Posts filed under 'buy/sell 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
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
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
Most small businesses, which provide the majority of employment, kind of fly by the seat of their pants when it comes to the area of life insurance and a business continuation plan. Just some food for thought. In the US today, you are more likely than not to either own a small business or be employed by a small business.
Whichever category you fit in to, there is a critical question that needs to be addressed. It affects your family. What if the owner, or a partner (oneof the owners) in a small business dies? Obviously, in the absence of adequate life insurance, whoever passes away will leave behind a family with some very hard choices.
Does the family sell the business? Truth is most small businesses are worth what the company earns while the owner is alive. Does the family try to continue the business? The truth is that generally family members aren’t interested in or capable of running the business. What usually happens in the absence of adequate life insurance is the employees are laid off and the physical business is sold for whatever it can bring.
Business life insurance can take the burden off the family, off the employees and off the business.
If it’s a partnership, a buy/sell agreement whereby both partners have life insurance, guarantees a fair price to the family of the deceased partner. If it is a corporation or sole proprietorship, a life insurance policy can allow the family to pass the business on to an employee or employees.
If you own a business or work for a small business, have a discussion with an independent life insurance agent today about what would really happen if you didn’t come to work tomorrow due to your death. It is a sobering thought when you consider the impact on the lives of your family, and your employees and their families. The cost is minimal in reality and almost invisible in proportion to the potential damage.
June 14th, 2007
How often do we hear it? A friend or family member has had a heart attack or been diagnosed with cancer at an age that is just, well….wrong! We expect health problems and death when someone gets into their 80’s. It’s not nearly so common in their 50’s and 60’s, or even 70’s anymore. But there’s that once a year shocker where somone we know that is in their 30’s or 40’s has some serious health issue diagnosed. Quite often we hear about their death. The question is, if they knew it was coming, would they consider life insurance differently?
I’ve been there and understand that bomb proof, immortal feeling at that age. We see bad things happen to the wrong people at the wrong age all the time and, because we have a shield of immortality (or denial) around us, we think we are somehow living in a different world. Certainly it could happen to them, but not to us.
Consider for a minute that there is something that would cost less than a dinner out every month. Life insurance can be that inexpensive and in will ensure the future of your family in the event you happen to get being one of them. It can not only insure you now, but it can also guarantee, or lock in your insurability for later years when the chances of health problems increases. Wouldn’t it be great to know that you were still insuring your family’s future for the cost of a dinner a month when you had recently been diagnosed with type 2 diabetes, breast cancer or melanoma. Once you have that great rate, it can’t be changed just because your health does.
Maybe life insurance isn’t the most popular subject, but it’s one that should be discussed earlier rather than later. Better that business partners set up a buy/sell agreement and buy business life insurance when they are both healthy. Better that a husband and wife discuss the real needs and make a purchase that will ensure financial security while they are young. I personally think buying juvenile or children’s life insurance with a guaranteed insurability feature is a tremendous gift. One they may not understand for years, but one that can make a huge difference for them down the road.
Like I said yesterday…..it’s time to talk about it. Too much is left undiscussed and as a result, not acted upon. How about we have a very frank discussion for the forseeable future about this whole idea of pulling all of our collective heads out of the sand and taking a look a reality? I’m up for it!!
May 3rd, 2007
In the excitement of starting a new business all the focus is generally onward and upward and the tendency is to kind of overlook the downside to success. This is more prevelant in partnerships, but is also a real problem for sole proprietors and corporations. Business life insurance can protect your family from losing the fruit of your labor and can also keep someone else from owning part of your business if a partner dies.
The obvious need for a business owner is to carry enough term insurance to make sure that all the debts of the business are taken care and don’t become a burden to your family. Most small businesses don’t have any real “market value”, so your heirs won’t really have anything to sell if you die prematurely. A life insurance policy can replace the lost income value of that business to your family.
In the case of a partnership it becomes more complicated. In most states if a partner in a business dies, their portion of the business is left to their heirs, their family. So you could go home one night and come back the next day with a new partner, one you may not want to work with at all or one that may not have any qualifications to work in the business. This problem is best solved by putting together a buy/sell agreement and funding it with buy/sell life insurance policies.
Then, in the case of an untimely death, the life insurance policy would provide the funds necessary to buy out your partner’s portion of the business. I know in my business I would much rather come in that morning and know that all of this was planned for and everyone will get what they need. Contact a good independent life insurance agent for quotes today on business life insurance.
March 27th, 2007
My mother never told me running a small business was easy. In fact it went something more like, “wouldn’t you be better off getting a real job?”
Whether you are in business for yourself, or work for someone, your future can be in jeopardy if you, or they, have not adequately protected the business with business life insurance. The untimely death of an owner, partner, or key person in a business when there is no business life insurance such as a buy/sell insurance policy or key man insurance in place can be the beginning of quick end.
We often think of life insurance just in terms of protecting our family from the loss of income if a parent should die, or in terms of final expense or burial life insurance. The unexpected death of a business owner or key person can have a dramatic impact, not only on their family, but on the employees of the business and their families.
If you own a business and don’t currently have business life insurance, meet with an independent life insurance agent soon and review the structure and financials of your business. The agent can then make recommendations and provide insurance quotes that help your business become a legacy to your family and your partner(s) and employees, rather than a loss to them all.
In most cases you will want to look at term insurance or possibly return of premium term insurance rather than universal life or whole life. Why term insurance? The truth is that most businesses change too rapidly to make locking in even the longer terms or permanent insurance. A more prudent approach is to look at each aspect of your business and consider the proper term length. It may take more than one life insurance policy, but with term insurance being as affordable as it is, you should certainly be able to protect your business without significant impact on your budget.
So, mind your own business! A good steward of a business will ensure that the business will survive them.
February 25th, 2007
Needless to say, these kinds of events can definitely present you with some challenges. Partnerships are tricky enough. Without the right business life insurance or buy/sell life insurance policy in place, the partnership can remain tricky long after the deceased partner is gone.
In general, a business partner’s portion of the business would be passed on to his or her family upon death. This can take place in a few ways.
One scenario is that the spouse or a surviving child of your partner would move into the partner’s old position and continue on kind of like nothing ever happened. A problem can arise if that spouse or child isn’t qualified to do the job, in which case you would probably prefer they weren’t there. A problem can also pop up if their aren’t any family members who want to step in, but they can’t afford to just walk away from the income generated by the half of the partnership they used to enjoy.
A buy/selll life insurance policy, usually a term insurance policy, can alleviate the problem. Each partner would carry an amount of insurance adequate to buy out the other partner’s portion of the business. That would provide the funds necessary to formally purchase the partner’s interest in the business from the deceased partner’s family.
So, what happens if your business partner wakes up dead today? Before that happens, get together with an independent life insurance agent and get some life insurance quotes today. Discuss a binding agreement with an attorney. You’ll be surprised how a little money can defuse a potential time bomb.
February 15th, 2007
