Guest Post: Sheilla Vidal, Independent Broker, FEG Insurance Services
When it comes to business, there are many risks and challenges and few guarantees. Nonetheless, risk can be managed. That is why businesses like yours insure their assets against loss by theft, fire, accident, and natural disasters.
But it shouldn’t stop there. There are certain things you may be overlooking so here are 5 critical problem areas all business owners should think about and be working on with an experienced professional who can give sound advice and guidance.
1. Loss of an Employee
The lifeblood of a business is the people in it. Whether you are solo or have employees, there’s no question that the business will not run without you and the people you hired for vital functions. You know it’s important to vet and hire the right people. After you hire them you will spend time and money training them.
Fast forward five years later, you have the right people, your business is running smoothly, great! Congratulations, you can now sit back and relax. Wrong! What happens if that person gets sick and unable to work for months? What happens if that person dies?
There are a few possible scenarios:
- Productivity and profits could decline. As the business struggles to fill the gap left by the loss of a vital employee, profits and productivity can slide. Indeed, the business could come to a complete standstill while other employees regroup and the organization reviews their options going forward.
- Customers and team members may look elsewhere for services. Customers as well as your other team members may become wary about the company’s ability to continue fulfilling their requirements. Meanwhile, competitors will be more than willing to take advantage of the situation.
- Overhead expenses continue as revenues drop. Leases, rent, medical insurance premiums, telephone services, salaries, and other expenses still must be paid.
- The cost and time it takes to hire and train a replacement continues to drain the business. It takes time and money to find “just the right” replacement, hire that individual with a competitive compensation package, and give the new employee time to become fully productive.
- Credit may shrink or dry up completely. As lenders adopt a wait-and-see position, credit may be jeopardized until lenders and vendors see how the company weathers the setback.
The financial loss could be staggering. The exact dollar amount of the potential loss is impossible to estimate. It could total tens of thousands of dollars, perhaps even hundreds of thousands. Fortunately, having a simple plan for the loss of a key employee will not only save your business but also your sanity.
So what do you do? Use life insurance to insure your key employees. If something happens, the policy will pay the business and can help offset the financial loss and, literally, buy the company time to find, hire, and train a replacement. If you are a solopreneur, you can get a key person insurance on yourself.
2. Your Key Employees Leaving For Greener Pastures
We looked at how the death or prolonged illness of a key person can hurt your business. Employees you had hired and trained can also be recruited by your competitor. How do you take care of those employees so they stay withyou for a really long time? How do you keep them from going elsewhere?
One strategy is to offer competitive benefits and compensation, but it doesn’t stop there. Showing your top employees that you value them and rewarding them with an executive bonus can also give the business additional deductions especially if the business has a high tax liability.
An Executive Compensation or bonus structured after the IRS code section 162 is a wonderful solution. The 162 Executive Bonus is limited to the top 15% to 20% of paid workers in the company. The goal is for the company to retain key executives and not lose them to a competitor.
3. Retirement Savings is Lacking
Comprehensive retirement planning that is designed to meet future needs and realize long-term goals, must consider many retirement income variables including:
- Qualified retirement plan limits
- Social security shortfalls
- Inflation
- Cost of health care
- Market fluctuations
- Taxes
- How much you save and how much time you have before retirement
- How much your savings earn
- How much you plan to spend in retirement
- How long you live
According to U.S. Census figures, individuals that retire at age 65 can expect to live another 25 years which means they will need savings sufficient to generate 25 years of income during retirement.
Saving for retirement has never been more complicated and difficult than any other time in history due to the volatile market, high cost of inflation and health care. Retirement planning means building significant financial resources designed to extend over a longer period of time to maintain lifestyles that are far more complicated and diverse.
Qualified plans or tax deferred retirement plans have many limitations. One needs to pay taxes upon withdrawal and subject to RMDs (required minimal distributions at age 72 in 2022).
Roth IRA, while not taxed as long as you wait until you’re 59 ½ and you’ve held the account for at least five years before withdrawing, is subject to contribution limits. The annual IRA and Roth IRA total contribution limit is $6,000 ($7,000 if you’re age 50 or older).
More and more are looking for other ways to save for retirement outside of traditional 401ks or qualified plans where taxes are deferred. Life insurance and annuities are great especially in hedging against the market risks and losses. When one is close to retirement, a recession like the one in 2008 or the one now, can wipe out a good amount of their savings.
The Impact of Caregiving
Anyone in the sandwich generation can attest that caring for family members whether it’s a child, grandchildren aging parent, or sick spouse can impact your own financial landscape. If you are not familiar, the sandwich generation stands for those who are caring physically and financially for children and aging parents at the same time. Many are women in their 40s to 60s. These women had decided to leave their jobs, work less or pass up a promotion so they can care for a sick family member. For some this was the reason they started a business: to make an income while they are at home providing care. This comes with challenges in itself as the income they are able to create is relatively less compared to what it would be if they didn’t have to provide care. Therefore retirement savings will also be lower. But on average women, live longer than men so they need to have a higher amount of retirement savings. The challenge then is making those savings work smarter and harder so they can last longer.
Life Insurance offers the following benefits:
- Tax deferred growth. Life insurance with the exception of variable life insurance, is protected from market losses. Be sure to work with an insurance broker who has access to different options that is right for you.
- Tax free withdrawal
- Tax free loans
- Flexibility on contributions
- No required distributions
An annuity is another type of insurance that can guarantee a lifetime income which means: you will never run out of money for as long as you live.
It has STYLE:
- Safety
- Tax-deferred growth
- Yield
- Lifetime income
- Escapes probate
4. Business Succession Plan
If the owner passes away, heirs, co-owners and employees need to be protected and the business will need competent successor. In addition to the financial losses a business can suffer at the loss of a key person, aka, the owner, (see number 1) there is a lot at stake when the owner of the business passes away.
- The family of the deceased owner is depending on the income of the business. They may be forced to take over the running of the business, despite not having the competency or interest to do so.
- If there are other partner owners in the business, they may not want the interference of the heirs of their deceased partner in the business.
- In the case of a family owned business, other children may not want involvement in the business but want their fair share of the family inheritance.
If you want your business to go on after you are gone, proper planning is necessary.
A buy and sell arrangement is the perfect solution to ensure effective transition into new ownership. Buy and sell agreement can 1. buy the deceased owner’s share so the remaining partners maintain control of the business and 2. the spouse and children receive a fair price for their fair share of the business interest. A succession plan designates which family member(s) will receive full control in the form of ownership, while non-participating family members receive their inheritance in cash.
Life Insurance has proven to be an effective buy and sell funding choice.
- Proceeds are tax free.
- Knowing the funds are guaranteed to be available provides peace of mind.
- Minimal cost.
- Fair and objective means to value the business.
- Prevents delays, ill will and legal entanglements.
- Ensures a competent successor(s) to the management of the business.
5. Estate planning
Your business is the largest single asset in your estate. That is only one reason why estate planning, with all of its challenges and opportunities, should be a primary planning priority. In addition to providing for the orderly disposition of assets, comprehensive estate planning strategies should also make certain that the executor has ready cash to pay estate obligations promptly, including final expenses, estate transfer taxes and administration costs, along with all of the costs associated with transferring a business interest.
Life Insurance can provide liquidity and cash to:
- pay estate and inheritance taxes
- satisfy creditor claims
- provide inheritance to children
- provide capital until the company can overcome the loss of the owner.
- settle all additional expenses associated with transferring assets to heirs
As you can see these are critical areas that need attention, and planning plays a major role in avoiding potential pitfalls such as financial losses or the loss of valued customers and employees.
Does life insurance or annuity have a role to play in your business? That’s something only you, with the help of an insurance professional, can decide. Perhaps the best place to start is to discuss your specific situation and needs with your trusted advisor. Together, you can decide what the next step should be.
Questions? Contact Sheilla Vidal, Insurance Agent/Broker at 707-319-5651, sheilla.livewithdignity@gmail.com
