Business Strategy

You may be concerned about protecting your business
from the premature death of a key employee whose
knowledge and contribution to your company are
invaluable. The loss of such a key person may result
in not only a loss in sales but also a potential loss of
important contacts and goodwill. Your company’s credit
position may also be compromised. The solution to this
problem is to establish a key person insurance plan.

WHAT IS KEY PERSON INSURANCE?
Key person insurance is an insurance policy taken out by a corporation on the life of a key employee to protect the business in case of a sudden death. The key employee can be anyone in the business whose loss would be significant to the company or could result in a loss of business. This could be the owner, a partner, or an employee whose knowledge and contributions to the company are invaluable.

HOW DOES IT WORK?

The corporation buys a life insurance policy on the life of the key employee, and the business is the owner and the beneficiary of the policy. The business will pay the entire premium and at the death of the employee, the business will receive the entire death benefit. This income tax-free death benefit may be used to replace lost profits, recruit and/or retain qualified replacements, or protect the company's credit position. The employee does not have any interest in the policy, nor does his or her family typically receive any benefits from the policy when death occurs.

BENEFITS OF KEY PERSON INSURANCE
Key person life insurance is simple to implement. It does
not need IRS approval and may include many people.
With key person life insurance, the business has death
benefit protection in case of a sudden and unexpected
death, and is able to access the potential cash values
of the life insurance policies for cash flow, retirement
benefits, or for unanticipated expenses.

Many small, closely held businesses do not continue
after the first generation, often due to a lack of
succession planning. A buy-sell arrangement can be an
excellent way to provide for the future of the business.

WHAT IS A BUY-SELL ARRANGEMENT?
A buy-sell arrangement is an arrangement for the sale of
a business interest upon a triggering event, such as the
owner’s death, disability, or retirement. A well-drafted
and properly funded buy-sell arrangement can protect
the interests of the business owners and help facilitate
the continuation of the business.

HOW DOES A BUY-SELL ARRANGEMENT WORK? Buy-sell arrangements can take different forms, including: (1) entity purchase or stock redemption, (2) cross-purchase, and (3) wait and see. The best type of arrangement to use depends upon several factors, including the type of business structure and the number of owners. BENEFITS OF BUY-SELL ARRANGEMENTS Guarantee a Buyer Create Liquidity Set a Fair Selling Price Fix Value Maintain Harmony

In today’s increasingly competitive environment, even successful businesses can have difficulty in recruiting and retaining the best talent for their company. Qualified plan limitations and restrictions often make it difficult to reward the most valuable employees. How can you help your business clients recruit and reward outstanding talent? A Non-Qualified Deferred Compensation plan (NQDC) may be able to help.
A NQDC plan is simply an agreement between an employer and a key executive, where the employer agrees to pay the executive an additional retirement benefit at a future point in time. In a Salary Deferral Plan, the executive defers current income which the employer promises to repay with interest in the future.

BENEFITS OF A NON-QUALIFIED PLAN
• The employer can choose to reward only a select group of employees, and give each employee a different benefit level.
• The employer can impose a vesting schedule, creating “golden handcuffs,” an incentive for the Executive to stay with the company.
• The employer will receive a tax deduction when retirement benefits are paid.
• The employer can use the income tax free death benefit to recover plan costs.
• In the case of the SERP, the employee receives an additional retirement benefit and does not have to pay taxes on it until it is received.
• In the case of the Salary Deferral, the employee has an opportunity to defer additional income for retirement purposes.

CONSIDERATIONS
• The employee must sign a “consent to insure” form.
• The employer may not deduct any plan contributions, including premiums spent on life insurance.
• The employer may only deduct the benefits when they are actually paid to the employee.
• The plan assets cannot be set aside in a trust to protect participants from company’s creditors. The assets must remain part of general assets of the corporation or they will become taxable to the executives.

**For more information, please contact your representative or our firm so we may assist you.