Today’s small business owners face a number of challenges. With economic and staffing concerns top of mind, many small business owners may be looking for ways to address these issues and keep their businesses functioning as normal.
When asked about their biggest worries, a recent Allianz Life Insurance Company of North America (Allianz Life) study1 found the top concern was about a recession or significant market downturn (85 percent). Rising expenses was also a common concern, with 83 percent worried about increasing costs of employee benefits, and 80 percent worried about increasing costs of wages.
In a tight labor market, business owners are also struggling with attracting, retaining and motivating employees.
Navigating these uncertain times is challenging for small business owners. With the help of a financial professional, a small business owner can use fixed index universal life insurance (FIUL) as an important part of their strategy to help address these challenges.
While the primary use of an FIUL policy is the death benefit, there are a number of other features in the products. These additional features include the potential to build accumulation value and the ability to access any available cash value in the policy through policy loans or withdrawals.2
Here are a few ways FIUL can help address some of these pressing issues.
Attracting and retaining key employees
Small businesses are uniquely susceptible to the loss of a key employee. This has been particularly true in recent months during the Great Resignation, as employees reevaluate their current work arrangements.
The study found the majority of small business owners said they have difficulty attracting or recruiting key employees (77 percent) or expressed concern about the loss of a key employee (77 percent).
Small businesses rely heavily on their key employees to grow the business, retain important business relationships, or provide specific knowledge or skill sets. The total compensation package offered to key employees is part of the employer’s value proposition to them. As part of this, small business owners can use compensation strategies and special benefits to help recruit, retain, and motivate key employees.
An FIUL policy could play a role in these strategies. Consider an annual cash bonus that many employers offer. It may be an effective tool for rewarding a key employee, but it doesn’t provide incentive for them to stay with the business.
One alternative could be putting the bonus contributions into an FIUL policy owned by the employee. These policies typically have built-in surrender charges in the early years and require ongoing contributions in order to build the accumulation values. These features can act as a natural vesting schedule.
Other ideas for key employee compensation that use FIUL include a restricted bonus plan, split-dollar arrangement, or stay bonus plan. Working with your small business owner clients, you can tailor strategies based on their unique needs and their specific employees.
Creating a sound business succession plan
Finding the right buyer when selling to a third party or retaining family harmony when selling or gifting to family members are important goals that require long-term planning.
According to the study, half of business owners expect to transfer their business in the next five to 15 years. Yet many owners don’t have a clear-cut plan. In fact, 25 percent say they have had discussions but haven’t put anything in writing. Another 23 percent say they have had discussions, but haven’t made a final decision. Only 69 percent say they have a formal written plan for transitioning out of business ownership.
You can help clients ensure a successful continuation of their business with potential strategies and life insurance opportunities.
In general, most business owners plan to formally transfer ownership of their business by selling it or gifting it to family (58 percent).
Developing a succession plan for a family-owned business requires consideration of potential family conflicts and emotional issues. The vast majority (77 percent) of small business owners who plan to transition ownership to a relative said they are worried about retaining family harmony and avoiding discord in the process.
Before a client can determine how to go about selling or gifting their small business to family, they should identify what goal they are trying to achieve. Some goals include:
- Treating all children equally and avoiding family conflict.
- Transferring business through lifetime gifts and minimizing gift taxes.
- Progressive transition of the business while retaining control.
- Selling the business to the next generation.
- Sell to the next generation and support charitable organizations.
- Continue the legacy of the family business.
Once the succession plan’s overall goal is identified, then a strategy can be created. Of course, all types of succession plans have their own unique challenges.
Small business owners who plan to sell to an outside party are worried about finding someone to take over the business. The overwhelming majority (93 percent) of small business owners in the study said they are concerned about finding the right buyer.
When it comes to transferring ownership through a buy-sell agreement, an FIUL policy can also help fund the agreement. This can be done though either a cross-purchase agreement, where each business owner buys and is beneficiary of a policy on the other shareholders, or an entity purchase (stock redemption) agreement.
When taking out loans against the cash value of a policy, it is important to manage the policy’s values carefully to prevent a lapse. And since life insurance is an underwritten product, any strategy that includes it is contingent on the health and financial underwriting of the insurance. To be successful in a buy-sell agreement, there must be funds available in the FIUL to carry out the terms of the agreement.
Understanding life insurance opportunities
Incorporating FIUL into strategies for clients who are small business owners can help address many of the concerns and challenges they face today. For financial professionals it starts with understanding client worries, listening, and helping develop unique solutions tailored to their specific needs.
- The 2022 Allianz Small-Business Owner Study was conducted by Allianz Life, an online survey in April/May 2022 with 516 small- to medium-size business owners, from a range of industries, employing at least five people and having a past 12-month revenue of $500,000 or more.
- Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Withdrawals in excess of premiums paid will be subject to ordinary income tax. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. If a policy is a modified endowment contract (MEC), policy loans and withdrawals will be taxable as ordinary income to the extent there are earnings in the policy. If any of these features are exercised prior to age 59½ on a MEC, a 10 percent federal additional tax may be imposed. Tax laws are subject to change and you should consult a tax professional.
Allianz Life Insurance Company of North America does not provide financial planning services. FIUL requires qualification through health and financial underwriting. Guarantees are backed by Allianz Life Insurance Company of North America. Products are issued by Allianz Life Insurance Company of North America.