One of the most crucial challenges business owners face in today’s environment is retaining top talent. Attracting and acquiring talent is hard enough, but once leaders have invested the time and resources to hire great people, they are then faced with the additional challenge of retaining those hires as competitors with resources attempt to cherry pick from other talent pools.
Companies are luring employees away from their competitors with attractive benefits packages that go well beyond a traditional 401K and health coverage. In order to prevent the poaching of their workforce, business owners need to proactively implement and utilize those same tools to retain their top talent. For the purposes of this article, top talent refers to any employee whose contributions are vital to a business’s success. Often, that’s C-Suite executives, heads of sales, vice presidents and controllers, but it also could refer to rising stars at any level.
There’s a whole world of products and solutions out there to retain talent, many of which offer attractive benefits not only for employees, but also for business owners. With taxes on the rise, owners are always looking for additional tax deductions, while employees seek tax-favored retirement solutions layered on top of traditional offerings. Cash value life insurance is becoming an increasingly popular retention tool because of its ability to do both.
Life insurance is one of the last great tax friendly vehicles. Cash value life insurance uses the wrapper of insurance to secure the related tax benefits for both the employer and the employee. It’s an effective way to layer additional benefits on top of traditional retirement plans. The money inside the policies grows tax-deferred (similar to a 401K, IRA, SEP), but without the contribution limitations of an IRS-regulated plan. The employee can withdraw funds while they are still living, and the money comes out income tax free though policy loans. Cash value life insurance also provides life insurance coverage for an employee’s spouse/family, which would be a hard cost to them if they were to buy it on their own. So, in the event that an employee dies during their vesting period, the company owns the insurance, and the liquidity goes back to the company.
One of the most public and famous examples of life insurance utilized as a retention tool is University of Michigan Head Football Coach Jim Harbaugh. The university utilizes cash value life insurance-based solutions to provide Harbaugh with millions of dollars of tax-free cash in retirement, through a vehicle and on a vesting schedule that are both favorable to the university.
When considering retention tools, it’s vital that business owners retain flexibility in such plans. With cash value life insurance, not only is the money that an employer contributes a tax deduction to the business, but the vehicle also allows for incredible flexibility. Unlike a qualified plan like a 401k, which must be offered to all employees, cash value life insurance allows employers to pick and choose to which key personnel they want to offer the benefit. Additionally, the employer determines each plan’s vesting schedule, which could be based on different factors for different employees. So, while it’s an attractive benefit for an employee, a vesting schedule that requires an employee to stay a certain number of years, hit a specific sales goal or bring in a designated revenue number, increases the likelihood that the business owner’s goals are met, as well.
Implementing tools to retain top talent is just one step owners and operators should take to protect their business. Incorporating Key Man coverage and Buy/Sell coverage are two more critical steps for business owners.
Any employee who drives a substantial amount of revenue needs to be properly insured with Key Man coverage. If that employee is suddenly unable to work due to death or disability and that revenue stream dries up, the company takes a major hit without the right coverage. Not only does it lose the revenue that person drove, but it’s also hit with the hard costs of replacing a valuable employee (headhunter, signing bonus, relocation, training, etc..). It’s imperative that business owners identify those key employees and cover their risk through insurance.
Similarly, proper succession planning and Buy/Sell coverage ensures a smooth transition in the event of the death of a business partner. A well-structured Buy/Sell document, funded with life insurance to create liquidity, will protect the business and surviving partner’s interests. Without it, the deceased partner’s spouse would take their stake in the business, regardless of expertise or competency. This is a very easy and cost-effective solution.
Business owners: how long has it been since you have assessed key employees or had a formal business valuation done? The COVID-19 pandemic has caused many changes in valuation, and an accurate valuation is the foundation for securing Buy/Sell coverage.