Years of hard work can be wiped out in an instant unless you have one of these.

Perhaps you’ve heard of a key person policy, key man policy, a key woman or business life insurance? 

A key person policy is simply a type of life insurance taken out by a business on the life of one or more of its key employees, whose knowledge, work, or overall contribution is considered uniquely valuable to the company. This policy helps mitigate the risk to the business in the event of the untimely death of the key person or even some medical events by providing a financial safety net, ensuring business continuity and stability during a potentially turbulent transition period. This can be a Term or Whole Life Policy and even combined with an Accidental Policy (an Accidental Policy is not to be relied on as a stand alone form of protection). 

There is one other option that stands above the rest when set up and used correctly. It’s an Indexed Universal Life Policy also referred to as an IUL. It’s what we like to refer to as the Swiss Army Knife of financial tools, and offers some distinct advantages over the others on how it can be used by a savvy business owner.

An IUL can be an excellent choice for a key person policy due to its blend of flexibility, potential for cash value growth, and death benefit protection. The policy's cash value is tied to a stock market index, offering the potential for growth without direct exposure to market losses, thereby providing a safeguard against the volatility of the investment component.

There are 4 distinct benefits of an IUL

1. Safety of Living Benefits: IUL policies offer living benefits, acting as a financial cushion for key employees if they face a critical, chronic or terminal illnesses.

2. Access to Cash: The cash value component of IUL policies can be accessed through loans or withdrawals, offering liquidity that the business can use in times of need.

3. Protection Against Market Losses: These policies offer downside protection, ensuring that the policy's cash value does not decrease, even in a down market. Your gains are locked in.

4. Tax-Free Income: An IUL allows for tax-free loans and withdrawals, providing a tax-advantaged way to access funds, which can be beneficial for both personal and business financial planning.

This blend of features makes IUL policies a strategic choice for small businesses looking to secure their operations and ensure their resilience against the loss of a key person. 

Before we continue on how you will take advantage of this amazing financial tool, let’s have a tiny lesson on the IRS tax code. 

Section 7702 of the U.S. Internal Revenue Code outlines the criteria for a life insurance contract to be recognized by the federal government. It also establishes the taxation rules for the benefits generated by such policies. What it basically says is that the proceeds of policies that meet the government's definition are not taxable as ordinary income…when set up correctly.

Let’s look at some examples of how this can be used as an essential financial tool for you, your family, and or your business.

Death Benefit. As with all life insurance, there is a Death Benefit.

Yes we know, nobody likes to talk about death, but in life there are two things that are unavoidable, death and taxes. So let’s address them head-on and take the proper measures to safeguard your business, your employees, and the loved ones you leave behind to pick up the pieces.

In the event of an untimely death of a key person, the proceeds of the death benefit can be used for absolutely anything the beneficiary chooses. As it relates to your business, this payout can be emergency funds to quickly hire a replacement or consultant, continue paying property or equipment leases or loan payments to avoid defaulting, or even payroll for the employees who depend on their jobs until the business can be fully operational or sold. 

Living Benefits

Depending on the state you live in, some or all of the living benefits will be available. In the event of a critical, chronic, or terminal illness a portion of the death benefit can be taken while the insured is still alive. And again this can be used for anything. For many people without a policy like this when faced with a critical, chronic or terminal illness sadly if available they will have to use their savings, liquidate assets, or access retirement funds to pay for medical treatment and other expenses. This can be devastating financially, yet completely avoidable with an IUL that's always working for you. 

Access to Cash

In times of need a business owner may require quick access to capital without having to apply and qualify for financing or liquidating assets. The cash value built up in the policy can be accessed without penalty or approval to be used as they wish. And the interest payments are being paid back to the policy itself and not a lender. So if you want to scale your business, and need money for a remodel, new equipment, or vehicles, you can be your own bank.

Protection Against Market Risk

With the cash value participating in a Stock Market Index, the gains are locked in, you never have to worry about what the markets are doing. This policy can also serve as an alternative retirement account that’s much safer than a 401K, IRA or Roth IRA because it will never lose any value due to market corrections. It’s a brilliant way to make up for limits on contributions the other investment vehicles are restricted by, so long as the policy still falls under the IRS guidelines and qualifies as insurance. 

Tax-Free Income

When properly structured and funded correctly this policy can provide Tax- Free income at retirement or even before in some cases. With a sufficient cash value built up the policy owner can take withdrawals supplementing or even replacing income that was expected from traditional retirement accounts. Because the money is coming from an insurance policy, and as you already know under the IRS code Section 7702 it’s not considered ordinary income and no taxes will be due, nor will it change the recipient's tax bracket. 

It should be abundantly clear now that a key person policy can be much more than just insurance to protect against a tragedy or untimely death. It can provide benefits to the policy owner while the insured is still alive. 

The best part is these policies are not restricted to only be used for business purposes. They can be placed on anyone who qualifies, including children, spouses, or domestic partners. The application process is simple without the need for an intrusive medical exam in most cases. 

The Set Up

Setting these up is easy. The first step would be to schedule a call and answer some pre-qualification questions, then determine how much coverage is needed and how much of a monthly contribution will be made. We’ll then generate a detailed illustration showing the amount of living benefits that will be available, the projection of the Cash Value growth, and the anticipated Tax-Free Income that this financial tool can provide.

Just a word of caution. Be sure to use a qualified professional with intimate knowledge of these policies when setting up an IUL, someone who has your best interest in mind. Let’s be honest, not everyone operates with the highest integrity and some are blinded by ignorance and may not know any better.

So avoid your family members or friends who recently got their insurance license or may not be sufficiently educated and trained to properly structure an IUL that will function the way it should. 

One minor adjustment made by them can result in them receiving a more than generous commission and in turn, your policy will perform less-than-optimal. This is one of the leading reasons why IUL’s have gotten a bad rap.

The other reason is the owners are not funding them correctly and withdrawing from the cash value too soon or not paying those funds back, creating too much drag for the selected index to keep up with.

Don't put your business at risk or those who depend on it or you. With some proper guidance and planning, you can protect all of it while having access to an amazing financial tool. 

Book a call today by going to www.pntfinancialservices.com 

We’re here to help educate you, your employees and anyone else looking to use this financial tool for a more secure financial future.

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