Kasfia Rashid - “Money Matters with Kash the Bookkeeper”
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Hello! Welcome to Money Matters, the accounting show with no numbers. This season we are going back to the basics of business…. Plot twist…. The basics have changed! In this ever changing, moving world, it’s difficult enough to start and keep a business running, let alone how to secure it. That’s where Crystal Suber of Crystal clear financial solutions comes in.
Many small or medium sized business owners don’t know how beneficial a business life insurance policy can be to a successful company. The truth is, regardless of size, all business owners need whole life insurance. It can help businesses break free from traditional bank loans, benefit their employees, and earn tax advantages. The benefits of life insurance are many and varied. Let’s dive in!
Show Objectives - The Why
Whole life insurance for business owners has an advantage many other types of insurance don’t: It earns cash value. This cash value accumulates over time due to interest earned and dividends paid. While the amount of the dividend paid may vary from year to year, mutual companies have successfully paid out dividends for over 200 years.
As a contractual owner of the insurance policy, the business owner has first rights to its accumulated cash value. When business expenses arise, the owner can use a policy loan, up to the amount of cash value in the policy, to cover business costs. Capital is then funneled back to the insurance company so funds will be available again for future business expenses. Business owners can take out multiple policy loans year after year.
Instead of paying high interest rates to a bank, the business owner finances their expenses in a way that allows them to recapture the cost of interest. Regardless of the amount of the policy loan, insurance carriers still pay the policyholder interest on the full cash value of the policy. The policyholder decides the payback schedule. The interest rate charged by the insurance carrier is typically lower than a traditional bank loan.
Business owners need whole life insurance because it’s the ideal place to store capital.
One of the reasons businesses fail is lack of a succession plan. If a business partner passes away, often there aren’t finances in place to continue funding the business. Depending upon the estate plan of a business partner and how they wish their assets to be distributed, it may be necessary for other partners to buy up the portion of business owned by the former partner.
A type of policy called a “buy-sell agreement” provides for an ideal business exit strategy. In this instance, a whole life policy is purchased for each business owner. When one owner passes away, the surviving owner will use the death benefit proceeds of the business life insurance policy to buy the deceased business owners portion of the business from their estate.
These types of buy-sell agreements don’t only apply to the death of a partner. Business owners need whole life insurance in the event that one business owner leaves the business due to illness, disability, or retirement. When this happens their business life insurance policy contract is simply assigned to the remaining owner(s). The remaining owner(s) now have complete access to cash value, increasing business cash flow. Because whole life insurance policies are for the duration of life, the business will collect on the death benefit when the departing owner dies, even if it is many years after they have retired or otherwise left the company.
What You Need to Know - The What
Life insurance plans in the United States are usually divided into term and permanent policies. A term policy lasts for a set period of time, such as 10 or 20 years. If the insured individual dies while the policy is in effect, the beneficiary receives a payment from the insurance company. Term insurance has the benefit of usually being cheaper than permanent insurance with equivalent benefits.
Some people shy away from life insurance policies because they think they can’t afford them. While the best plans can definitely be expensive, cheaper plans are available, especially if you’re comfortable with a term policy. Other factors also affect how much life insurance will cost. Smokers and individuals with serious health conditions can expect to pay more for their policies, while younger people and women tend to have lower premiums than older adults and men. In fact, the premium for a plan that has coverage of $250,000 can cost less than $200 per year depending on your demographic and the plan you select.
There are several tax benefits associated with whole life insurance, which extend to the cash value growth while the insured is living, as well as to the death benefit after the insured has passed away. Business owners need whole life insurance because it provides a place to grow wealth tax free. With careful planning, distributions can also be taken tax free.
When it comes to taxes, even a contractor, freelancer, or someone else who is self-employed benefits from whole life insurance. These types of self-employed workers are responsible for more taxes, as their employer isn’t covering a portion their Social Security tax or Medicare tax. The tax advantages of whole life insurance can help off-set these expenses.
The tax benefits of whole life insurance for business owners include tax-free retirement income, tax-free policy loans, and tax-free use of the growth of cash value. Plus, policies earn interest and dividends tax free. The death benefit of a policy also has tax advantages.
The IRS considers death benefit proceeds to be inheritance and not income to an estate, so they are passed on income tax free. There are estate-planning strategies that ensure that the death benefit proceeds are not included in the estate tax calculation.*
What You Need to Do - The How
Life insurance is something most people have at least heard of, but not everyone understands who should get it and what it’s actually for. Contrary to what you might expect, life insurance isn’t just for the elderly. Instead, it’s a guarantee for your loved ones that they’ll have the financial resources they need in the event of your death. While the specifics can vary from plan to plan, you’re paying to ensure the well-being of the people you leave behind, whether that happens today or decades from now.
From Lincoln Heritage to MetLife to Erie Insurance, there are many life insurance providers to choose from, each with their own range of plans and options to choose from. Between the range of choices and the prospect of dealing with your own mortality, making sense of life insurance can seem like a daunting task. Don’t go at it alone! Call Crystal Suber of Crystal Clear financial services and have her create a customized plan for you!
Crystal Clear Financial Solutions
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Written by Kash the bookkeeper
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