IUL2022IULBizOwners indexeduniversal.life 800-743-9221 [email protected] INDEXED UNIVERSAL LIFE INSURANCE FOR BUSINESS OWNERS
TABLE OF CONTENTS 04 07 08 12 16 17 17 18 Is Your Company Your Most Valuable Asset? What Would Happen to Your Business If the Unexpected Occurred? Solutions for Business Succession Planning Why Consider Indexed Universal Life (IUL) Insurance for Business Succession Funding? Additional Solutions Offered Through Indexed Universal Life (IUL) Insurance Other Benefits of Indexed Universal Life (IUL) Insurance How to Find the Right IUL Policy for Your Specific Needs and Objectives Is Indexed Universal Life (IUL) Insurance Right for You? 2 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
Many business owners put in excessive time and money to get their company off the ground and keep it running. Nights, weekends, and holidays are often dedicated to working rather than family or social events. So, if you’ve built a successful company that continues to benefit you and your loved ones, the last thing you want is for an unexpected event to cause it to all come crumbling down. The good news is that there are ways to plan for a wide range of situations that could occur. The Best Results Come From Expert Advice. Discover How You Can Benefit From An IUL Expert. Visit IndexedUniversal.Life 3 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
Depending on the size and profitability of the entity, the most valuable asset held by many business owners is their company, and this doesn’t just refer to the value of the business itself. For example, there is a whole host of other benefits that a business may provide, such as: Income for the business owner, their family, and the company’s employees An entity that could be passed to the next generation or sold to an outside buyer, using the funds that are received to generate income in retirement One of the biggest challenges for business owners is taxation. The way a company (and its owners) are taxed can depend on the entity that is chosen for the business. In addition to that, federal taxes, estate taxes, and inheritance taxes can fall particularly hard on small business owners. In some cases, the heirs of a small business might even be forced to sell the company to pay the due estate taxes. In doing so, it essentially erases all the years of hard work that were put into starting and growing the business. Several different options may be used as a business entity. These could include: • Sole proprietorship • Partnership • Corporation (C-Corp or S-Corp) • Limited Liability Company (LLC) Is Your Company Your Most Valuable Asset? 4 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
Sole Proprietorship Sole proprietorships are typically the simplest form of business entity to establish and maintain. These are unincorporated businesses that only have a single owner. Any income earned by the company is considered the owner’s personal income, and as such, the owner pays personal income tax on the profits. While the sole proprietorship’s owner can take part in all of their profits, there are some disadvantages with this type of business entity structure. Primarily, the owner is at risk of the business’s liabilities. Likewise, the debts of the sole proprietorship are also considered to be the owner’s debts. Partnership A partnership is a formal arrangement made by two or more parties to operate and manage a business and share in the company’s profits. There are two primary types of partnership arrangements: general and limited. In a general partnership business, all partners share in both the company’s profits and liabilities. Therefore, the parties can be personally responsible for the partnership’s debts. The profits of the company are also shared equally. Limited partnerships differ from general partnerships because the general partners have full personal liability for the company’s debts, but the limited partners have limited liability, which is typically “capped” at the amount that they invested into the company. In addition, the limited partners do not participate in the day-to-day operation of the business. 5 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
Corporation A corporation is a legal entity that is separate and distinct from its owner(s). Corporations can engage in a wide variety of activities, including: • Entering into contracts • Loaning and borrowing money • Hiring employees • Owing assets • Suing and being sued • Paying taxes The shareholders of a corporation can take part in its profits. However, they are not personally liable for the debts of the company. There are different types of corporations. These include the C-Corp and the S-Corp. C-corporations are subject to “double taxation,” which means that the company pays tax on a portion of their income, and owners then pay tax on the dividends they receive. On the other hand, S-corporations are “pass through” entities, where the individual owners report their share of the company’s income on their own income tax returns. Limited Liability Company (LLC) Limited Liability Companies (LLCs) protect their owners from personal responsibility for their liabilities and debts. These business entities essentially combine the characteristics of corporations with those of a sole proprietorship or partnership. LLCs don’t directly pay tax on their profits. Instead, profits and losses are “passed through” to the LLC members, who then report them on their individual income tax returns. The Best Results Come From Expert Advice. Discover How You Can Benefit From An IUL Expert. Visit IndexedUniversal.Life 6 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
While nobody likes to dwell on it, the reality is that unexpected accidents and illnesses can occur. So, it is essential to plan for them, just in case of death, disability, or any other potential incapacity that could render a business owner or partner unable to fulfill their future roles. Consider that you are a part of a business, either as a sole owner or a partner. In that case, you must construct an estate plan covering the company’s assets and its inventory, real estate owned, or any trade secrets (if applicable) so that future events do not harm them. In addition to including your company in your estate plan, there are other reasons why a business should have a solid succession plan in place. For example, if an owner or partner dies or becomes disabled, their family might not be able to run the company efficiently. They also might not have sufficient capital to replace the owner or partner in their role. Even if there are other partners in the business, they may not necessarily have enough capital on hand to buy out the deceased partner’s share of the company. With that in mind, many business succession plans include a buy-sell agreement that can help with addressing and funding various issues, such as: • Death • Disability • Incapacity • Retirement • Failure of the business owner or partner to perform their expected duties What Would Happen to Your Business If the Unexpected Occurred? 7 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
Regardless of whether you plan to sell your company to an outside, third-party buyer, or instead keep it in your family, careful business succession planning is a must. This can better ensure that the company will remain up and running while the transition takes place and that it will be protected from excessive (often unexpected) tax liability when it is sold or transferred. At a minimum, a business estate or succession plan should ideally include ownership and management transfer methods. In this case, the transfer of the ownership of the company should include: • Consideration of what is in the company’s best interest, as well as the best interest of the owner’s or partner’s heirs • Valuation of the business • Timing of the transfer • Delegation of responsibility (which would include information regarding what type of authority the company’s successor(s) will have going forward) • Whether or not the company’s employees would be retained (and how to go about keeping or terminating them) A critical element of a business organization is its contingency plan if the owner dies. These steps would be taken to reduce or eliminate taxation and avoid the probate process. However, any strategies in the business succession plan may not be feasible without the proper funding if the new owners or partners must purchase the former owner’s/partner’s share. The chosen funding method can be based in part on how the business succession takes place. Solutions for Business Succession Planning 8 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
Buy-Sell Agreement A buy-sell agreement is a legally binding contract that stipulates how a partner’s share of a company may be reassigned if that individual dies or otherwise leaves the business (for instance, due to disability or incapacity). Typically, a buy-sell agreement will stipulate that the available share be sold to the remaining owners or partners of the business. In some cases, these agreements will also establish a method for determining the company’s value, typically using a pre-determined formula. This can help eliminate disputes among the remaining owners or partners regarding how much the business is worth at that time. There may be other components in a buy-sell agreement as well. For example, the agreement could restrict the owner(s) from selling their interest to an outside investor without first obtaining approval from the remaining owners or partners. A buy-sell agreement must have a funding mechanism in place. In fact, these types of agreements must include provisions for how the price of the former or departed owner’s/partner’s portion of the company will be paid by the new buyers/ partners. The strategy used will depend largely on the goals and objectives for the succession of the business. At a bare minimum, a business estate or succession plan should ideally outline how ownership and management transfers will take place. These issues will typically encompass some of the more common methods that are used for accomplishing the funding for a business’s succession, including: • Installment Sales: These are determined based on the company’s current earnings at the time of the departed individual’s death or disability • Future Purchase Fund: There could be a set amount of capital set aside and invested to be used for the future purchase • Borrowed Funds • Life Insurance Proceeds There are two commonly used buy-sell agreements: the cross-purchase agreement and the redemption agreement. 9 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
Cross-Purchase Agreement The cross-purchase agreement allows the remaining business owners or partners to purchase the interest of a deceased or selling owner/partner. This type of buy-sell agreement will often rely on life insurance proceeds (in the event of an owner’s or partner’s death) to facilitate the exchange of value. A cross-purchase agreement usually outlines how the shares are divided or purchased by the remaining owners or partners. For instance, this could be via a proportional distribution, according to each of the remaining individuals’ stakes in the company. Suppose there are several owners or partners in the business. In that case, a cross-purchase agreement will entail life insurance being purchased on each individual and then naming the other owners/partners as the beneficiaries. Then, if one of the owners/partners dies, the policy proceeds may be used to fund the purchase of their shares. Because of the tax-advantaged status of life insurance proceeds, this type of transfer won’t be subject to income taxation. In addition, the proceeds from life insurance are also not subject to the claims of creditors. The same arrangement can be set up using disability insurance if an owner or partner becomes disabled or incapacitated and can no longer fulfill their duties in the company. When using life insurance as a funding mechanism for a cross-purchase agreement, there are several key advantages to going with indexed universal life (IUL). First, because these are permanent policies, the coverage would remain in force as long as the premium is paid. Second, IUL policies can build up a sizeable cash value, especially if they are in force for an extended period. This cash could be used either via withdrawals or policy loans, and used for other financial needs. 10 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
Redemption Agreement With a redemption agreement, the business entity must buy the interest of the selling or deceased owner or partner. This agreement between shareholders in a company states that when a shareholder dies, becomes disabled, or otherwise leaves the business, the company will purchase their shares. Like other types of buy-sell agreements, redemption agreements can set a pre-determined value for the business. This is helpful for companies that are increasing in value. However, for the IRS to honor this pre-determined value, three conditions need to be met. These include: 1. The agreement must be a bonafide business agreement. 2. The agreement cannot be a device that is used for transferring the company to members of the decedent’s family for less than its total value (and without adequate consideration). 3. The agreement terms must be comparable to similar agreements entered into by non-parties. Life insurance could be used as a funding mechanism for the redemption agreement. In this case, at the death of an owner/partner, the business entity would be the purchaser of the coverage, so it would therefore be the owner of the life insurance policy. This is the case with all of the owner’s/partner’s policies. The life insurance proceeds would be paid out to the business upon death. The company would then use these funds to purchase the deceased individual’s shares. Once the company has purchased the shares, they are no longer outstanding, and the interests of the remaining owners/partners would then be increased proportionately. There are also some other advantages to using life insurance as the funding mechanism in a redemption agreement, such as the proceeds not being accessible to the business owner’s creditors. These funds would also not be includable in their estate, thus reducing the amount that could be taxed through estate taxation. Permanent life insurance like IUL could be a good choice for funding a redemption agreement, as the policies would remain in force (given continued premium payment), along with the proceeds free of income tax paid out at the insured’s death. 11 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
Indexed universal life (IUL) insurance is often considered to offer a “best of both worlds” scenario, particularly as it pertains to the growth and protection of the policy’s cash value component. These policies have become more popular over the past decade or so, due in large part to the opportunity for generating higher returns in the cash value than whole life or regular universal life. At the same time, you can keep your principal and previous gains safe in any stock market or economic environment. These policies also offer a cash value component that grows on a tax-deferred basis and has a return based on the performance of one or more underlying market indexes (such as the S&P 500 or Dow Jones Industrial Average). Some of the other popular market indexes that are tracked in IUL policies can include the: NASDAQ 100 Barclays Capital U.S. EURO STOXX 50 Russell 2000 When the underlying index(es) perform well in a given period (such as a contract year), the cash component of an IUL policy will be credited with a positive return typically up to a preset maximum. No losses are incurred in return for this limited upside, even if the underlying index incurs a negative return. So, when the index(es) turns around and provides a positive return again, there is no need to “get back to even” before you can start generating any gains. Instead, you can continue to build upon previous gains right away. Plus, the funds in an IUL cash value grow on a tax-deferred basis. Hence, you could increase the value exponentially over time. Because of this, even if the life insurance coverage is not needed, investors could use indexed universal life (IUL) as another way to build tax-advantaged savings. This can be especially beneficial if other tax-advantaged accounts, like IRAs and employer-sponsored retirement plans, have been “maxed out” with their annual contribution limits. There are no maximum yearly contribution limits with indexed universal life (IUL) insurance as a bonus. So, going this route could allow you to increase your tax-deferred savings substantially. If you are considering the purchase of an indexed universal life (IUL) insurance policy, it helps to understand which crediting methods are used and how they work. That way, you will know what to anticipate in certain situations. When the premium on an indexed universal life insurance policy is paid, a portion of those funds goes towards funding the death benefit. Then, once any fees have been paid, the remaining premium will be added to the cash value. Why Consider Indexed Universal Life (IUL) Insurance for Business Succession Funding? 12 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
The IUL cash value crediting methods can include one or more of the following (and in some cases, a combination of one or more): • Cap • Spread • Participation Rate Caps represent the highest growth rate which will be credited to the cash value, even if the underlying index (or indexes) has a stellar performance during a given contract year. Consider a policy that has a cap of 5%, and the underlying index generates a 7% return for the year. Then 5% will be credited to the cash value. The participation rate on an IUL policy is also set by the insurance company that offers it. These rates refer to the percentage of the index’s gain credited to an IUL’s cash value. For instance, if the participation rate is 90%, and the underlying index generates 10% in a given time frame, the cash value would receive a 9% positive return (90% of 10% equals 9%). 90% participation rate X 10% return on the underlying index = 9% return credited to IUL cash value A spread is also expressed as a percentage. In this case, a certain amount is subtracted from the return that is generated from the underlying index(es). For example, if there is a spread of 4%, and the index being tracked returns 10% in a given contract year, then 6% will be credited to the cash value (10% minus a 4% spread equals 6%). 10% return on the underlying index – 4% spread = 6% return credited to the IUL cash value Similar to other types of permanent life insurance, the growth in an indexed universal life (IUL) insurance policy’s cash value component compounds on a tax-deferred basis. This means that there is no tax due on the amount of gain that is generated until the time of withdrawal. Therefore, over time, the value in the cash component of the policy could grow considerably, especially as compared to a fully taxable account (with all other factors being equal). The Best Results Come From Expert Advice. Discover How You Can Benefit From An IUL Expert. Visit IndexedUniversal.Life 13 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
Tax-Deferred versus Taxable Growth Example of Life Insurance Surrender Charges and Surrender Period $300K $275K $250K $225K $200K $175K $150K $125K $100K 0 5 10 15 Years Tax Deferred Fully Taxable 20 25 As with other permanent life insurance policies, funds from the cash value of an indexed universal life (IUL) insurance policy may be either withdrawn or borrowed. If you take a direct withdrawal, taxes will be due on the amount considered gain. However, the part of your withdrawal that is considered to be a return of your premium will not be taxed. It is essential to be careful when you are withdrawing funds from an IUL policy. This is especially the case if you are under the age of 59 ½ because you could incur an additional 10% “early withdrawal” penalty from the IRS (on top of the tax you owe on the gains). In addition, like whole life, variable life, and regular universal life policies, indexed universal life insurance policies will usually include a surrender charge period. This means that if you withdraw more than the annual penalty-free amount (which is often 10% of the cash value), you will be penalized by the insurance company for taking an “early withdrawal.” This penalty is in addition to any tax that you may owe. Likewise, if you cancel the IUL policy contract altogether, you will have to pay a surrender penalty as well, if the policy is still within the surreder charge period. Typically, life insurance surrender penalties will last anywhere from just a few years, up to 10 years (or more). However, the amount of this charge will usually decrease over time until it eventually disappears. Policy Year 1 2 3 4 5 6 7 8 9+ Surrender Charge % 8% 7% 6% 5% 4% 3% 2% 1% 0% 14 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
Many indexed universal life (IUL) insurance policies offer additional features, such as allowing the insured to access a portion of the death benefit penalty-free. It is offered when diagnosed with a terminal/chronic illness, or if they must reside in a nursing home for a certain period (such as for 90 days or more). In addition to providing tax-deferred savings and a death benefit for your survivors, IUL could also be a solution for your business succession planning strategy, particularly as a funding mechanism. For instance, a company purchases life insurance coverage for its executives and other high-ranking individuals with a key person plan. The business is named as the policy beneficiary. Then, suppose a key individual passes away while the insurance policy is in force. In that case, the death benefit is paid out to the company, and the funds may be used for keeping the business afloat while a replacement for the decedent is found or until the business is ultimately sold to the right buyer. Pros and Cons of Indexed Universal Life (IUL) Insurance Advantages of Indexed Universal Life Insurance Disadvantages of Indexed Universal Life Insurance Death benefit coverage (paid income tax-free to the beneficiary) Limitations on the growth of the cash value (caps, spreads, and participation rates) Low premiums Surrender charge(s) on withdrawals from the cash value Flexibility Surrender charge if the policy is canceled during a preset period of time Tax-deferred gains in the cash value Premium for the death benefit could go up Opportunity for higher growth than whole life and regular universal life insurance Principal protection in any type of market environment No limit on annual contribution to the policy Ability to access cash via withdrawal or tax-free loan 15 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
Several different riders may be available to further “customize” an indexed universal life (IUL) insurance policy. These are optional features that could be added to the policy, which are sometimes free and other times require an additional amount of premium to be paid. Depending on the policy and the insurance company that is offering it, some of the more common indexed universal life insurance policy riders may include: Accelerated Death Benefit Rider: The accelerated death benefit rider can be attached to the policy. It can enable the policy holder to receive cash advances against the death benefit when diagnosed with a terminal illness. This allows some (or all, depending on the policy) of the benefit to be used while the insured is still alive. Waiver of Premium Rider: The waiver of premium rider will allow the policyholder to stop paying premium payments if they become critically ill, seriously injured, or disabled. Other criteria may also need to be met depending on the policy and the rider. Long-Term Care Rider: A long-term care rider is designed to help pay for the cost of long-term care services if they are needed by the insured. To qualify for this benefit, the services must typically be recommended by a licensed health practitioner, such as the insured’s doctor. As a business owner, you may have heirs that are interested in taking part in the company and others who are not. Using indexed universal life (IUL) insurance can help with “equalizing” inheritance for your survivors. For instance, one (or more) of your heirs could inherit the business. At the same time, other(s) could receive death benefit proceeds from an IUL insurance policy in the same amount as the value of the company, in turn, making the inheritances more “equal” in value. Additional Solutions Offered Through Indexed Universal Life (IUL) Insurance The Best Results Come From Expert Advice. Discover How You Can Benefit From An IUL Expert. Visit IndexedUniversal.Life 16 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
The cash value of an indexed universal life (IUL) insurance policy can provide additional benefits. For instance, money could be withdrawn from the cash value and used for making purchases or paying off higher-interest debt. However, because it can be somewhat “expensive” to withdraw funds from an IUL policy, many policyholders take an alternate route for accessing money from the cash value by way of a tax-free loan. Although many people do not like to take on debt, a loan from an IUL policy could actually be quite enticing. One reason for this is because you’ll have use of 100% of the money you access, as there is no tax due on the borrowed funds. In addition, you are technically borrowing from the insurance company, and not your policy’s cash value. Therefore, interest will continue to be generated on the total amount of the cash in your plan. As an example, if your IUL policy has a cash value of $100,000 and you borrow $50,000, the return on your cash component is still determined based on $100,000. As a plus, even though interest will accrue on the borrowed amount if the loan has not been paid back in full by the time the insured passes away, the balance will simply be covered with the death benefit proceeds (the remainder will be paid to the policy’s beneficiary). With the many advantages of owning indexed universal life (IUL) insurance, you may be a good candidate if you: Are looking for secure permanent death benefit protection for your loved ones or business succession requirements Would like to have additional alternatives that can generate tax-deferred growth (even if you have already “maxed out” the annual contributions to an IRA or employer-sponsored retirement plan) Want the opportunity to generate higher growth than whole life and regular universal life insurance can offer, yet also want to have the assurance that principal will be safe, even if the stock market incurs a “correction” Are in good health at the time of policy application (to qualify for the death benefit coverage) Other Benefits of Indexed Universal Life (IUL) Insurance How to Find the Right IUL Policy for Your Specific Needs and Objectives 17 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
If you’re a company owner or partner and would like to learn more about indexed universal life (IUL) insurance for business succession purposes, please contact us directly and set up a time to talk with a retirement income specialist. You can reach us by phone at 800-743-9221 Or you can send us an email with any questions that you may have regarding IUL, and we will be happy to provide you with more details. Our secure contact form can be found by going to [email protected] We look forward to assisting you. Is Indexed Universal Life (IUL) Insurance Right for You? The Best Results Come From Expert Advice. Discover How You Can Benefit From An IUL Expert. Visit IndexedUniversal.Life Disclosure: Content is not personalized financial advice and should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed. Tax and legal information provided is general in nature and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. Indexed universal life insurance may not be suitable for you depending upon your investment objectives, risk tolerance, financial situation, and liquidity needs. Accessing policy cash value through loans and surrenders may lead to a permanent reduction of the policy’s cash value and death benefit, which may lead to a potential lapse of the policy. There may be tax penalties for distributions prior to age 59 ½. Insurance product guarantees are subject to the claims-paying ability of the issuing companies success. Working with a highly-rated adviser also does not ensure that you will experience a higher level of performance. Please contact the adviser for more information regarding the criteria for any awards or rankings noted. Ratings can be based on client evaluations, professional activity and promotional fees paid by the professional. 18 IUL2022IULBizOwners [email protected] • indexeduniversal.life • 800-743-9221
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