Prefunding can be done with a corporate sinking fund, with increased allocations to qualified plans, with funds allocated to a rabbi trust or with life insurance. In the last case, consider how prefunding helps create a predictable and manageable exit plan for the owner, since the cash value of life insurance is acquired while the owner is insurable and still working.
If he retires, the tax-deferred accumulated cash values represent a source of retirement income. If he dies prematurely, the death proceeds offer a tax-free source of capital to his beneficiary. Depending on the jurisdiction and the way the life insurance is held, it may also be exempt from the reach of creditors. And, perhaps best of all, the business owner has funded this insurance on a fixed, predictable schedule. Premiums go into the insurance product, offering diversification, tax advantages and prefunding.
There is little question the economy has disrupted the plans of business owners, and the rebuilding process may be long and cumbersome. But advisors can help these owners peer into the future and begin planning for an eventual exit and retirement. Getting a handle on the owner's goals and finances can lead to a well-thought-out and adequately funded long-range plan.
Steve Parrish, JD, CLU, ChFC, RHU, is National Advanced Solutions Consultant with the Principal Financial Group.