Today’s challenging economy dictates that small business owners be more focused and nimble than ever before. Margins are slim and savvy businesses are looking for every possible advantage to help them meet their bottom line. From managing daily expenses, to paying rent to ensuring payroll is met, every task is crucial and nothing can be overlooked.
In that context, it can be extremely challenging to get small business owners to think beyond the issues that face them today and focus on future necessities – namely business continuation plans and executive benefits, both of which can be addressed through life insurance. The problem is, having that initial conversation with your small business client can be a challenge in and of itself.
According to a 2009 LIMRA study of 874 small businesses with 100 employees or less, 71 percent of those surveyed said they had thought about who would run their business in their absence, but only 35 percent of all surveyed had a business continuation plan. Furthermore, only 14 percent of those with a business continuation plan had life insurance as part of their plan.
In terms of executive benefits, the same LIMRA study points out that less than half (46 percent) of small businesses provided any type of executive benefit, only 20 percent provided an executive bonus plan and only five percent provided a Non-Qualified Deferred Compensation plan (NQDC) plan.
These are significant issues that every small business should address today to ensure they are prepared for the challenges that may come tomorrow. Yet, understandably, focusing on their life insurance needs is not a top priority for many small businesses when keeping the lights on still ranks as a major concern.
So how can you get your small business client thinking about the benefits of life insurance? Start with a talk about taxes.
Recommending that a client review the new tax laws – specifically the laws put into effect with the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 – is a great way to connect with your clients and demonstrate the value of incorporating life insurance into their larger business strategy. Of course, you should always qualify the conversation by directing them to a tax attorney for more education on the topic since Allianz Life Insurance Company of North America or its agents do not provide legal or tax advice.
There are a number of changes that are relevant to business owners both personally and to their employees as well – especially since these changes are good for only two years, expiring at the end of 2012.
Individual taxpayer provisions – relevant changes for both income taxes and estate taxes include:
- Income tax and payroll tax changes
- Lower income tax rates with no phase-out for itemized deductions or personal exemptions.
- Lower capital gains rates of 0 percent and 15 percent, depending on income.
- In 2011, a one-year only reduction of 2 percent in employee withholding for Social Security payroll tax (down to 4.2 percent for employee portion only).
- Estate tax changes
- The estate tax exemption was set at $5 million per person and $10 million per couple for estates of decedents dying in 2011 and 2012.
- Gift tax exemption increased to $5 million per person for gifts made in 2011 and 2012.
- The tax rate was capped at 35 percent for estates, gifts and generation skipping transfers for 2011 and 2012.
- “Portability” of the estate tax exemption is available to married couples, meaning that any unused estate tax exemption of a deceased spouse can be carried over and utilized by the other spouse who dies second.
Business tax payer provisions – relevant changes exist in the areas of expensing and incentives.
o No change in tax rates for C corporations, but flow through entities like partnerships and S corporations are taxed at individual owner’s rates; lower income tax rates help those business owners.
o New bonus depreciation deductions for certain businesses.
o Higher section 179 expensing abilities.
o New energy incentives for businesses.
Life Insurance-Funded Advantages
While some of these changes may be relevant to your client and others may not, having your client review the new changes can lead to a larger discussion about life insurance and the relevance the new tax laws have on business continuation and executive benefits.
In terms of business continuation through life insurance funding, your client should be aware of a number of advantages made possible through the new tax laws. Specific changes that may be more attractive within the next two years include:
o Cross-purchase plans funded with life insurance, due to individual tax rates
o Gifting of business interests due to higher gift exemptions
o Generation skipping transfers of businesses due to higher GST exemptions
o Rollouts of split-dollar or premium financed life insurance plans in trusts due to higher gift exemptions
Changes that impact executive benefits through life insurance funding are also significant and should be shared with small business clients. Two notable examples are the effects on Executive Bonus/Restricted Executive Bonus Arrangements (REBA) and deferred compensation. Because of the new individual tax rates, Executive Bonus/REBA may be more attractive over the next two years. Yet, due to the same individual tax rate changes, deferred compensation may be less attractive through the end of 2012.
The key is to connect with your small business clients now since uncertainty lurks in 2013 and beyond. Because the tax landscape could look very different in two short years, it’s imperative that your clients remain flexible with things, such as estate planning and business continuation. If they do have life insurance for their business, they will also need to monitor premium payments more frequently if individual tax rates increase.
The bottom line is that, because of the new tax laws, small businesses owners have a great opportunity to make important changes that can protect their business in the future. As the LIMRA study shows, it’s clear that small businesses need assistance in this area. Recommending that a client review the new tax laws is a perfect way to connect with these clients and demonstrate your value as someone who has their best interests in mind.
Debra Repya is senior director of Advanced Markets for Allianz Life Insurance Company of North America. Repya is active in the Association for Advanced Life Underwriting (AALU) and also holds the Chartered Life Underwriter (CLU) and Chartered Financial Consultant (ChFC) designations, along with the FINRA Series 7, 24 and 66 licenses.