Posts filed under 'business life insurance'
For those of us who own and operate small businesses, we pour all we have into feeding our family, paying our employees and hopefully leaving something of value behind to our heirs. For many that entrepreneurial drive is cut short by a premature death and without adequate life insurance, those that would have benefited from all of your work, simply won’t.
Small business has become the backbone of the American economy and the primary employer in our country. Too many small business owners, often because it’s never brought to their attention, never look into protecting their investment by guaranteeing income replacement for their family, or ensuring the continuation of the business through a buy/sell life insurance policy.
For most of us, owning and operating a business is a daunting task. We’re in business usually because we are good at something. Very often starting a business leads us to a sudden realization that what got us there isn’t going to keep us going unless we learn how to run a business and how to protect it as we grow. I know that hiring my first employee and becoming a corporation and putting life insurance in place that wasn’t just about my wife and I, were all quantum leaps.
So, just a quick check list:
1. What would happen to your family’s income stream if you died?
2. What would happen to your business and your employees if you died?
3. How would any business debt be paid if you died?
4. If you are in a partnership, how will your portion of the business be handled if you die? Would a family member step in and take over your position or would you want your family bought out?
5. Do you have a business continuation plan in place or do the doors shut when you die?
Bottom line. We work hard to build our businesses and there is no reason that the business or the legacy of what we’ve done shouldn’t outlive us.
July 2nd, 2008
I swear, where a year ago I was thinking New York would probably miss this century also, they have now rocked the life insurance world by approving return of premium term insurance for sale.
Return of premium has been available in the rest of the country for years, but today ING Reliastar the first ever ROP products in New York. Until this release New Yorkers were left only to wonder what it would be like to use term insurance for protection, and having outlived it, get a full refund.
Forbes ran article almost three years ago extolling the virtues of ROP (every where but New York and Utah). Attached is that article.
forbes-return-of-premium.pdf
While there isn’t any doubt that the younger you are the more attractive the product becomes, it can still fill needs that no other products can. For instance, a key man business insurance policy. You can use a return of premium policy as an insurance/bonus program. If the key employee dies, the money is there to help the company through a transition phase. If the key employee lives, the company can bonus the tax free premium refund as a retirement gift.
Bottom line. Let’s all welcome New York to the rest of the country. Past due, but welcome. Question now is, will Utah ever jump on board. Don’t hold your breath.
February 21st, 2008
Small businesses, the backbone of American employment, often run by the slimmest of margins. I’m not talking about profit margins. I’m referring to the owner or one of the owners being just a heart attack away from leaving their family with the business or a partner trying to figure out how to buy the deceased partner’s family out of the business.
In either case, business insurance in the form of key man or buy/sell life insurance can save the company and your family the strain of trying to figure out what to do with their inherited new career.
There are so many unprotected partnerships out there that it boggles the mind. How would you like to have your partner replaced by one of his family members tomorrow? If you can’t afford to buy out the partner’s portion of the business, the family has a right to do what they need to do to replace the lost income. You could end up with someone “helping” you run the business that doesn’t have the slightest clue what to do.
If you are a sole proprietor, carrying life insurance to replace the lost income and carry the business until it is closed down, sold or turned over is critical. In the absence of that protection, your family will not only lose the income, but likely lose the business along with it. Rare is the small business that can be successfully taken over by your wife or another family member.
Bottom line. Ensuring the succession of your business with life insurance makes great sense and in most cases the cost is very low. Compared to the alternative it is always low.
February 14th, 2008
A what you say? To put in more meaningful terms, if your employer died today, would the company continue to exist? Is there a plan in place to keep the business going? If not, is there a plan in place to soften the economic impact on employees, especially key employees in the event of an untimely death?
Safe to say that there isn’t a day that goes by that a small business in this country isn’t faced with this situation, and if left unplanned for, it is not just a blow to the family of the deceased, but to everyone who depended on their jobs to take care of their families. A succession plan is simply a road map for the company, the heirs and the employees to follow to ensure the last economic impact on all.
Often in small businesses there is a key employee that, in the absence of the boss, could step in and run the company without any severe loss of momentum. Given the resources, this person could well step in and take over as the new owner and the company would have its’ future intact. Those resources, in the form of business life insurance, can be planned for in a succession plan.
In that model, an insurance policy could buy the family out and provide working capital for the transition. Legal documents would transfer the ownership of the company and its’ assets to the new owner.
Another avenue would be if the family wanted to maintain ownership and control. A life insurance policy that provides a pool of working capital is a prudent step. Even though the family may have a good working knowledge of the business, until customers see that a business if on solid ground, there may be some hesitancy about continuing a flow of orders until they are comfortable with the new leadership. In many cases, in spite of best efforts, customers will be lost. The capital to weather that storm and work toward new accounts and a new customer base will be crucial to the surival of the company.
Bottom line. Life insurance, usually in the form of term insurance, is an inexpensive way to ensure that faithful employees can continue a company beyond your death. If there is no desire or possibility that the company could or would continue on, life insurance can provide a reasonable severance resource that will help those employees move on.
October 31st, 2007
I had an email from a potential client today that said “I am looking for reasonably priced life insurance where there are no health questions and/or physical exam. If your group can fullfill these requirements than you can contact me”.
There are a lot of people who think life insurance companies are too nosy. Consider people purchasing business life insurance where the company would like you to simply divulge every financial detail of the business. I actually share the business person’s concern that much of what the companies ask for is unnecessary to the life insurance company and rather confidential.
“No health questions and/or exam?” “Reasonably priced?” I’m thinking he wishes his mother would still do his laundry too.
Since all life insurance pricing is based on mortality assumptions, the more a life insurance company knows about the risk, the more reasonably they can price the product. If they don’t know anything about the risk, it follows that the only way to cover themselves and the risk pool they represent (that would be you), is to offer less reasonable rates and products to those who don’t want to talk about their health or be examined.
To meet his needs we’re really talking about a guaranteed issue product. Guaranteed issue, just as the name implies, will issue insurance to anyone with usually the only caveat being that they have to fall between 40 and 60 years old. How can they do it? First, it is a whole life policy, so the premiums are high. The death benefit is generally limited to $50,000, so the risk is held down. And lastly, they have a 2-3 year waiting period before the death benefit is activated, giving them some cushion before they really assume the risk. During that waiting period, if a death occurs, the company will normally return all premiums paid plus a modest amount of interest to the beneficiary. That’s what you get with no questions and no exam.
Another option is no exam but some questions. Usually call a simplified issue policy, it relies on the application and information from the medical information bureau. These policies can be applied for on line and issued within hours. They are generally at standard or worse rates no matter how good your health is and they are generally capped at $250,000 to $300,000. This is the type of product that is usually used to underwrite children’s life insurance.
Bottom line. The best prices for life insurance, whether term insurance, universal life or whole life, will come with a full medical disclosure and an exam. Make the company comfortable with the risk and they will reward you with the best rates.
October 30th, 2007
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.
October 12th, 2007
In a post a few days ago I talked about the fact that women in business have several reasons to consider life insurance. On a site called Women’s Initiative , they presented a list from an article in the Birmingham Business Journal, of statistics about women in business.
As I read through that list it struck me that women may have already taken over the world and that their need for business life insurance is certainly as large as I had insinuated, and really more far reaching.
Left out of my thought process were women majority owners of stock companies. Life insurance has long been a key tool in keeping control of a stock company in the event of the death of a major stockholder, through the use of a policy for stock re-purchase.
Women as key persons in a business should be insured to offer stability to the business if there was an untimely death. Creative use of a return of premium refund policy can set that up to protect the company and reward the employee if they outlive the need for it.
Bottom line. Women are a powerful force in large and small business and they should seek counsel as to the best ways to put in place a business succession plan.
September 7th, 2007
Whether as an executive or CEO of a large business, or as owner of one of the small businesses that are the backbone of this country, women are increasingly in charge of companies and increasingly needing to consider life insurance as a way to protect that for their families or their employees.
Business life insurance has always played a key role in business continuation. We’ll discuss three ways that women can ensure that the value of their business passes in the right direction in the case of an untimely death.
In a partnership, a buy/sell policy is the best way to ensure that both partners get what they want in the event of a death. If a partner dies, their half of the company is owned by their estate. This leaves two options for the surviving partner. Either buy the deceased partner’s from the family, or consider that the family may either sell that part of the business to a third party, or become a part of the business.
With life insurance both partners carry on each other, in an amount equal to their portion of the business, if the unfortunate happens, the money is instantly available to buy out the partner’s family. The alternatives are much to unpredictable not to insure against.
In the second scenario, a sole proprietorship, the business in many cases has virtually no value to the businesswoman or her family. The value in many businesses is the income. In this case, life insurance is all about loss of income. You have a job that just happens to be owned by you. If the business doesn’t have any inherent sellable value, insure to replace income.
Third is something we don’t see often, but life insurance can make the difference in making this scenario work for your employees. There are often situations where employees, or at least a key employee could continue a business on. If there is no estate or family with an interest in the business, a policy large enough to effectively transfer the business would work. If there is an estate, a policy to pay the value to the family and transfer the business to the employee would work.
Bottom line. Women are more of a force in business all the time. Protecting that can be done most effectively with business life insurance.
September 3rd, 2007
Every profession has it’s share of dirt balls that will make a buck no matter who it hurts. The truth is that most of the unscrupulous types don’t last in the life insurance business, and leave damaged customers behind trying to make sense of what happened.
A rather fresh example of this is a friend who came to me recently. She and her husband are in their 70’s and both are in pretty poor health. They just got a notice from their life insurance company that their policy had lapsed after 55 years of paying premiums. When they took out a whole life policy 55 years ago, it was for $10,000 of insurance on him and she was a rider on the policy for $7500. This policy, really nothing more than a final expense life insurance policy, at least had a guaranteed level premium and death benefit to age 100.
In 1988 Mr Unscrupulous Agent, representing Great West Life Assurance, called them and said he could increase their coverage, and their payments would be even lower. He got them to use the $5000 cash value from their policy to fund the new policy. The new policy had an $18,000 death benefit for him and $10,000 for her. The agent assured them that the policy would last forever because of the dividends or interest that would be credited to the policy.
Well, Mr Unscrupulous was a nice enough guy, and they believed him, so they bought the new policy. Because of the large cash input up front, the policy held out very well as interest rates dropped and dropped and dropped. This year though, they got a notice saying their $150 a year premium was going to be $425.87. This was more than my friends can afford so they asked me to try to mediate a solution.
Great West Life Assurance, sadly a product of my own home state, Colorado, said that was the way it was. Tough luck for my friends. They went on to say that since the policy was now out of cash, next year’s premium would be about $1800 just to keep up with mortality costs. Mortaility cost increases with age, so it would be higher each successive year.
It is the contention of Great West that my elderly friends should have been able to tell there was a problem based on their annual statements. They should have seen that it was running out of cash. Even though the agent is long since gone, they should have been able to understand the intricacies of a universal life policy and have recognized that there was a problem and they should have known to call the home office before it ever reached this point. It was their own fault, and no, there was really nothing they could do about it. The Colorado Insurance Division is now reviewing the information.
55 years of faithfully paying premiums to a company and the company isn’t willing to clean up the mess that this agent made. If the agent had been client oriented and not commission driven, he could have told them to invest that $5000 and even at a modest return, by next year they would have had almost enough cash to replace what they used to have in insurance. Or better yet, he should have just left them alone. They had life insurance that was guaranteed and he ruined it. Great West allowed him to ruin it.
Because of health reasons, my friends are uninsurable now. They paid for 55 years and now their family will have to take care of final expenses.
Bottom line. Don’t take your own universal life policies for granted and if your parents have life insurance policies, dig them out and review them. Find out what is guaranteed and what isn’t.
July 23rd, 2007
Probably the most often asked question in life insurance. What is the difference between term and whole life? I will deal with whole life and universal life at another time, but let’s talk about term and what it’s really made to do.
Term life insurance provides a policy with a level death benefit and a level premium (payment) for a guaranteed length of time. The most common term lengths are 10 years, 15 years, 20 years and 30 years. Once you come to the end of that guaranteed period, the price is going to go up dramatically, so it is not a product that is designed to have in force longer than the guaranteed term.
While there are those that would argue that “they are just betting against themselves” when they buy term, they are just kind of missing the target of what the product is made for. If a person wants a policy to be there absolutely until they die, then whole life or universal is the answer. Another blog will cover that.
Term insurance is the right choice for probably 90-95% of life insurance needs for us normal folks. We all have pretty much the same three main basic life insurance needs and the truth is that those needs actually diminish and often disappear with time.
The first need is family protection while we have children that are dependent on us. We don’t want to leave prematurely and have our spouse and children suffer because of the lost income. Children grow up and go away and at some point (this is just a theory), and they are no longer dependent on us. If we were to die, they might miss us emotionally, but should be just fine financially. The need for that insurance goes away. It is a term insurance need.
The second need is also centered around replacement of income. After the children are out of the picture there is generally still a spouse who is partially, if not wholly dependent on our income. At retirement age several things come together. A retirement income will generally (more discussion in an upcoming blog) continue on to our spouse after we die. Social security will offer some part of offset in the financial change and lastly, this is the point in our lives where our assets are generally at a maximum. At that point income has been mostly, if not totally replaced and we have assets that can be used to further supplement the picture, reducing or negating the need for the large amount of term insurance that was carried for income replacement. The need goes away. It is a term need.
Third is our mortgage. As long as, at some point, people quit refinancing their homes every other year, our mortgage will get paid off or at least get paid way down. At that point the large amount of term insurance set aside for that purpose is likely not needed anymore. The need goes away. It is a term need.
That’s the big three, but there are plenty of places where term is simply the right product. I advocate term for use in most business life insurance. The truth is that businesses change and generally a term policy can be used to cover the particular need. Buy/sell agreements don’t usually go on to age 100. The need goes away when a partner retires. It is a term need. The bank wants a business person to assign all or part of a life insurance policy to back up a loan. The loan doesn’t go on forever. The need goes away when the loan is paid. It is a term need.
Sometimes for health reasons, term is all a person can afford. Something is always better than nothing. It is a term need.
Bottom line. Term is a great product for most needs. It is tremendously affordable. I’ll write more about how to make term work for those needs that don’t go completely away at a later time.
July 18th, 2007
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