if you’re confident in your ability to pay the loan on a typical amortization schedule.
If banks won’t finance you—they’re notoriously picky, after all—life insurance is there for you. When you want a policy loan, there are no hoops to jump through. You don’t have to make your case or prove the value of your business decisions. You can take a policy loan for anything (yes, even a vacation, if you want). The life insurance companies only care about one thing: do you have the available cash value? If you’ve got it, the insurance companies will loan you up to that amount (give or take a small percentage, to account for interest), unless you already have a lien against it.
5. Providing Employee Benefits
When you’re a small business, you can’t always give your employees everything that a large corporation can (although you may have other benefits to offer). However, life insurance can provide a way for you to offer some perks to high-ranking employees.
Remember that key-person insurance from part one? This can be a great way to finance benefits for employees, such as paid vacation time and sick days, bonuses, and other perks. You can also do this via a policy loan, which allows you to finance these benefits over time, rather than all at once.
As the business owner, you own the insurance policy on your key employee, so you’re paying premiums. You’re also the beneficiary, and would receive the death benefit should they pass away or become disabled while under your employ (provided you add a disability rider).
However, if your key employee retires or leaves the company, you can actually transfer ownership to them as a benefit of their employment. While they take over any remaining payments, they get the gift of all the premiums you’ve put into the policy. When they take ownership, they can change the beneficiary and have the ability to use their cash value however they please. It can be anything for them: savings, investment capital, pension, etc.
This is a huge perk to employees, provided they understand the value of whole life insurance and what’s possible.
Solve Your Business Problems
Are you ready to start solving your business problems with whole life insurance? We’d be happy to run an illustration for you, so you can see exactly how life insurance fits into your future. Connect with us today or email your questions to firstname.lastname@example.org.
Already have a whole life policy and want to start getting more from it? Watch our Whole Life 101 course to start speaking the language of life insurance.