Insurance Insights
Advice from Brian Poncelet, CFP

1) Is your business safe?

2) Is your family protected?

3) If something happens to you what happens to your business?

4) Are your finances protected?

5) Have you taken steps to protect the health of your business?

There are three solutions to protect your business and your family.

1. Liquidation

Thes best alternative upon the death of a shareholder may be liquidation if:

-No replacement is set in place

-There is no cash on hand

-No or lack of corporate credit

Solution…Life insurance

-Can offset the shrinking value of good will

-Can provide heirs with the cash equivalent of the deceased’s business interest

2. Reorganization and retention

-Heirs are willing to and able to take over the business.

-There is enough cash to pay surviving spouse and equal inheritances for children not connected with the business

-There is sufficient cash to overcome losses during the changeover period.

Solution…Life insurance

-Can provide spouse with income until heirs are established as active shareholders

-Protects against financial hardship for all parties involved

-Can ensure business maintains financial stability and continues operations

3. Sale to Surviving Shareholders

Selling the deceased’s share will be a good option if:

-Customers and creditors approve transfer of the deceased’s business interest to surviving shareholders

-Continuation of corporate credit is assured

-Prevents the introduction of new, perhaps unwanted management

Solution…Life insurance

-Shareholders should establish an insured buy sell agreement that sets out the commitments to buy and sell the shares at an agreed value

Where do you go if you need special coverage?  There are some insurance companies that can provide coverage when no one else can…please call me for details.

Examples are:

• Coverage for those 65 and over who lose their Group LTD (long term disability) due to age – we can offer coverage to 65 year olds who continue to work but no longer have LTD.
• Coverage for Canadians who travel to or work in high risk countries and might need war/terrorism coverage
• Coverage for people in other applicable professions, such as: professional athletes, entertainers, pilots, high net-worth individuals, unearned income

High limit Disability Buy-Sell

An investment firm required $15 million life and disability buy-sell coverage on the majority owner, pursuant to the terms of their shareholder agreement.  They were able to obtain the life coverage in the regular market but could obtain at most $2 million worth of disability buy-sell coverage.  A policy was issued for the full $15 million required.

You should consider permanent life insurance if you:

-have a disabled child who will need financial help later in life

-have a cottage or large real estate holdings

-are looking for more tax deferred shelters

-are a business owner whose business has grown and is incorporated

Pricing

More expensive than term. However, there are pricing advantages in that permanent is usually much cheaper than term as one gets over 46 years old….

Example: a 35 year old male gets a $250,000 term 10 policy (rates go up at age 46) which costs $15 per month. At age 46 if his health is not the best, he can renew at $88 per month. At age 76 to age 80 this will be $1,665 per month and at age 80 the term insurance is gone!

You should consider Term Insurance if you:

-have a tight cash flow

-don’t have a real need for insurance once all debt has been paid.

-have good pension plans for you and your spouse

-do not need for to provide for children

-need lots of short term coverage, for the least amount of money

For term insurance always get a convertible policy that allows you to convert the life insurance policy without a medical.

Please review my Income Replacement Calculator, under the Financial Tools section on my main site.

For further information please call Brian (905) 338-7689

Many companies have life insurance on their partners, so in the unfortunate event of a partner’s death, shares can be bought out with the life insurance policy. But the most likely case is in fact a disability, so the partner may become – from the company’s point of view – “dead weight”.

Imagine if a partner has a heart attack: after 3 months he is back to work (no disability benefits were paid because of the 90 day waiting period or self insurance period), and his doctor has told him that he has to take it easy. So for this partner, only 10 – 20 hour work weeks are possible for the next several years.

Your best sales person is gone. But you can’t buy him out unless you have at least $500,000 cash. The critical illness policy could have taken care of that.

The Shareholders agreement should have a clear definition of disability. Example: mental and physical incapacity. The disability should be such that the shareholder or partner can not perform her duties within the business and a doctors certificate may be needed (example: “must be able to work at least 40 hours a week”). A time frame is also a wise idea – for example, how many days off work before the disability buy out starts (maybe after 6 months off).

Looking at a critical illness policy which will pay out a lump sum – tax-free – is probably the best way to consider this problem. A risibility policy, while good, will pay only 60% of the partner’s or shareholder’s income. This simply will not be enough to buy out the partner.

How to pay for these policies. An employer might also purchase critical illness policies on the lives of a group of employees. Each insured employee would be beneficiary of the policy on his or her life. The premiums should be deductible to the employer. However, a good case exists for this arrangement to be considered a “group sickness or accident insurance plan”, in which case no taxable benefit would be incurred by the employees for premiums paid by the employer. Plus, the employee would not be taxed on any benefits received.

The above is for illustration only; please contact me to review your situation.