How to use your life insurance to invest in your business

• Life insurance is a tool, not a one size fits all solution.
• The cash value of a life insurance policy is a dynamic tool available to business owners.
• Life insurance policies can help with estate planning, tax planning, and talent retention.

As a business owner, you’ve got a lot on your mind. The day-to-day operations and growth of your business rightly take up much of your time. That leaves little time to focus on the future of your company after your death.

A life insurance policy is one way that you can handle these issues once without having to focus on them much in the future. Beyond that, there are many benefits to using a life insurance policy in a business, but first, there are things you need to be aware of.

Life insurance is a tool

Like any financial concept, there is no one size fits all move that everyone should make. The investments that you can handle, your personal financial strategy, and company policies will all inform what tools you should use in your business. Life insurance is really good at a few things and really bad at other things. It is important to keep that in mind when purchasing life insurance for your business.

Life insurance has costs

        Stating that life insurance has costs is a no-brainer, but it is often something life insurance salespeople glaze over. They focus on the payout and the cash value and the tax benefit, which are all great, but you must consider the costs as well.

        Unlike a personal investment, a life insurance policy is issued by a company that is trying to make money. The goal for them is for you to put more money into the company than you take out. That means that the premium to maintain your life insurance will be quite hefty. Also, any investing done by an insurance company on your behalf is often laden with fees.

These are things to be aware of before using a life insurance policy. Once again, life insurance does a few things very well and makes a great addition to your tool belt, but it is not a one size fits all tool. So let’s look at how you can invest in your business with life insurance.

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4 ways to invest in your business with life insurance

        Keep in mind that throughout this article we are referring specifically to a whole life insurance policy, also known as permanent insurance. Term life insurance is helpful in a business as a benefit that you can offer to your employees, but the ability to invest in your business comes from a permanent insurance policy.

1 Borrow from the cash value

        The first and most straightforward way you can invest in your business with a life insurance policy is by accessing the cash value. In a term life insurance policy, in general, there is no cash value because the payout is not guaranteed. But with a permanent life insurance policy, since you are going to be paid at some point, the insurance policy starts to accumulate value that you can tap into.

Usually tapping into the cash value of your life insurance policy takes the form of a loan or borrowing against the value of the policy. Since the money is yours you can get a loan against it pretty easily, which is great for businesses that need to solve a short-term liquidity problem or have other immediate money needs.

There are two things to keep in mind, however, when taking out this loan. First, it is a loan. Even though the money is yours, the insurance company isn’t going to let it slip through their fingers without tacking interest on top of it. Second, this option isn’t immediately available to someone who takes out a permanent life insurance policy. Since the cash value of the policy is your money it will take some time for your money to build up, especially since the insurance company covers their costs first before adding significantly to your cash value.

Still, having access to a quick loan on hand can come in handy for a business owner.

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2 Protect your business with succession planning

        Life insurance policies can also help succession go smoothly in a business, especially one with partners or multiple heirs. This is how it works. When all the partners in a business are still alive, they can set up a buy-sell agreement that states how much a partner would need to pay to buy out the other partner in the event of their death. This is great except that the amount needed to buy out the deceased partner’s heirs is probably more than the living partner has on hand.

        There are a lot of potential ways around this, but one of the cleanest options is to have a life insurance policy. If one partner dies, the life insurance policy kicks in and pays out to the heirs, and then it is business as usual.

        This is a major investment in the business because probate, estate closing, arguing heirs, and so forth are great ways to destroy a business. By setting up a simple mechanism to pay off a partner’s heirs, the business will be able to get right back into operating which will allow the business to keep growing.

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3 Reduce your tax burden

        The more successful your business becomes the more difficult it will be to find tax benefits to reduce your tax burden. As a business owner, you may be hitting the cap on contributions for ROTH IRAs or other retirement accounts. A life insurance policy is an option to get past that.

        With no income caps on who can contribute to a life insurance policy, and life insurance payouts being tax-free, a life insurance policy can act like a ROTH IRA in many ways. This might not seem helpful since you have to “die to benefit” but giving your heirs a tax-free lump sum is a huge benefit. Going the other way, it is also possible to invest in a life insurance policy on a tax-deferred basis, much like a regular IRA, meaning you won’t pay taxes on the gains until they are withdrawn.

        These strategies are something to discuss with your CPA as you consider ways to use a life insurance policy to benefit your business.

Recommended Reading: Tax professionals can save you time and money on your taxes

4 Offer retention bonuses to talented employees

        Lastly, life insurance is a benefit you can offer to employees. A lot of people like the idea of having a life insurance policy but don’t really want to pay for it. Offering life insurance, or additional contributions to a life insurance policy is one way to incentivize talented employees to stay at your company. Since you can offer a much larger policy than you are initially paying in, you can think of it as offering much greater compensation to your employees for pennies on the dollar.

        This will all depend on what your employees want and what will incentivize them to stay. But once again, this is another tool in your tool belt.

The Money Wrap Up

        Permanent life insurance policies have a lot of benefits that a business owner can tap into. The cash value of the policy is one of the most practical ways to get a quick loan once you’ve built up the value of the policy, and that should not be discounted. Keeping a business operating after the death of an owner can’t be understated. The ability to reduce your tax burden even on a higher income is important as a business becomes more profitable. And keeping talented employees will help a business grow faster than ever.

        Business owners need to consider whether life insurance is a tool they should use to invest in their businesses.

Do you think life insurance is the right tool for your business? Comment below.

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