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If you own or manage a business, you’ve likely had two challenges on your mind lately: attracting (and retaining) staff in today’s hot labour market and making sure your operations hold their own in the event of an unforeseen disruption. Fortunately, there are solutions to help you with both of these issues.

We’ll start by delving into some low-cost insurance options that can provide cash flow to your business if, say, you or another critical employee suffers an unfortunate circumstance and falls ill or passes on. Then we’ll examine how you can use group benefits to retain the people you have – and attract new ones – while keeping your costs manageable.

Finally, if you’re thinking about retirement, we’ll share a unique strategy that lets you access money you have built up in your corporation in a tax-efficient way. 

Key-person insurance: a business-saving tool many entrepreneurs overlook

A good way to think about key-person insurance is as a personal life or disability policy with one key difference: instead of a beneficiary of your choice – a family member, say – it’s the business that receives a tax-free payout upon the death of the insured person.

This payout helps stabilize the company if you or a staff member who is vital to your business’ daily operation dies or falls critically ill. In such a case, your revenue could suffer as the management team adapts to the loss of, and eventually replaces, an essential member. Key-person insurance can also help you cover the expenses associated with filling the position and for your new hire to gain the experience to perform at the same level as the person you lost.

Also like life insurance, key-person insurance can either be permanent (where the policy carries both a cash surrender value that builds up over time and pays a tax-free benefit on the death of the insured) and term (which doesn’t have a cash surrender value but does offer lower premiums than permanent insurance).

Premiums on term insurance increase at renewal as the insured person ages, which could work nicely in a business setting because you can cancel it once your key employee retires, thereby avoiding higher premiums. Permanent insurance has appeal because you can cash it in for its surrender value at any time – for example, if the employee resigns.

But despite its flexibility and relative affordability, few businesses carry key-person insurance, according to Andre Guillemette, Wealth Protection Specialist at BlueShore Financial. “A lot of business owners know they should have this insurance, but they push it to the side because they’re busy keeping their company moving forward,” he says. “It’s typically after a life event, say a friend or employee gets sick, that they realize they need it.”

Another useful feature of this insurance is that you get to define who the key people are in your company. According to Guillemette, most businesses hold these policies on owners, partners, or C-suite members like the CEO or CFO. But you could also hold it on an employee – an IT manager, for example – whose knowledge of your company’s operations make them critical to its day-to-day functioning.

Buy-sell insurance helps you maintain control

Here’s a scenario you want to avoid at all costs: you own a business in partnership with someone else and they die suddenly, leaving all their assets (including their stake in the company) to someone who has little or no involvement. Ideally, you’d like to buy their shares, but you can’t afford to.

This is where buy-sell insurance comes in, providing a tax-free payout that could be used to buy out your partner’s heirs. You can also pair buy-sell insurance with key-person insurance to build a package that offers your business complete protection during the succession period. 

“Let’s say you have $2 million worth of buy-sell and key-person coverage on an executive, and that person dies,” says Guillemette. “In that case, $1 million could be used to buy the partner’s stake, and the other $1 million could be used to stabilize the business while a successor is brought aboard.”

Group benefits – a must-have in today’s labour market

There’s been an attitude shift among business owners when it comes to group benefits, says Guillemette, and it comes back to COVID-19:

“Business owners have told me they want to reward their staff for sticking with them through the pandemic,” he says. “That idea of rewarding staff has been more prevalent than in the past, when business owners mainly saw group benefits as a cost.”

In addition, when it comes to attracting talent, group benefits give you an advantage over companies that don’t offer them, as COVID-19 has increased many people’s desire to make sure their families are protected from health threats.

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Your BlueShore business advisor can help you assemble the right plan for your company, but the best place to start is with your employees. You’ll want to discuss which options are most valuable to them, with features like disability insurance typically being costlier, from a premium perspective, than, say, dental coverage or wellness programs that cover physical and mental health. 

You’ll also want to ensure you’re clear on how much your company will split the cost with employees. Will it be 50/50 split, 70/30 or 100% company paid? To make sure your plan fits your budget, you can also adjust other parts of it, such as the number of visits to a massage therapist, counsellor, or dentist, it will cover per year. 

You may also go with a more flexible approach where you offer basic benefits, such as eye care or dental, then each employee has a health spending account, under which they can choose which services are most important to them, with the option to change those preferences on a yearly basis.

One thing to bear in mind is that premiums on your group benefit plan will likely rise sharply at your first-year renewal. That’s because staff have never had benefits in the past, so they’re likely to take full advantage. Once there is more of a history (roughly three years), you should expect premiums to rise about 5% a year, according to Guillemette.

Finally, consider this tax-smart retirement strategy

If you have retained earnings held in your corporation, you can use life insurance to release those earnings in retirement in a tax-efficient manner. This is known as a corporate insured retirement plan. You can set one up and utilize it by buying a permanent life insurance policy on your life with the policy being owned by the company. You then fund that policy with retained earnings. 

For example, let’s say you have a million dollars in retained earnings in your corporation. Over a decade, you move $100,000 a year into that policy. By year 10, you have a million dollars of cash surrender value in your corporate insurance (that grows on a tax-deferred basis). You can then leverage these funds without triggering taxes by securing a personal line of credit against your corporate-owned life insurance policy. 

You’d then use that loan as retirement income. When you die, the loan will still be outstanding, but your executor would use the life insurance’s cash surrender value to pay it off. Your policy would still have a tax-free death benefit beyond the surrender value that would go to your estate, or to a beneficiary (or beneficiaries) of your choice. (As with all tax strategies, we recommend consulting a tax professional, as well as your BlueShore business advisor, before proceeding.)

Build insurance programs that work for your business

Insurance can be complicated and there are many policies and insurance types that are specifically designed to help protect your business interests and keep your employees happy and engaged. Your people are your greatest assets with the knowledge and skills that make your business function and grow every day. Simply put, protecting their interests – and your own – makes for a sound business strategy. Speak to your BlueShore business advisor to explore the types of insurance programs that best suit your business.
 

BlueShore Financial, Business Advisor, Robert Lewis

Robert Lewis

Business Advisor

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The information contained in this article/video was written by BlueShore Financial or one of our expert financial writers and was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. It is provided as a general source of information and should not be considered personal financial advice.