Phase 1: Working years
During the years when you are actively working in your business, the personal key-person life insurance policy provides income tax-free death benefit protection to your family from day one to:
- Replace your income if something were to happen to you;
- Help cover over a shortfall in the business’ value should your family not be able to sell it for as much as they expected;
- Serve as an inheritance for your family or equalize an inheritance between family members who work in the business and those that do not; and/or
- Cover long-term care expenses for you should you become chronically ill (if the optional long-term care rider is added to the policy), providing additional protection if your ability to work and produce income is halted.
Additionally, depending on state law, life insurance proceeds receive favorable protection from creditors, including bankruptcy protection. Particularly if your business is in a higher-liability field, this solution can help provide a level of asset protection during working years.
Phase 2: Retirement years
Once you decide it is time to step away from the business, the potential cash value build-up within your personal key-person policy can be used to help supplement your income via tax-free withdrawals or loans. This access to cash value provides additional flexibility and protection to help address common issues, such as:
- Extended period of time before appropriate buyer can be found;
- Reduced business value due to down market, slow economy, or having to sell quickly; or
- Periods where your income from the sale is lower than anticipated (possibly due to cash flow challenges related to the new owner).
Unlike qualified plans which require distributions starting at age 72 and are subject to income tax, withdrawals from the life insurance policy are purely discretionary and received income tax-free. You have ultimate control to take withdrawals or loans if you need them or retain the cash value in the policy — and increase the death benefit to heirs — if you do not.
Phase 3: Later retirement years, beyond life expectancy
Lastly, your life insurance policy’s potential cash value also can be used to provide additional supplemental income in the event you outlive or have insufficient other primary assets to draw from. If the cash value is not needed, the death benefit is preserved and can provide a source of funds for a surviving spouse and/or enhance the legacy you leave to your loved ones.
In our next blogpost, we will show you the way to estimate how much coverage you need.