One of the downsides to the cost of business buy/sell or cross purchase plans is that the cost of the life insurance premium is not income tax deductible. All of us in business know that we really would like air to be deductible if it could be arranged.
Let me qualify what I am about to throw out by saying that I am not an attorney or a tax accountant. If this peaks your interest, check it out with your attorney and accountant before jumping on it.
Let me run a real life case by you. It involves a company with two corporate shareholders. They built a commodity trading business together. Now the business is worth several million dollars. That value was substantiated by an outside third party offer to buy the enterprise for its fair market value. The principals wanted to be certain that each of their respective interests was protected and solidified in the event of death. They also were adamant that the business existed and continued to grow because of their unique talents and they did not want the other principal’s spouse involved in the business in any manner if death of the other principal occurred. They insisted that a corporate income tax deduction be allowable for the life insurance premium used to fund the buy-sell agreement. They heard from one life insurance agent that this wasn’t possible.
After making sure they understood that any decisions should be based only on the advice of their independent tax and legal advisors, we provided sample Section 162 Bonus plan language to the client’s attorney, together with appropriate sample buy-sell agreement language. In this instance, a Cross-Purchase plan was proposed because the funds for the premium payments would come from the principal’s own assets as augmented by income from the Section 162 Bonus plan.
Applications were obtained, individually signed by the principals, and submitted to Underwriting. The Section 162 Bonus plan was started by the client’s attorney, in concurrence with their accountant. Once the underwriting is completed and the offer from the carrier is received, bonus checks to the principals will be made by the corporation under the authority of the Board Resolution prepared. The executives will then issue checks to pay the premium. The process of a Board Resolution, a bonus check being issued to each of the two shareholders, and then each shareholder writing a check for the respective insurance premium on the other principal will be followed each year.
Bottom line. I wouldn’t recommend that a business go through this process for a small policy, but when millions are on line and the premiums are substantial, you bet a business owner wants every deduction they can legally get.
There are life insurance agents and there are people who also sell life insurance. What does that small difference mean to you?
I talk with my Farmers agent every so often about my auto or homeowners and he inevitably asks how business is going. It really leaves him scratching his head when he tries to rap his mind around the fact that I sell life insurance and nothing else. He just can’t get over the fact that I can place reasonably priced insurance for people with diabetes and heart disease. It slays him that I can write good coverage for cancer survivors.
His confusion comes from the fact that he is in the “insurance business” and a captive agent with Farmers and actually knows very little about life insurance, even though he is a licensed life insurance agent.
You will find this same phenomenon with any of the major property/casualty (auto and homeowners) agencies. State Farm, Farm Bureau, Allstate, Farmers, etc. What they specialize in, they’re very good at. What they don’t specialize in, but hang a sign out saying they can sell, they really don’t do their customers any good service with.
My office manager had a term life insurance policy with State Farm (prior to working with me), and she had asked her State Farm agent to provide quotes to convert the policy to whole life. For those not in the business, conversion is the closest thing we get to easy. No exam. No underwriting. Just quote it, sign here and put a new policy in force. The State Farm agent still hasn’t provided her any quotes.
Bottom line. Go where the knowledge is. If you need life insurance, go to an independent life insurance agent. The excuse that you have all of your other insurance there is just that, an excuse. If they don’t know how to sell it, they don’t know if they are doing a good job and they won’t know how to service it in the future.
About two-thirds of all private pilots belong to the AOPA, Aircraft Owners and Pilots Association. The AOPA is a self proclaimed advocacy group for pilots. One of the things they have pushed for years is life insurance through AOPA, underwritten by Minnesota Life.
I know some may get tired of me leaping on this soapbox, but the definition of advocate and what the AOPA and Minnesota Life are doing don’t match.
From www.thefreedictionary.com they provide this definition: ad·vo·cate
(dv-kt)
tr.v.ad·vo·cat·ed, ad·vo·cat·ing, ad·vo·cates
To speak, plead, or argue in favor of. See Synonyms at support.
n.(-kt, -kt)
1. One that argues for a cause; a supporter or defender: an advocate of civil rights.
2. One that pleads in another’s behalf; an intercessor:
This sounds like someone who is going to do the right thing for you. When it comes to life insurance, the right thing is to be represented by someone who is going to offer you the coverage you need at the best possible rate.
From this page on the AOPA website we find out that one of the benefits of buying AOPA life insurance is that the “AOPA receives revenue” from Minnesota Life. Guys, in my neighborhood that is called a kickback and the way Minnesota Life is able to offer a kickback is that they have the “advocate” of over 400,000 pilots helping sell overpriced, poorly structured life insurance products.
Bottom line. The AOPA really isn’t the best place for pilots to buy life insurance. I don’t know if they ever were, but they haven’t been for a very long time. If private pilots have their insurance through Minnesota Life, they can look down, way down, at lower prices and better product. Time to find an independent agent to be your advocate when it comes to this arena.
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