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Small Businesses and the Case for Annuities

Small Businesses and the Case for Annuities

June 10, 2024

Annuities are a well-kept secret in the small business financing world. Businesses can use these products in various ways, both to meet their own financial goals and to provide retirement benefits to owners and employees. Below, we discuss a few ways annuities can benefit small businesses.

What is an Annuity?

An annuity is a financial product that provides a steady income stream over a defined period. The person purchasing an annuity will either make one lump-sum payment or regular payments to the insurance company selling the annuity. In exchange, the insurance company will make regular payments to the purchaser in the future.

How Can Annuities Benefit Small Businesses?

One of the main benefits of an annuity is its ability to fit into any retirement strategy. Annuities can complement other retirement savings vehicles, like 401(k) plans or IRAs, by offering guaranteed income payments (much like a pension).

By purchasing an annuity, business owners can work toward having a steady income stream when they step back from day-to-day operations. This is especially helpful for business owners who don't want to sell when they retire. Instead, it can allow you to pass down your business to a family member or loved one.

It can be tough for small businesses to offer retirement benefits that compete with the big guys. Businesses can set themselves apart from the competition by offering an annuity in an age where even pensions are hard to find.

Annuities can also be useful outside the retirement context. For closely held businesses with multiple owners, annuities can be used to fund "buy-sell agreements." These agreements are used to help transfer ownership interests after an owner's retirement, disability, or death. By using annuities to structure the buy-sell agreement, small businesses can establish that adequate funds will be available when needed. There are additional tax advantages to this strategy you can discuss with your financial professional.

Finally, annuities can be used to fund "key person insurance" policies, which are designed to protect the business from financial losses resulting from the death or disability of a key employee. Annuities can accumulate cash value within the insurance policy, providing a source of funds to cover the costs associated with replacing the key person or sustaining the business during the transition.

Overall, annuities can be valuable financial tools for small businesses, offering retirement income security for owners and employees, tax advantages, and flexibility. But it's essential for small business owners to carefully consider their specific needs before diving in. Be sure to consult with financial professionals to determine the most appropriate use of annuities within their business strategy.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Annuities are long-term investment vehicles designed for retirement purposes. Guarantees are based on the claims-paying ability of the issuing insurance company.Withdrawals prior to 59 ½ may result in an IRS penalty, and surrender charges may apply.

This article was prepared by WriterAccess.

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