For many optometrists and practice owners, it probably feels like you are a long way off from ever getting to a point where you'll be able to provide bonuses to your key personnel. Or, maybe you did so previously but never felt it achieved the resounding motivation and effect you were hoping for with your employees? Rest assured this is all too common of a feeling for many reasons; your business is your life.
You take all these risks, but these short-term cash bonuses ultimately end up feeling kind of flat and lacking in any of the long-term impacts you were hoping for. Sound familiar? If so, consider some alternative solutions to offset this type of everyday business challenge—how can I reward my top-performing optometrists today and keep them motivated and thriving for tomorrow?
A better way to bonus
Instead of providing ODs with bonuses as cash payments, consider leveraging their bonuses into a long-term financial tool for your key employees and a potential benefit for their families!
Cash-value life insurance can be that tool, and an executive bonus strategy can be the solution. This simple, tax-deductible strategy can provide supplemental benefits to your best optometrists and staff. You can be selective and reward only top performers as well, something very different than the heavily regulated retirement plans such as Simple IRAs and 401(ks)of which many successful optometric practices are also implementing.
Why cash-value life insurance?
Cash-value life insurance is a long-term financial tool that provides several benefits during your employee’s entire life, both while working and after retirement! If you don’t think your top employees are thinking enough about retirement, guess again! Millennials, many of whom have grown up in households where they saw their parents and grandparents struggle from the effects of the most recent 2008 recession, will especially appreciate this option.
Employers who are thinking comprehensively and out of the box about their ODs’ work AND personal lives are the ones who are being rewarded the most.
The importance of cash-value life insurance while working
What makes life insurance helpful while one is still employed?
- Life insurance provides death benefit protection funds to help ensure your employee’s family is cared for financially, should he or she die unexpectedly.
- The cash value that grows within the policy provides a source of funds that can be used during your employee’s lifetime, such as a down payment on a future home, or even purchasing the business from you one day (if they are an associate OD looking to be groomed for succession planning).
Benefits of cash-value life insurance after retirement
What aspects of these plans will help you after retiring?
- The same death benefit protection that comes with the original policy can be used for estate planning needs, including tax-efficient asset transfer to heirs upon the employee’s death.
- The cash value that has accrued over years, has accumulated and compounded tax-deferred and can now be accessed in a tax-advantaged way to supplement retirement income.
How does an executive bonus with life insurance work?
- You (employer) pay a tax-deductible bonus to your employee(s).
- Your key employee pays income taxes on the bonus amount (no different if cash bonus via W-2 paycheck), OR, you may choose to pay the income taxes for the employee as an additional bonus, i.e. double bonus!
- The employee takes out a personal life insurance policy and names a beneficiary with the help of your trusted financial advisor/business planning consultant.
- The bonus is used to pay the premium on the life insurance policy to company XYZ.
- Since the employee will own the policy, he or she may use the policy’s cash value on a tax-preferred basis. “Tax-preferred basis,” meaning the premium $ grow tax-free and there are several ways your employee can access the cash in a tax-advantaged manner.
- If the employee dies at any time, the death benefit is payable to the beneficiary chosen on file.
Why consider using this type of bonus strategy?
These strategies provide a variety of benefits that more people should be taking advantage of.
- Easy implementation with straightforward administrative efforts (financial advisor handles most of the paperwork)
- Bonus is reported to IRS as compensation
- Deductible as a business expense
- Minimal cost to administer
- Selective nature of bonus – you can choose to reward only highly compensated management or associate ODs.
- There are no IRS mandated qualifications other than compensation must be reportable
- Flexibility – can be terminated at any time; customizable for each key employee
In summary, considering a different approach to the normal “cash bonus” that is quickly spent and often less appreciated in the long run may be a prudent business decision for your optometric practice. If you consider looking into ways to attract, retain, and reward your top talent, strongly consider working with a financial professional who can go into full detail about your options regarding cash value life insurance as bonus tool for your employees as well as many other alternative solutions such as 401(k)/profit-sharing plans, non-qualified deferred compensation strategies, golden executive bonus agreements (GEBA) and employer-owned life insurance (EOLI) policies, all of which have similar but still different characteristics than the aforementioned concept illustrated here.
Information provided by GCG Financial, Inc. should not be considered tax or legal advice. Should you require tax or legal information, please consult your tax advisor or attorney.