Employee Loyalty Using Life Insurance And The Stay Bonus

Today, of the more than 33 million small businesses in the United States (defined as having less than 500 employees),1 the majority (approximately 24.2 million) are family-owned.2 One significant challenge for any family-owned small business is creating a successful plan to transition ownership from one generation to the next. This struggle has plagued family-owned small businesses for decades, with only an estimated 19 percent of family-owned businesses successfully transitioning to the second generation of ownership.3 Most certainly, the most significant reason for these failures is the lack of a tailored, documented, and communicated succession plan.

For many years, I have had the pleasure of working with some of the most innovative and dedicated small business owners across the county. My experience has taught me to ask a few very important questions during my discovery interviews with business owners. What am I looking for? Primarily, I am exploring whether the next generation is ready, willing, and able to take on a leadership role within the business after the matriarch or patriarch is no longer at the helm.

Past mistakes in succession planning for family-owned small businesses leave an inexperienced and overwhelmed second generation faced with losing the family legacy simply because they were not ready. My questions to the business owner focus on other members of the organization that are significant to the company’s ongoing success. They can be other family members or non-family members. I am looking for key contributors that know and run the day-to-day operations and know the business inside and out. These key employees need the incentive to stay with the company after their leader is no longer involved in the business.

My target planning opportunity is to create a “stay-bonus” structure. This would be launched while the matriarch and patriarch are still actively involved in the business. The stay-bonus is funded using life insurance that has a death benefit payable at the death of the owner to generate enough financial security for the key employees to stay through a potentially bumpy transition. The written stay bonus agreement requires the business to make payments to the key person who remains with the business and effectively achieves the target performance levels each year after the original owner’s death. Making the performance targets part of the stay-bonus agreement keeps the expectations front and center each year for everyone involved. The stay bonus helps to ensure the key employees continue the business until the second generation is ready to take over.

Here is a common life scenario I see that fits for a stay-bonus plan. Say there’s a successful family-owned small business run by one parent, and their desire is to transition the business to their child or children. However, for whatever reason, the next generation’s age or inexperience makes him or her not quite ready to take over. The business has one or more key employees that play a significant role in the day-to-day and strategic operations of the company.

The key employees typically have worked for the business for several years and are loyal to the owner. In some cases, if the business owner dies, the key employees will not stay with the company and the second generation will face significant challenges keeping the business running without their parent and key employee contributions.

Using a key person stay-bonus structure, the new second-generation business owner can afford to pay significant stay bonuses each year until they gain the knowledge and experience needed to run the business successfully. The stay bonus plan includes specific business targets that must be reached for the bonus to be paid.

Additional benefits of the stay-bonus structure include adding cash flow to the business at a critical time when the owner passes away. The additional cash flow adds stability to the business which helps with any other debt owed by the business and can help prevent those debts from being called by a lender, especially if the deceased owner had personally guaranteed the loans. The business also has the benefit of taking a tax deduction for the stay bonus paid to the employee, even though they are using the income tax-free life insurance proceeds to make the payment.

My experience has led me to find that business owners react positively when they are presented with a way to give a few more years for the second generation to develop professionally and prepare for leadership. They take the opportunity to honestly assess the ability of their son or daughter to successfully run their business, as it is challenging for the first-generation business owner to consider the downfall of their life’s work simply because the second generation wasn’t ready. Offering more time for transition, which statically improves chances of success, is a welcome option.

There are other important strategies to use when working with a small business owner, which includes partnering with their CPA and attorneys to work together to solve concerns. It is also important to structure the life insurance policy to supply enough death benefit to meet the company’s needs.

In all cases, bringing awareness to those running family-owned small businesses so they can make informed choices about succession is a worthy conversation.


  1. https://www.zippia.com/advice/small-businesstatistics/#:~:text=There%20are%2033.2%20million%20small,to%20the%20COVID%2D19%20pandemic Updated Feb. 9, 2023.
  2. https://familybusiness.org/content/measuring-the-financial-impact-of-family-businesses-on-the-US-ec.
  3. https://hbr.org/2022/09/how-to-prepare-the-next-generation-to-run-the-family-business.

Chuck Van Devander CLU, ChFC, chief distribution officer, Brokers International, has spent nearly three decades in the insurance and financial services space, gaining experience in multiple facets of the industry, including sales and distribution, marketing, product development, compliance, contracts, and litigation.

He earned a bachelor’s degree in accounting from Arizona State University, and both a Master of Laws and a Juris Doctor from the University of Denver. He also holds Chartered Life Underwriter and Chartered Financial Consultant designations and has passed the Certified Public Accountant exam.

Van Devander has held several senior vice president roles for groups such as Aviva, American General Life Co, and Global Atlantic. He’s currently wearing two hats and serving as Brokers International’s senior VP of Sales and president and general manager of Brokers International Mountain States.

Van Devander can be reached at Brokers International, 4135 NW Urbandale Dr., Urbandale, IA 50322.