Why Should a Small Business Owner Consider Whole Life? 4 Reasons.

Small Business Owner

1. Income Taxes


Issue/Concern: By definition, you are highly compensated. You may or may not have a qualified plan. If you have one, you're likely to be 'maxing out' contributions and are looking for additional opportunities to lower income taxes. If you have considered a qualified plan and have rejected it, for whatever reason, creating deductions could be a challenge. A common question may be, “…what (else) can I do to lower my income taxes?”

Whole Life Insurance as a Strategy: Tax benefits associated with whole life insurance are unparalleled in the financial industry. Using the high contribution limits via premium deposits, of a properly designed whole life insurance contract combined with the tax deferred growth of both the guaranteed and non-guaranteed cash values has the ability to generate significant supplemental tax favored supplemental income during retirement. Because of the 'FIFO' accounting of life insurance accumulated values, distributions from life insurance policies, if structured properly, can be tax free for the remainder of your life.


2. Qualified Plan


Issue/Concern: Recent 'safe harbor' rules now make it easier for small businesses to have qualified plans. But, maximum contribution limits may be forcing you to look elsewhere to invest supplemental funds. Or, the question may be, “….do I have the best qualified plan design? Are there other types of retirement plans where I could contribute more?”

Whole Life Insurance as a Strategy: Non-Qualified Plans informally funded with whole life insurance tend to be explored because of the flexibility, high premium limits, and tax benefits. There is no discrimination testing with non-qualified plans so, for example, the business owner could establish it solely for himself/herself. Properly structured whole life insurance policies can take advantage of the tax deferred build up of cash values. Finally, because there is no tax deduction on contributions into the plan, the ability to take tax free distributions in retirement can provide much needed flexibility and 'tax diversification'.


3. Buy / Sell


Issue/Concern: If you have a partner or multiple partners, what is the plan if one of them dies, suffers an extended illness or injury, gets divorced or retires early? Would all the remaining partners stay? Would you need to add a partner? Is the agreement in writing? How is it funded….how will payments to the deceased heirs be made and where will the money come from? If you have an agreement and have made provisions for payment, is it tax favored?

Whole Life Insurance as a Strategy: Whole life insurance can provide an income tax free death benefit to fund either Cross Purchase or Stock Redemption Buy-Sell Agreements. In addition, the accumulated cash values can be used as a 'sinking fund' to help offset living buyouts in the event you or your partner retires.


4. Key Employee Retention


Issue/Concern: You can only pay so much in cash compensation. Yet, the grass always seems greener for your best people? What is available to tie them to the company, long term, without 'giving away the store'?

Whole Life Insurance as a Strategy: Whole life insurance can be used to informally fund various deferred compensation plans designed to retain key employees. The policy, typically owned by the employer, can be held beyond retirement of the key employee in order to fully recover costs associated with the plan upon the death of the key employee.

This publication is offered for the purposes of education and information only and should not be considered tax or legal advice. For more information on your specific situation, please consult your legal or tax advisor. Neither Guardian, nor its subsidiaries, agents, or employees provide tax or legal advice.