Posts filed under 'buy/sell life insurance'
What happens to a business partnership when one of the partners passes away is of particular interest to both the family of the deceased and the surviving partner. If a plan is in place the transition can go smoothly. If there is no plan in place it can be everyone’s worst nightmare.
For the family of the deceased partner there are two things that have just happened financially. First, they have lost the income that was derived from the business on an ongoing basis. Hopefully there was a personal life insurance policy in force to cover that possibility.
Second, and a bit more complicated is the status of the partnership and the value of the deceased’s portion of the business. Even though there has been a death, the family of the partner who died, in most cases, has the right to either be paid the value of that portion of the business, or in many states they can actually take over the responsibilities of that portion of the partnership. Paying out the value of the partnership can be an untenable burden on the business and it is not uncommon for it to be the cause of the end of the business. To have a family member move in and take over as partner can be equally untenable as the likelihood is that, well, they just aren’t the same person with the same knowledge and the same long term working relationship. It can often be a train wreck.
The answer lies in a legal buy/sell agreement funded by life insurance policies on both partners or however many partners there are. The legal document spells out the agreement of the partners that upon a death the life insurance proceeds will be used to buy out the deceased partner’s widow or family at an agreed upon price. Because obviously the value of a company can change dramatically these plans should be reviewed on a regular basis to make sure that they buy out is at a fair price.
In most cases term insurance is the appropriate product for buy/sell funding for a couple of reasons. First, partnerships seldom reach the longevity that would justify a permanent policy. Very few partnerships last to the partner’s ages in their 90’s or 100’s. Second, because businesses change and business value changes, term insurance is a more flexible product.
Bottom line. Families rely on both the income and value of partnerships and prudent planning protects both of those.
July 31st, 2009
That’s an easy one. If you can think of a person in the company, whether that is you, your partner, a long time key employee or board members that make the whole thing work, whose death would cause a financial stumbling block, there is a need for business life insurance.
In addition, if your company runs any significant amount of ongoing debt, business life insurance on the principals of the company is a must. Business life insurance is there for many of the same purposes we all carry personal life insurance, the difference being that if not handled properly it’s not just your family that can be affected, but the family of your partner(s) and possibly the very viability of the company and the people it employs.
Just a brief overview of a few policies that business owners should consider. Buy/sell agreements are a real must when it comes to businesses where two or more people own the business. Funded by life insurance on each of the owners, it allows the company, upon the death of an owner. to buy out a family’s interest in the business. In most states if an agreement is not in place, the surviving owner either has to come up with the money to buy the family out or, if the family wishes, they can replace the deceased partner with someone of their choosing. From a practical standpoint the surviving partner really doesn’t want to be in a position of having to accept a new partner whether they want to or not. Their options are left open through a fully funded buy/sell agreement.
Key person insurance is often overlooked, but is vital to company continuity upon the death of a key person. That person could be a plant manager, a business manager or an office manager. It is that these people have become so key to the everyday running of the company that creates the need for a key person life insurance policy. With this type of policy, the company becomes the beneficiary and can use the money to overcome the obstacles that pop up due to their loss. It could be that these are the people who kept the customer base loyal. It could be that this was the person that helped the employee base be so productive.
An influx of cash upon the death of a key person in your company can provide incentive money to hire the right replacement person in a quicker time frame. It might provide smaller per employee bonuses to keep the team together and working hard during the transition. There really are no restrictions on the creative use of the money. A business owner might even use the money to fund a retreat for key customers to get their input and the qualities a replacement needs to bring to the table.
If the death of a partner will have an impact on the productivity of the company, the owners should consider carrying life insurance to pay off any debt the company has. The extra slack created by having the debt paid off could be just what it takes to ensure the company isn’t strapped during the adjustment period.
Bottom line. The death of an owner or key employee in a company can wreak havoc with the very ability of the company to survive. A well considered business life insurance policy can ensure a company will have the cash flow to deal with any number of challenges.
May 18th, 2009
It’s been a fascinating couple of years. I will sum it up by saying that we have helped a lot of people get life insurance who never thought they could. And what better way to celebrate the information we’ve shared and the victories we’ve had than with a shared meal, a key word salad.
Diabetes has been at the forefront of our life insurance efforts from the very start. We’ve made huge headway in finding aggressive underwriting for type 1 diabetes and type 2 diabetes. I think our strong point has been in education. There are a lot more people out there today that know what their A1c is than when we started.
I’ve been very clear about where some of the problems lie in our industry. The AARP/New York Life collaboration, on what can only be described as a sick crime against older folks, continue to offer the worst term insurance and whole life insurance in the business. They are simply not the advocate they claim to be.
I’ve stepped on some toes along the way. Selectquote and Zander Life insurance have taken exception to some of my observations. Being a Dave Ramsey fan and I think, ultimately, a reasonable person, I did apologize to Zander. In spite of Selectquote’s berating commentary, I still stand by my assertion that they are biased in what companies they offer (otherwise they wouldn’t be so easy to beat) and I still believe that Suze Orman should go back to waitressing. As to their assertion that I only use Selectquote and Suze Orman for search engine optimization, well, I don’t, even though they think I do. If I didn’t think there was better service elsewhere and more honest advertising, I would never have mentioned Selectquote.
We’ve touched on scuba diving and Prudential being a leader in great rates for recreational divers. Pru also stomps the competition on prostate cancer, sleep apnea and mild anxiety issues. While providing direction on those issues we have also been able to provide direction for those involved in skydiving and foreign travel to places where kidnap and ransom insurance is more than just a casual thought.
We’ve stayed abreast of the economic meltdown and recession that have whacked us all and tried to help people understand how best to handle their life insurance needs in these tight times.
We’ve held lengthy discussions about obesity and the impact it can have on other health issues such as hypertension or high blood pressure, cholesterol, heart disease, heart attack, stroke and cancer. We’ve discussed the risk and benefits of gastric bypass surgery as a means to avoid the life threatening side effects of being over weight.
Probably our biggest response has been from those suffering from depression and bipolar disorder. We reached a group of people that have truly been black balled in the insurance industry and we’ve been able to find some level headed underwriting and hit some major home runs for those who have the name tag but lead normal lives.
We have bared the facts behind the black eye of all black eyes in the insurance industry, the non guaranteed whole life, universal life and variable universal life policies and explained the alternatives in the permanent insurance market. There is nothing that provides greater value and peace of mind than a rock solid guarantee.
We’ve had frank discussions about business life insurance such as key man insurance and buy/sell life insurance. We did a whole series on women and life insurance. We’ve provided direction and information to private pilots that they aren’t getting anywhere else. We’ve talked about the guts of the policy when it comes to the two year suicide and incontestability clause and the accelerated death benefit and the beneficiary rights and the beneficiary issues for those who aren’t in a legal relationship such as a gay couple or an unmarried couple.
Bottom line. And the list goes on and on. We’ve tried to leave no stone unturned and no question unanswered in our quest to find life insurance for those whose mortality risk might be more challenging than average. As an independent agent it has been gratifying to have so many ways to help those who have been mishandled by the wrong agent or the wrong company. As we continue to reach out my prayer is that all who need help find it, and that more agents consider serving those who are harder to help.
March 18th, 2009
For those that sell whole life or universal life they would have everyone believe that term insurance is a product developed by insurance companies to keep from paying death benefits. The only way to have life insurance is to have it go on for life, says them.
What they fail to acknowledge is that all life insurance needs are not going to last forever. The truth is that most, yes most, life insurance needs are temporary. I concede that there are permanent needs, but what I won’t concede to the last day I spend counseling families in this business, is that that permanent shoe fits all feet. And for those who don’t need it but buy it because they were “sold”, they have been the victim of an injustice that grossly overcharges them with the only true beneficiary being the agent who committed the injustice.
Just a recap of some examples where term is so obviously the right choice. If I have young children and need to know that there is money for their well being while they are still dependent on me, barring that instance where a profoundly handicapped child could be dependent their whole life, the need is completely covered by a 20 year term, 30 years if you are planning more children or want to cover them until they have a Masters degree.
If I have a business partnership and have a buy/sell agreement funded by life insurance, it isn’t a permanent need unless we really believe that we will still be active partners at age 100 or beyond. I’m in business and I think most business people would agree that locking in a life insurance best guess at the value of the business for longer than 10 years is foolish. My own business model uses the 10 year term for business purposes simply because businesses change too fast to lock in anything longer and assume it will be accurate.
If I have 15 years to go to retirement and at that time I have a retirement plan that will meet my financial needs with a good spousal continuation benefit, I really have a 15 year need, 20 tops. I don’t need to be throwing thousand of extra dollars a year into a permanent insurance policy when that money could be going toward paying off my house or beefing up my retirement options.
Bottom line. For every permanent need out there, there are twenty term insurance needs. Don’t get sold whole life or universal life until you’ve seriously studied the term alternative.
February 10th, 2009
Ah, the almost age old question, term versus whole life. What is the right thing to do? Forgive me for being more than just a little opinionated on this subject, but personally I think that is a right for anyone that is on the right side of an argument.
Whole life insurance, a cash value building permanent policy is one of the earliest versions of life insurance. Whole life insurance is sold as a savings plan with life insurance, a retirement plan with life insurance, a loan source with life insurance and I’m sure by some, a fountain of youth with life insurance. Whole life insurance is generally sold by life insurance agents that believe that whole life is not just the best way to buy life insurance, but the only way to buy life insurance.
What they don’t tell you, primarily because it would end their career, is that whole life insurance is a horrible savings plan, a worse retirement plan, a silly place to borrow money from and unless it is in fact a fountain of youth, it is grossly overpriced. The cash value that does build in a whole policy doesn’t magically appear but rather dribbles in as the leftovers from your huge premium payments after the internal and company charges. You get the honor of earning a little bit of interest on the little bit that is left. A good example is a policy my Dad had with New York Life. His parents started it in 1935. It had a $1000 death benefit. Since 1935 the premium payments paid have totaled $1387 and the cash value in the policy is now $723. Now there’s some bang for your buck!
Term insurance on the other hand is essentially pure insurance. There is no cash value. No bells. No whistles. Just a guaranteed level premium for a certain period of time (the term) and a guaranteed level death benefit if you die while the policy is in force. Depending on your age you can get guaranteed terms ranging from 10 years up to 30 years.
Term insurance is a small fraction of the price of whole life insurance and really, from a practical standpoint, more appropriate. The truth is that most, and I am thinking that is 95% or more, of life insurance needs are not permanent needs. We carry life insurance because we have a spouse and children who are dependent on our income. Children, theoretically, reach a point where they are no longer dependent on us. That’s a need that goes away. Term insurance! Replacing an income for our spouse is a need that should resolve itself at retirement or sooner if our assets outgrow the need for income replacement. That’s a need that goes away. Term insurance.
Although I’m surprised it was never offered along with all the other magic mortgages of previous years, there are no life time mortgages, so life insurance for mortgage protection is a need that goes away. Term insurance. Business partners that carry business life insurance as a buy/sell life insurance agreement aren’t likely to still be business partners to age 100 or beyond. That coupled with the fact that most businesses and the associated value to a deceased partner’s family change over time makes the need or at least the size of the need a temporary situation. That’s a need that changes or goes away. Term insurance.
Bottom line. When there is a product that is available (term insurance) that meets 95% or more of all life insurance needs and you have people selling whole life insurance and they claim that it is the best thing for all needs, a lot of people are left wondering why. It’s called compensation. An agent makes a lot more money selling whole life than term. Yes, I’m saying that whole life is a product that is primarily sold for the benefit of the agent.
January 31st, 2009
I wrote some time back about the problems that can potentially occur when a person has life insurance with someone who is not related as the beneficiary. The potential problem only exists during the two year incontestability period when part of the claim process involves a review of medical records.
If there is a death during that period, a claim kit is sent out to the beneficiary and part of that claim kit is an authorization to release medical information. This enables the company to acquire the medical records necessary to confirm that the cause of death wasn’t known, but not revealed, during the underwriting process.
The potential problem comes up if the beneficiary doesn’t have legal standing to sign an authorization to release the records of the deceased. Wives have that standing. Fiancee’s don’t! Business partners with a legal buy/sell life insurance agreement have that standing. Business partners who just take out the policies and don’t have a legal buy/sell agreement drawn up don’t! Husbands and wives have that standing. Gay couples don’t!
In the absence of legal standing the authorization will not be accepted by doctors and hospitals who are so afraid of HIPAA laws. The next logical step is to have someone who does have legal standing sign the authorization, but that’s where things became sticky for my clients. The relatives of the deceased were mad because the fiancee was the sole beneficiary of the policy and they refused to sign the authorization. Aren’t people just awesome?
In this case it took five months for the beneficiary to finally get a court order forcing the release of the records to the insurance company. That came today. Now, where were we? Now the company can get on with processing the claim.
So how can this be avoided? If someone who is not related to you is important enough to be the beneficiary of your life insurance, make sure they also have a medical power of attorney that allows them to sign a release of records authorization.
Bottom line. A lawyer and a few extra bucks can save a huge hassle.
January 29th, 2009
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
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
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
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
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