Covering key employees with key person insurance

Your employees help make your business a success. Some employees may be especially key to that success, bringing unique skills, expertise, talent and decision-making power.

Key person life insurance is a powerful way to protect your business from the potential loss of those key employees.

How key person life insurance works

With key person insurance, your business is typically the owner of the policy and pays the premiums. If you use permanent insurance, you have access to any cash values through loans¹ as business needs arise.

If the employee dies, an income tax-free death benefit is paid to your business, minus any loan amounts, to help you get through a difficult time after the loss of a key employee.²

Key person life insurance can help you:

Protect with a death benefit: A life insurance death benefit can help your business transition after the death of a key employee.
Access cash values: Use permanent life insurance to build cash value that you can access through policy loans when your business needs it.
Add flexibility with riders: Certain available policy riders can add additional protection from events such as disability or employee retirement.

Your financial professional can help you explore key person insurance as a protection strategy for your business.

¹ Loans and withdrawals, if taken, will reduce the death benefit. Loans and withdrawals from life insurance policies that are classified as modified endowment contracts may be subject to tax at the time that the loan or withdrawal is taken and, if taken prior to age 59½, a 10% federal tax penalty may apply. If tax-free loans are taken and the policy lapses, a taxable event may occur.

² Income tax-free death benefits on employer-owned life insurance policies assume compliance with IRS guidelines including Internal Revenue Code Section 101(j). Employers should obtain a signed notice and consent from the insured before policy issue to help keep death benefits income tax free.

This material provides general information that is designed to be educational in nature and is not intended as specific tax or legal advice to any particular individual nor the law of any particular state. Please seek the advice of a qualified tax or legal professional for your specific situation.

Important documents for estate executors to locate

As you work through the planning process of closing out your loved one’s estate, you may struggle with where to begin.

Here are some important documents that you should locate to help you prepare for filing claims or meeting with the estate attorney.

Certified death certificate
Last Will and Testament and trust documents
Social Security card
Individual and group life insurance policies
Disability income, annuity, and property insurance policies
Safety deposit box number, location, and key
Birth certificates of all surviving children
Marriage and/or divorce papers
Name and phone numbers of current employer
Employer benefit plans, pension plan and 401(k)
Real estate papers, such as deeds and mortgage documents
Important tax documents
Statements for all bank accounts
Automobile titles/registrations
Instructions for funeral proceedings
Deed to cemetery plot
Military service serial number and dates of entry and discharge
Veteran’s benefits

Planning for retirement success

If you’re saving for the future, or have already built up a sizable retirement nest egg, you’re off to a great start. But achieving the retirement you envisioned takes more than just saving. A successful retirement plan requires building up savings, and then turning those savings into lasting retirement income.

Annuities can help you:

Ensure retirement income: Annuities offer multiple income payment options, including guaranteed income for life.
Increase retirement assets: Annuities may offer growth opportunities with higher return potential than CDs, treasuries or other fixed investments.
Leave a legacy: Annuities’ death benefits can help ensure that the assets you built for retirement are able to help protect the people and causes you care about once you’re gone.

Annuities can provide an extra layer of protection, while also helping you build up the assets you’ll need to not only survive retirement, but also thrive throughout retirement.

For example, Fixed Indexed Annuities may offer higher growth potential than CDs or treasuries and ensure you can’t lose any retirement assets due to poor market performance. They can also provide an income stream that’s guaranteed to last throughout the rest of your life.

Consider these important factors

As you and your financial professional build a retirement income strategy, consider important factors like:

Your planned retirement age and future income needs
Employer benefits, personal savings, and estimated government benefits
Your current and future savings capability
Your risk tolerance, and how it may evolve over time

Together, you can find solutions that fit your needs and budget, and help all of the pieces of your plan work in harmony.

Annuities are issued by the AuguStar Life Insurance Company. Guarantees are based on the claims-paying ability of the issuer. Guarantees do not apply to the investment performance of any index.

Early withdrawals may be subject to surrender charges. Withdrawals may be subject to ordinary income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply. Fixed annuities are not insured or guaranteed by the FDIC or any other government agency.

Fixed indexed annuities (“FIA”) are long-term investment vehicles designed to accumulate money on a tax-deferred basis for retirement purposes. Upon retirement, FIAs may provide an income stream or a lump sum. If you die during the accumulation or payout phase, your beneficiary may be eligible to receive any remaining Contract Value.

Products, product features, and rider availability vary by state. Issuer not licensed to conduct business in NY.

Protection for your business and valued employees

One of the best ways to keep highly valuable employees is to offer fringe benefits. One benefit that can be mutually beneficial to you as the business owner and your valued employees is a split-dollar plan.

How split-dollar works

Through a split-dollar plan, you enter into an agreement with your employee through which you share the rights and obligations of a life insurance policy.

As the business owner, you generally pay the policy premium and your employee, as the insured, has the benefit of life insurance protection at an affordable cost. The benefit continues as long as the split-dollar plan is in force (typically, as long as the employee works for you). If the employee leaves the company or passes away, you have certain rights in the policy, depending on the type of split-dollar plan chosen.

Split-dollar plans can help you:

Offer a benefit with mutual protection: Your employee gets life insurance protection while your premiums may be returned on the benefit if the employee leaves the company or passes away.
Be selective: Unlike a qualified retirement plan, you can be selective when you choose which employees get this benefit.
Have flexibility in policy design: From how premiums are paid to who owns the policy, split-dollar plans can be designed to meet the needs of your business.

Your financial professional can help you explore split-dollar plans as a protection strategy for your business.

Products issued by AuguStar Life Insurance Company, member of Constellation Insurance, Inc. family of companies. Product, product features, and rider availability vary by state. Guarantees are based on the claims-paying ability of the issuer. Issuer not licensed to do business in New York.

Four estate planning steps

If you’re like most people, you’ll work your entire lifetime to accumulate assets: a home, cars, savings, real estate, investments, etc.

The comparatively small amount of time and money required to create an estate plan will help ensure that your assets are passed on with the best possible tax consequences to your beneficiaries.

A good estate plan will:

Ensure that your wealth reaches the individuals or organizations you select, in the manner that you choose
Help to minimize the effect of federal and state taxes
Help to ensure settlement costs are paid without jeopardizing your family’s inheritance

Here are four basic estate planning steps.

Take an inventory of your assets

Your inventory should include your home, jewelry, stocks and bonds, bank accounts, insurance policies, retirement plans, and other property. Note how they are owned. Next, take a similar inventory of your debts and liabilities.

This estate planning workbook can help you track your assets.

Determine your estate goals

For example, do you want all your assets to go to your family? Do you want any assets to go to charity? Do any of your children have special educational, medical, or financial needs?

Your goals can also be documented on the estate planning tool. More importantly, the final wishes need to be included in your will or trust. An estate planning attorney can guide you through this process and draft important documents.

Develop an organized plan for the payment of taxes and expenses

The payment of state and federal taxes cannot always be avoided. There are options for meeting tax liabilities:

Use existing liquid assets.
Sell estate assets which could result in the assets being sold at a loss due to forced sale conditions.
Life insurance is often the most cost-effective solution as it is generally income tax-free and can be used to pay taxes and estate settlement costs, thus protecting the value of your estate.

Review your plan

At a minimum, your estate plan should be reviewed every three to five years or any time your life or circumstances change dramatically. If you encounter any of the following changes, they can alter your estate plan significantly:

Marital status
Ownership or value of property
Birth of a child or grandchild
Tax laws
Income or employment status
Business ownership
Relocation

Periodically reviewing any wills and trusts will help to ensure that your plan still accomplishes your goals in a tax-efficient manner.

Now is the time to plan

There is little that can be done after death to create a plan. By working with your financial professional now, you can enjoy the peace of mind knowing that a plan is in place to help preserve your estate for your beneficiaries.

Life insurance loans: Flexibility when you need it

In addition to providing financial protection for your loved ones, owning a permanent life insurance policy (whole life, indexed whole life, universal life, indexed universal life or variable universal life insurance) can offer some flexibility when you need it.

When you own a permanent life insurance policy, your policy has the potential to build cash value and you may be able to access the cash value if you need it through a policy loan.

The loaned funds can be used however you’d like. Loans can serve as a source of supplemental retirement income, help with a loved one’s college tuition, or help pay for unexpected expenses.

How do life insurance loans work?

When you borrow money, the cash value in your policy acts as collateral for the loan. The loan does accrue interest and is added to the loan balance.

You have control over when and how you repay the loan. If the loan is not repaid before your death, the policy death benefit will be reduced by the outstanding loan balance.

Here are some pros and cons to consider:

Pros

No credit check, income, or approval process. Your financial representative or customer service can share if any forms are required for a loan request.
You choose your payment plan. There is no required payment plan or payback date for a life insurance loan.
The loan is not reported to credit agencies and will not appear on your credit report.
Policy loans are not taxable as long as the policy stays in force.

Cons

Loan interest is charged and added to the loan balance.
The death benefit will be decreased by the amount of the outstanding loan and loan interest.
To keep the policy insurance coverage, the policy’s loan balance cannot exceed the total cash value in the policy, since the cash value is serving as collateral for the loan. If the balance and any interest exceeds the total cash value, payment may be due, otherwise the policy can lapse which would result in loss of insurance and adverse tax consequences.

Loan FAQs

Have more questions about loans? These frequently asked questions may be helpful:

How much can you borrow for your life insurance policy?

The amount of money you can borrow against your policy is directly connected to the policy’s cash surrender value – the higher it is, the more you can access in a loan. You can’t, however, borrow more than the cash value of your policy (including the loan’s interest charges). To find the cash value of your policy, you can log into your account and check the “Cash and Loan Values” sub-tab under “Policy Summary.” Use this value as an estimate only. The value may be different due to incoming payments, expenses, etc. To get the most accurate loan value, please contact Customer Service by clicking the “Contact” tab (be sure you are logged into your account). You can fill out the contact form to start the loan conversation. Or, call 800.366.6654.

Are there tax implications to taking a loan?

Generally, loans are tax free. However, if your policy were to lapse, and you had borrowed more money than you paid into the policy, then there may be tax implications.

When do you have to repay a life insurance loan?

With a life insurance loan, you get to choose when and how you want to repay the loan. There is no set payment plan.

How do you repay the life insurance loan?

Loan payments may be made in full or partial payments via automatic bank draft or check and are applied to the current year’s interest first and then to principal. There may be other payment options depending on the type of life insurance that you own. Talk to your AuguStar financial representative or Customer Service at 800.366.6654 to find out which options may be available to you.

How do you make a loan request or borrow from your policy?

Start by talking to your AuguStar financial representative or by calling Customer Service at 800.366.6654. Depending on the amount of your loan request, you may need to complete a form. Limited loan amounts are available via phone.

How long does it take to get a loan?

From the time the request and any necessary paperwork is received, it usually takes five to 10 business days to process the loan and send a check or to direct deposit the loan proceeds.

Consult your representative before taking a withdrawal or loan. Withdrawals and loans may cause loss of the no lapse guarantee. In addition, withdrawals may incur substantial charges and tax penalties. Withdrawals and loans will reduce the death benefit and cash surrender value. Surrender charges may apply to withdrawals. Consult your policy to see if surrender charges apply.

If you are considering the use of policy loans as retirement income, you should consult your personal tax adviser regarding potential tax consequences that may arise if you do not make necessary payments to keep the policy from lapsing.

If tax-free loans are taken and the policy lapses, a taxable event may occur. Loans and withdrawals, if taken, will reduce the death benefit. Withdrawals (partial surrenders) and loans from life insurance policies that are classified as modified endowment contracts may be subject to tax at the time that the withdrawal or loan is taken and, if taken prior to age 59½, an additional 10% federal tax may apply. Always consult with a tax advisor regarding your particular situation.

Essential planning for a loved one with special needs

Caring for a family member with special needs can be a commitment for a lifetime and beyond. A major concern for most families is what the future looks like for the loved one with special needs. Having a plan in place for your loved one can help bring peace of mind.

While every family’s needs will be unique, here are some basic considerations for any plan.

Last will and testament

A will is the foundation of any estate plan. Without one, your assets will be distributed according to your state’s intestacy laws. Usually this means that, upon your death, some or all your assets may be distributed directly to your children.

This may cause your loved one with special needs to be ineligible for government benefits if he or she is your child. Also, the state will determine guardianship of your minor children and of any adults with special needs who are incapable of making medical or financial decisions for themselves.

With the help of an attorney, a properly written will (in conjunction with other estate planning documents), can help ensure that your loved one with special needs is taken care of properly, and by the guardian of your choice, without jeopardizing any government benefits or assistance they qualify for. This may include discussion of establishing a special needs trust.

General durable power of attorney for financial affairs

Your loved one may not be able to make key legal decisions for their own future. This may require you to establish a durable power of attorney (DPOA).

A DPOA is a written document that gives another person you entrust the power to manage your loved one’s financial affairs and property should you become incapacitated. A general DPOA typically allows the person you designate as your agent or “attorney-in-fact” to do every legal act that you could do.

Durable power of attorney for health care

The durable power of attorney for health care is a limited DPOA created solely for the purpose of making health care decisions. It gives your designated person the power to make medical decisions for you when you have lost the ability to do so. This may be necessary when your loved one with special needs requires help with decisions about their health and medical care.

Now that you have the basics of a plan, planning an estate for a family that includes an individual with special needs requires extra steps like these to provide for the individual’s future:

Drafting a letter of intent

Now that you have the basics of a plan, planning an estate for a family that includes an individual with special needs requires extra steps like these to provide for the individual’s future:

Creating a guardianship

A guardian is a person lawfully given the power and duty of taking care of a person who is considered incapable of administering his or her own affairs. Designating a guardian and successor guardian(s) is a critical aspect of drafting a will.

An individual with special needs may still need a guardian upon reaching the age of majority. Typically, once children reach the age of majority, they become their own legal guardians, regardless of their ability to manage their lives or financial affairs. If yours is incapable of making medical or financial decisions, you will need to file with the court for legal guardianship.

You will want to give special consideration to who you name as guardian, and power of attorney for financial decisions, as they require different skills.

Providing financial security

Individuals with special needs may require higher out-of-pocket medical and/or educational expenses than those without. Many of the available government benefits are need-based.

If there are countable assets and/or income in excess of certain dollar amounts owned by an individual with special needs, their benefits may be jeopardized or payback for benefits received may be required.

Planning for the financial security of an individual with special needs should involve consideration of any impact to qualification for government benefits. A special needs trust funded with life insurance may be the right solution.

Next steps

Planning for the future of your loved one with special needs is a big task, but assistance from a financial professional can make all the difference.

Surprising ways business owners use life insurance

You know your business inside and out, but do you know all the ways you can use a life insurance policy to protect or grow your business?

Most think it’s a policy that pays a death benefit to your loved ones when you die. And they’re right. But life insurance can also be useful for business owners in ways you may not have considered.

Here are a few ways life insurance has proven to help business owners meet challenges and work toward building their business.

Protecting your business against loss

Many business owners know life insurance can protect families if a primary breadwinner dies, but it can also help protect your business if a key employee dies. You may have employees who help drive your organization or bring in crucial sales. What if suddenly they were gone?

Many employers use life insurance to protect their businesses from the loss of a key employee. Key person insurance is a policy that makes your business the beneficiary of a death benefit to provide needed income as you make a very difficult transition after losing an important employee.

Securing a loan

One way a business owner can use life insurance is to help secure a business loan. Certain banks and lenders may allow you to list life insurance as an asset when being considered for a loan. Other lenders may allow a collateral assignment, where a business owner with a life insurance policy collaterally assigns the policy to the bank/lender.

If you die, the bank receives their portion of the death benefit based on your loan collateral agreement, covering some, or potentially all, of your loan amount. This can reduce your risk as a borrower and play a role in securing a potentially lower loan interest rate.

Saving for a rainy day

Permanent life insurance policies build cash value within your policy as you pay premiums. This cash value can serve as a rainy-day fund in lean times for your business because you can take out loans¹ from the life insurance policy against that cash value.

There are less credit score worries for your business to qualify for a loan, because the life insurance company will use your cash value as collateral. The loan will likely have a significantly lower interest rate than what you can secure from a bank.

Sweetening the pot for your employees

Many business owners use life insurance as a fringe benefit to valuable employees. From executive bonus plans to split-dollar agreements, life insurance can be used to recruit, retain, and reward valuable employees who are crucial to the success of your business. And because it’s not a qualified benefit like a 401(k) plan, you can determine who is eligible without having to offer to all employees.²

Leverage to meet challenges ahead

Many business owners like you have been able to leverage the features and flexibility of life insurance to meet challenges head on and keep their businesses moving in the right direction. This isn’t a solution you should work out on your own though. Your financial professional can help you determine which life insurance policy could help you meet your specific needs, budget, and circumstances.

¹ If tax-free loans are taken and the policy lapses, a taxable event may occur. Loans and withdrawals, if taken, will reduce the death benefit. Withdrawals (partial surrenders) and loans from life insurance policies that are classified as modified endowment contracts may be subject to tax at the time that the withdrawal or loan is taken and, if taken prior to age 59½, an additional 10% federal tax may apply. Always consult with a tax advisor regarding your particular situation.

² Consult a tax/legal professional for guidance; conditions apply.

Important reminders for a loss of a loved one

When you lose a loved one, it can be overwhelming on where to start with notifying people and handling the final details.

Groups to notify

In addition to contacting close family and friends, here are some other suggested groups to notify of the loss of your loved one.

Attorney

Notify the family attorney, the executor and any trustees (if it’s someone other than the widow/widower)
Locate important documents, including the will
Review the will and file it with the probate court
Work with the attorney to change the deed on the house and update any other property ownership information, if applicable

Financial professional: Contact the financial professional to get assistance with filing the death claim with the insurance company and help you navigate important financial decisions.

Bank: Contact the bank about accessing individual accounts or removing the
deceased spouse’s name from any joint accounts.

Creditors: Notify creditors, close credit card accounts and cancel ongoing payments and subscriptions.

Employer: If the deceased spouse was still working, contact the employer.

Social Security office: If the deceased spouse was receiving Social Security benefits, you may not want to spend any payments that arrive after the spouse’s death. It is very likely the government will request that those payments be returned.

Crucial tasks to think about in the near future:

Obtain 10-20 copies of the death certificate from the funeral director
Change the title on vehicles
File tax returns (states have their own deadlines, but federal estate tax returns typically must be filed within nine months of death)
Take any required minimum distributions from the deceased spouse’s retirement accounts (the penalty for not doing so is 50 percent of the amount that should have been taken but was not)
Change the number of tax exemptions with your employer
Stay on top of regular monthly bills (setting up auto-pay online can be helpful, if it isn’t presently in place)
Remove the deceased’s name from home utility bills
Review insurance including auto, homeowners, health, disability income (DI) or life insurance policies to see if name changes are needed and pay any insurance premiums
Re-evaluate day-to-day finances (for example, if your spouse was still working, the loss of income might require altering spending habits)
Update any beneficiary designations on documents such as wills, insurance policies, mutual funds, stock, and bonds

This provides general information that should not be construed as specific legal or tax advice nor the law of any particular state. Please seek the advice of a qualified legal or tax professional for your specific situation.

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How much life insurance do I need?

Although it is easy to see the benefits of having life insurance as a way to protect your family, it is more challenging to determine the right amount. To help you figure out how much you need, here are a few starting points to consider.

Calculate your potential premiums

There are various ways to get a ballpark figure on how much life insurance coverage the average family should have, but one of the easiest places to start is a life insurance calculator. This term life insurance calculator will calculate annual life insurance premiums based on the coverage amount you input. You may be surprised to find that term life insurance is more affordable than you thought.

Think about your expenses

While a calculator can be a place to start, the figures are just a guideline and don’t reflect your unique needs. Talking to your family and loved ones will help you identify those needs. Here are some questions to consider:

What’s the plan to move forward if you’re no longer around to help care for the family?
What are the total expenses of your mortgage, taxes, and other monthly bills?
Do you have any outstanding debt?
What is your plan for college tuition costs?

If you can project these expenses out over five years, you’ll have an idea of the minimum life insurance coverage you’ll need.

A financial professional can help

You and your family may have other unique needs that should be addressed, too. Perhaps you own your own business, have a blended family, or care for a family member with special needs.

Talking with a financial professional is an important step in helping you find a solution that fits your unique needs.

Not only do they bring expertise in helping you design a strategy, financial professionals can ask helpful questions to guide your conversations, and help you think about financial challenges from a different perspective. They will help you determine how much coverage you need and can also show you ways life insurance can be used beyond helping to provide protection for your loved ones.