I recently came across a business owner that had been in business for 30 years. For those here in business less than 10 years, we may feel that this business owner had "made it."
He survived and beat the odds and the statistics that say 98% of small businesses will not make it past 10 years.
Digging deeper into the situation, the business owner had been profitable for over the last 25 years.
This business owner wanted to know when he could retire?
So, one of my first questions was about what type of retirement account he has? He said he never set one up but that his current 'advisor' recommended a couple insurance policies that would serve as an "investment and insurance. "
After reviewing the policies that his 'advisor' recommended, what I found was the following:
1. He had 2 cash value life insurance policies.
2. He had been funding them for over 20 years.
3. He did not have another tax-advantaged retirement account open.
When asked why he didn't open a retirement plan for his business, he said he felt like he couldn't afford it. He found the insurance policies easy to 'invest' into because the money was automatically taken out of his bank account and he counted it as part of the cost of running his business.
Here's the problem with cash value insurance policies of any kind: IF you were to die, you lose all the cash value you built up and only get paid on the face value of the policy.
Here's an example: Say a business owner had a $500,000 cash value insurance policy. And say they had been funding it for 20 years and now they have $100,000 built up in cash value. He has been paying $700/month for this policy.
Sounds great right? If something were to happen to you, your family would get the $500,000 plus the $100,000 right?
If something were to happen to you, you would only get the $500,000 and the insurance company keeps the $100,000.
Sounds crazy right? Yes. But, it's true.
What if the business owner would have purchased a $500,000
30-year term insurance policy? If he was healthy at the time of purchase, the cost would be somewhere near $60-70/month.
Say the business owner opened a good retirement plan (solo-401k, 401k, SEP IRA, SIMPLE IRA) and would have invested the rest of the money.
Average interest: 9%
For the last 20 years
Current value would be: $386,771
So just by making this one move, this business owner would have almost $387,000 in his retirement account and still have his $500,000 life insurance policy.
Not only that, he could have received a tax deduction every year for contributing that money!!
The difference is, his family gets to keep BOTH the $500,000 and the nearly $387,000 if something were to happen to him. This is not enough for him to retire on, but it's a start.
This is one of the fatal mistakes that happen WAY too often to business owners.
There is one key statement from this example I want you to take away. The business owner said: He found the insurance policies "easy to 'invest' into" because the money was automatically taken out of his bank account and he counted it as part of the cost of running his business.
There are a couple things I want you to see here:
1. You should never say you are 'investing' in an insurance policy. Insurance policies are meant to transfer risk, not invest in. And,
2. This is what it means to understand the TRUE COST of running your business. Yes, you need to understand all of your expenses: fixed, one-time, and variable. But, you also have to include YOUR retirement contributions as a cost of doing business.
If you don't take care of yourself, then who will? The government? I don't think so.
My fellow business owners, if there's one thing you do this month, make it a MUST to understand what the TRUE COST of running your business will be.
Figure out how much you need to retire, figure out how much you should be contributing now, what type of tax-deferred or tax-free retirement plan you should open. Then, the PROPER insurance you need for yourself and your business. (The most underinsured area I find for business owners is disability insurance. You have a 1 in 4 chance to become disabled. This can be a higher priority than life insurance for most)
If you need help with this, I would be happy to help you out. We have business insurance specialists to get you the right coverage, CPA's that will help you lower your taxes, and investment specialists to help you plan for retirement.
Whether you need help getting all of this setup, or you just want a second opinion, feel free to contact us and we can schedule some time to chat.