Tax Savings Double Down
by Richard S. Bernstein on Apr 13, 2018
Increased cash flow is always a welcome sight on a financial statement. Whether it’s the result of a reduction in expenses, an increase in sales, or other financial gain, the extra cash is certainly welcome. The Tax Cuts and Jobs Act has enabled many companies to see more after-tax funds in their cash flow statement. As this increase is realized, many business owners have to decide on what to do with these increased cash flows.
Excess cash is great if a business needs to pay off debts or other obligations, but by itself, cash is a relatively passive asset that doesn’t generate income. Therefore, when presented with excess cash flows, business executives often purchase property, inventory, or other assets such as stocks and bonds. These purchases have more potential to appreciate or generate revenue, but are less liquid or subject to capital gains tax upon sale. Some executives believe they have to choose between liquidity or growth, but there is a financial product that provides liquidity and is a tax-deferred growth asset.
Key-Person whole life insurance is a financial vehicle that permits this very circumstance. It’s more than insurance on the lives of a group of key employees. Rather, it can be used by business owners to preserve liquidity and allow their assets to grow on a tax-deferred basis.
The liquidity comes in the form of loans against the policy or withdrawals from the policy’s cash value. These can be done tax-free as long as the loan is repaid or a withdrawal doesn’t exceed the policy’s basis. The dividends of a whole life policy are not taxable income as they are seen as a return of premium, and in many cases can pay for the premium or be used to purchase additional life insurance. Lastly, the cash value gains on permanent life insurance policies are not taxed until withdrawn, meaning that year on top of year gains provide a significant return compared to cash.
Access to liquidity often means the difference between a business succeeding or failing. Key-person insurance is the nest egg that provides business owners and managers with the peace of mind that they are prepared in case of any financial emergency. A properly structured, key-person whole life insurance policy should be considered by any business that is looking to shore up its financial stability.
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