Business Tools

Protecting Your Business

Many of us spend the better part of our lives building a business we can call our own. The pride, freedom and sense of accomplishment make all of the sacrifices worthwhile.

One of the keys to any successful organization is having good people in place. But good people aren't around forever. The death or disability of a key employee can send a business into a financial tailspin.

You can protect your business by protecting yourself and your people. At First Hawaiian Bank, we help protect employees and employers against financial loss associated with death or disability, and we can guide employers with business succession, split dollar agreements, and protection for business loans.

1. Protect Your Key Person
2. Exit Strategy
3. Business Continuation Strategy
4. Executive Compensation and Benefits Plan
5. Deferred Compensation

Protect Your Key Person
What if you lost your key employee? It will never happen!
Or could it? Every business has one or more key individuals without whom your business would not be able to grow and prosper. He or she is the reason why your business is successful.

It's not a pleasant thought, but what if this key person suddenly dies in an accident or from a sudden illness? Do you have a plan that can ensure your business can continue with the same success without faltering?

How you can protect your business?
Protect your business from financial disaster with a Key Person Life Insurance plan. It is a very cost-effective way to ensure that your business will have the necessary funds to replace the loss of a key individual with someone of the same talent or skill. With Key Person Life Insurance, your business applies for, owns, and is named the beneficiary of the insurance policy. Upon the death of a key employee, your business will immediately receive the insurance policy's death benefit. Businesses have used Key Person Life Insurance for many years to:

  • Protect the business from a monetary loss caused by the death of a key employee;
  • Provide funds needed to repay loans and lines of credit;
  • Fund succession and estate planning cash needs;
  • Secure the benefit plans offered to your key person and their family;
  • Provide capital through policy loans which may fund emergency needs, expansion or other business needs.

The advantages of choosing a Key Person Life Insurance Policy.

  • Protection. Simply put, this life insurance provides your business with immediate cash to replace the loss of the key employee or to cover the unexpected changes in revenue;
  • Immediate liquidity. Death benefit proceeds from a Key Person Life Insurance policy is paid immediately to your business so you can recover quickly;
  • Borrowing power. A Key Person Life Insurance policy can be designed to build significant cash value from which your business may access through policy loans or withdrawals;
  • Cost effective. Life insurance plans are simple to set up with as much flexibility as you require.
  • Confidence. Key Person Life Insurance can ease the concerns of your banker when obtaining business loans.

Adapt to your changing needs.
As the years go by your business will change and perhaps your staff will too. It is essential that you review your business goals with a qualified insurance professional who can help you to identify risks before they occur and to suggest solutions that can adapt to your changing needs.

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Exit Strategy
Building your Golden Nest-Egg
You've worked very hard to build a successful business. And with careful financial planning, you're looking forward to a long and successful future. When you're ready to retire, who will succeed you in running your business?

Establish an Exit Strategy
There are many complex issues to consider when planning to exit a business. First you need to ask yourself some important questions:

  • Do I plan to retire someday? If so when?
  • When I retire, how will your business fit into your retirement plans?
  • Who will succeed you in running your business?
  • Are you - and your business - currently protected against a sudden, unexpected event such as a disability or death?

Three Steps To An "Exit Strategy"
An Exit Strategy is simply a comprehensive lifetime plan which prepares you to exit from your business, whether it happens during life or at death. Your Exit Strategy should focus upon three key areas:

1. Establishing your retirement plan and reviewing it regularly.
2. Arranging for a succession plan: who will succeed you when you leave? And who will succeed that person?
3. Coordinating these retirement and succession strategies into your estate plan.

Planning for retirement
You've worked hard many years to build your business and you're finally ready to retire. Or can you? The primary financial concern of most business owners is saving for retirement. Sound financial planning strategies today can help ensure financial independence tomorrow. First Hawaiian can be your partner in designing a road map to success that will allow you to chose retirement on your own terms.

Planning for your successor
Your business is probably one of the largest and most important assets you own. But, if you plan to draw from it after you step away to retire, you need to be sure your business stays healthy. That means identifying your successor now and training him or her so that you can relax and enjoy your retirement while he or she runs the business.

If you plan to sell or give your business to a family member, have you considered the tax consequences? There are ownership strategies and insurance products that can make this transition smooth and the least costly in terms of taxes.

Planning your estate
Whatever your plans for your business, you need to be sure your own personal assets are organized to best fit with your business assets. This process is better known as estate planning. Lack of proper planning may cost up to 55% of our estate.

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Business Continuation Strategy
Who Will Run Your Business?
You've worked hard to build a great business. With careful planning, you're looking forward to a bright and successful future. What would happen to our business if you or another owner dies, becomes disabled, or wants to retire?

One of the keys to longevity of a business is to ensure a smooth transition of ownership during your lifetime or at death. Without an agreement between the current owners, you may risk the business being owned by an unqualified person or even perhaps a competitor. Proper planning can help business owners maintain control when a change of ownership becomes necessary.

A Business Succession Plan.
Invest now in a plan that lets your business have the funds to either buy you out (and let you retire with a nice nest egg). In case you die, those funds can provide our estate with the value of your ownership in the business. Either way, your business can remain stable and healthy...and can move right along without the prospect of facing a forced sale. Proper planning can ensure that the business you've created will succeed long after you've left.

Buy-Sell Agreement.
This succession plan is also known as a Buy-Sell agreement. The agreement gives the owners an opportunity to determine who takes over the business, whether it be family members, remaining partners, key employees or someone else. A life insurance policy is purchased on the life of each of business owner(s).

Upon the death, disability or retirement of an owner the agreement will:

1. Identify the purchaser, price, and payment terms for the sale.
2. Provide cash values or death benefits consistent with your agreement.

Advantages to You and Your Successor(s)

  • Immediate Liquidity. The cash values of an insurance policy or death benefits make funds readily available for purchasing and owner's share.
  • Cost Efficiency. Life insurance is a proven, cost-effective tool which may help to fund a business purchase may occur during your lifetime or upon death.
  • Stability. Ensures a smooth transfer of ownership and maintains current management.

Advantages to Your Heirs.

  • Protects Your Investment. A Buy-Sell Agreement fully funded with life insurance can automatically convert your business interest into cash upon your death.
  • Avoids a Forced Sale. When properly funded, a Buy-Sell Agreement lets the business avoid the threat and uncertainty of a forced sale.
  • Family Protection. The proceeds from the Buy-Sell Agreement can be used as replacement income for your family or to take care of other needs such as estate taxes.

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Executive Compensation and Benefits Plan
The Split-Dollar Plan: A Solid Foundation
The cornerstone of any successful financial plan is life insurance. For some individuals, this need is satisfied by cost-effective group term life insurance. However, most people realize that their group insurance plan is NOT enough. Business owners and key employees need even more life insurance protection to cover their personal and estate planning needs.

Every business is challenged with retaining and recruiting talented employees. With salaries being so competitive, supplemental plans have become a key ingredient in many compensation and benefit programs. One of these plans is called a Split-Dollar Plan.

What is it?
A Split-Dollar Plan is a selective benefit plan that provides life insurance benefits to both owners and employees. This plan can be customized to meet the employee's needs while providing options for cost recovery of premiums to the employer. As a non-qualified plan, split-dollar is easy to set up and has a very little administrative costs.

How does it work?
Split Dollar can be designed in a variety of ways, depending upon the needs of the key people you have in mind, and your benefit objectives.

In general, a split-dollar agreement between you the employer and your key employees splits the premium, the cash value and the death benefit of a permanent life insurance policy. The details:

  1. Who pays the premium?
    Although the business usually pays most of all of the non-deductible premium, the employee may pay a small portion. By doing so, the employee avoids paying income tax on the value of the life insurance.
  2. How is the cash value determined?
    It depends upon how you design the benefits and how much premium is paid. Typically, if the Split-Dollar Plan is designed as an equity plan, the employee will own any policy cash value in excess of the premium costs paid by the company. (Consult your tax advisor concerning the tax consequences of this arrangement.)
  3. How is the death benefit distributed?
    Upon the death of the employee, your business will recover its cumulative premium payments. The remainder of the benefit is paid to the employee's designated beneficiary.

What happens upon retirement?
The split-dollar arrangement is usually terminated or "unwound". Depending upon how the agreement was set up, the employee may have the option to purchase your company's interest in the cash value. Or the employee may be required to reimburse the business for the cumulative premium costs.

What are the advantages to your business?

  • Flexibility.
    As this is a non-qualified plan, you have the freedom to select which employees will be offered the plan and what the level of their benefits will be.
  • Better Retention.
    By giving your key employees extra coverage, you can reward them for their extra value to your business.
  • Cost Recovery.
    Your business can eventually recover nearly all the costs of the premiums it has paid by sharing the cash values and the death benefits.

What are the advantages to your employees?

  • Low-cost Coverage. Actually far lower cost to the employee than either group term or individual term life insurance.
  • An Ideal Supplement. Equity Split-Dollar Plans can provide excellent supplemental income for employee retirement plans, as well as supplemental coverage for group life insurance plans.

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Deferred Compensation
The Scenario
Finally, you have your business humming. You have a good product or service. You have a great reputation. And you have excellent employees.

But... what have you done to retain your key employees? How do you encourage them to stay with your company? It's not easy when there are tight restrictions on how much you may contribute to a qualified retirement plan. Highly-paid key executives want, and expect, more retirement benefits than what your company's qualified retirement may allow. And, if you can't offer stock options, the problem is even worse.

You need to hang onto your key people - Let us show you how!

The Solution
A simple strategy can be used by a business owner whereby the key employee or executive receives added benefits should they remain with the company. Also known as the "golden handcuffs," an insurance policy can be structured to provide additional retirement benefits by deferring income taxes until the retirement benefits are paid. This technique has become an attractive benefit which helps to retain your key employees.

How It Works
The technique is called a nonqualified deferred compensation plan. And it can be provided only to a select group of your managers or other highly paid employees. Its purpose is to serve as a supplement to your company's regular qualified retirement plan (also known as a Supplemental Executive Retirement Plan or "SERP").

A life insurance policy is used to informally fund the plan which may be financed out of your business revenues. These benefits are deductible as a business expense, when paid out. Key executives covered by this policy do not have to declare the premium payments as income. Therefore, no income taxes are paid (i.e. deferred) on this benefit until they retire and begin receiving the benefits.

Flexible in Design
Nonqualified deferred compensation plans are considered a business asset and may be structured to benefit your business AND your key executives. For example, insurance may be used to informally fund the pre-retirement and retirement benefits and to recover all the costs to the corporation.

Advantages to Your Business

  • Key Employee Retention.
    A deferred compensation plan encourages your best employees to stay with your company.
  • Selective Participation.
    As a nonqualified plan, you may select only your highly paid executives or key persons to participate in a deferred compensation plan.
  • Cost-Effectiveness
    Business life insurance is a cost-effective tool to accumulate tax deferred cash values with the added value of death benefit protection for future funding needs.
  • Advantages to Your Key Employees Retirement Income.
    Significantly reduces financial worries for your key employees by providing additional security and retirement benefits.
  • Tax Advantages.
    Income taxes on the benefits are "deferred" until received during retirement.
  • Family Protection.
    If your employee dies before retirement, many deferred compensation plans provide for significant pre-retirement benefits.

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