Many business owners recognize the threat of losing a key person and ultimately protect their businesses with key man insurance. But more often than not, they fail to see a golden opportunity to create value by combining the idea of retirement planning and key man life insurance.
The most basic use of key man or key employee life insurance is to protect your company in the event of the untimely death of a major contributor to the “bottom line”. However, an often overlooked use of key man life insurance is to provide supplemental retirement benefits to YOU, the business owner.
In this case, key man life insurance serves a dual purpose. In addition to protecting the company, a cash value life insurance policy can ensure that money is available at a future date to supplement retirement. If key man life insurance is properly structured, it may provide an attractive addition to your retirement package.
Key Takeaways of Retirement Planning and Key Man Life Insurance
A life insurance retirement plan can supplement traditional retirement savings while offering a death benefit and potential tax free withdrawals.
Different policies like a variable universal life policy or universal life policy can help accumulate cash through a cash value account with proper premium payments.
Funds accessed from the cash value component may avoid taxable income, depending on tax rules, tax liability, and avoiding modified endowment contracts.
Life insurance strategies should align with your broader retirement goals, retirement portfolio, and may complement social security benefits and retirement investments.
Always consult a financial advisor, tax advisor, or financial professional, as this is not a deposit, and does not substitute legal or tax advice.
How It Works
When a company purchases key man insurance, the business typically owns the policy, pays the premiums, and is the beneficiary. When incorporating retirement planning and key man life insurance, there are several strategies constructing the plan.
The company can bonus the money to the key person or business owner and have them own the policy and name their own beneficiary. This option is known as the executive bonus arrangement and there are advantages and disadvantages to this type of structure. Additionally, there are other options such as a non-qualified deferred compensation arrangement.
This strategy is a bit more complicated but essentially has the company purchasing and owning a policy on the key person and includes a vesting schedule where the cash values are “vested” to the key person over time.
Types of Policies
Several different policies can be used to provide supplemental retirement benefits to key executives and business owners including whole life insurance, universal life insurance, indexed life and variable universal life insurance. The business owner’s needs, risk profile, and aggressiveness in terms of investment all play a role in deciding which policy is best.
Benefits to the Employee
One of the biggest benefits of linking retirement planning and key man life insurance is that any cash accumulated inside the policy grows tax deferred. One vested, the key person can pull out money tax-free through loans and withdrawals. This can provide a fantastic supplement retirement income.
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Benefits to the Company
When a company pays premiums into a permanent (non term) key man insurance policy a cash surrender value begins to accumulate over time. This cash value can be counted as an asset on the balance sheet and used for a variety of business purposes such as meeting cash flow needs, collateral for securing a loan or supplementing retirement programs.
Frequently Asked Questions about Retirement Planning and Key Man Life Insurance
What type of life insurance is best for retirement?
Permanent life insurance, particularly whole life or indexed universal life (IUL), is often considered best for retirement because it builds cash value over time that can be accessed tax-deferred.
Can you use life insurance as a retirement plan?
Yes, life insurance, especially permanent policies with cash value, can supplement retirement income by allowing policyholders to borrow against the cash value without triggering taxes.
What is an insurance retirement plan?
An insurance retirement plan typically refers to using a life insurance policy, like IUL or whole life, to accumulate tax-deferred cash value that can be withdrawn or borrowed during retirement.
Is life insurance good for retirement planning?
Life insurance can be a useful part of retirement planning, especially for those looking for tax advantages, legacy benefits, and additional income options alongside traditional retirement accounts.
Conclusion and Summary of Retirement Planning and Key Man Life Insurance
For business owners and key employees, blending life insurance for retirement with a structured financial plan can deliver long-term value that extends beyond basic protection. A permanent life insurance policy, particularly a variable universal life policy or universal life policy, offers a cash value component that may support early retirement and estate planning goals while still addressing the need to cover outstanding debts or provide a death benefit to family members.
A well-structured life insurance retirement plan not only diversifies retirement investments but also contributes to a retirement portfolio that allows tax free withdrawals under current tax rules. While it is not a deposit and does not guarantee future performance, its cash value feature and ability to accumulate cash over time can make it a powerful investment strategy. The cash value account can also offer flexibility for those looking to manage income tax exposure, potential tax consequences, and taxable income during retirement age or full retirement age.
When implemented carefully, life insurance retirement options may offer tax-deferred growth, access to funds without increasing taxable income, and peace of mind that makes the most sense based on your overall financial situation and long-term financial goals.
