Bulletproofing the Future: It Begins with Sound Financial Planning
June 17, 2016
By: Glen Seymour, Vice President, Cal LeGrow Financial Services
Financial plans should align with the goals and objectives of an organization and assist with the business operation during both stable and changing environments. Many financial plans consider business objectives, the stage of the business, risk level, and an investment portfolio – making insurance coverage a secondary priority.
When an organization considers bulletproofing itself against times of sudden and unexpected change, complete financial planning should be a key component included in its overall plan. In addition to wealth management, consideration should be given to a sound approach to insurance coverage.
Life insurance is a powerful tool available to businesses. Similar to the key drivers for individual coverage, life insurance for business ensures stability in the event of losing an owner or key decision maker. Benefits can include:
- Discharging liabilities at death;
- Ensuring survivors are prepared to keep the business after a death; or
- Assisting survivors in reaching long-term goals.
There are many planning components related to insurance that business owners should consider, including:
- Business continuation in the event of a death;
- Buy-sell agreements which can ensure that a deceased business owner’s heirs receive full value of the business, while ensuring that the business partner can carry on with the business.;
- Key person life insurance, which helps mitigate the loss of income or impact of increased expenses, as a result of the loss of a key employee;
- Tax treatment of life insurance proceeds. Given the fact that death benefit proceeds to a corporation are tax-free, a corporately owned business can put contingency plans in place without the concerns that taxes will reduce the gross value of the life insurance proceeds.
Besides using life insurance for contingency plans, it can also be used as an investment choice. When a company has retained profits or surplus cash, these funds can be used to purchase a life insurance policy versus investing in taxable investments. Additional tax advantages are provided by the “capital dividend account” mechanism, which allows most or all of an eventual death benefit paid to a company to be withdrawn to Cnadian shareholders on a tax-free basis. By carefully structuring a life insurnace investment you can significantly increase th amount of funds available to your heirs or a charity of your choosing.
Disability insurance is another tool that can be used to replace income in the event of a key employee becoming disabled, and unable to earn income. Disability policies are designed to assist businesses at times when:
- A key employee becomes disabled;
- The shareholders of a corporation purchase the interests of a disabled shareholder under a disability buy-sell agreement;
- When a business owner becomes permanently disabled, impacting expenses associated with running the business. The insurance policy is known as overhead expense insurance coverage.
Although there are various strategies that may be used when bulletproofing your business, the starting point is implementation of a sound financial plan. Insurance strategies can be used to strengthen your plan, based on the objectives and goals of your business.