Edwin Moses was the king of the 400 meter hurdles and is considered one of the greatest athletes in the history of track and field. His winning strategy was simple: take only 13 steps between every hurdle, pulling away in the second half of the race as his rivals tired and changed their stride patterns to 14 or 15 (or more) strides. His simple strategy, backed by a legendary work ethic, led to two Olympic golds and a decade-long, 122 race winning streak – a feat unrivaled in the history of track and field.
Working with Business Owners
Business owners are gold medal clients for insurance professionals. Business insurance cases typically involve multiple product solutions and unlock a variety of planning opportunities, not to mention referrals to other business owners.
Business owners want to use the company checkbook to pay themselves first. After all, they shoulder the risks associated with business ownership and typically contribute years of blood, sweat and tears into the endeavor. As fringe benefits go, a qualified retirement plan may suffice for rank-and-file employees, but it will not complete the picture for most business owners.
The insurance advisor must learn to overcome the “pass-through hurdle” standing in the way of many business life insurance cases. The vast majority of businesses are pass-through entities with earnings flowing through to the business owner’s personal tax returns. Limited liability companies (with few exceptions), S corporations, partnerships and sole proprietorships are examples of pass-through entities comprising the majority of businesses in the United States.
What does this mean? Payment of life insurance premiums using the company checkbook for a personally owned policy is not tax deductible for most business owners. This is often a considerable hurdle to clear. Business owners have been drilled for years by their accountants and the financial press that income tax deductions are the beginning, middle and end of all business planning decisions.
Clearing the Hurdle
Clearing the pass-through hurdle involves a simple strategy: personally owned life insurance. Taxable business earnings provide the premium. The insurance premium is nondeductible; however, policy cash values grow tax-deferred and can be accessed via properly structured loans and withdrawals on a tax-free basis as long as the policy remains in force.
One of the few political issues nearly all people agree on is the future of income tax rates. Do you know anyone who thinks income tax rates will decline in the coming years? Nearly everyone agrees that income tax rates are “on sale.” Tax rates are sure to be re-examined in 2013 when the 2010 Tax Relief Act expires, particularly for taxpayers in the middle and upper income tax brackets.
Clients and prospects who believe income tax rates are on sale should be interested in a strategy where they trade income taxes today for tax-advantaged cash flow later. This is the same logic that has created much of the excitement surrounding Roth IRA conversions. Today is a prime time for you to explain that the absence of an income tax deduction is a good thing.