Buy-Sell Agreements, Insured Retirement Plans, Business Contingency Planning or Succession Planning: Life Insurance Has a Role in your Business
Whether you’re purchasing life insurance to satisfy a buy/sell agreement, creating an Insured Retirement Plan to get money out of your business in a tax favourable way, for business contingency planning or succession planning, life insurance can fulfil a very cost-effective and tax-effective function within your business. There are a lot of insurance carriers offering a lot of different products, so how should you decide what solution or insurance company is right for you and your business?
- Cost: If the only thing you are concerned about is a straight payout if something should happen to you within the term of an insurance policy, then price can be your most important criteria. All the insurance carriers are reputable and financially strong and will honour a legitimate claim. For the young, healthy person, the cost can be relatively cheap, but the likeliness of paying out is relatively slim.
- Term or Permanent Insurance: As the name indicates, term insurance covers a specific period of time. It’s the least expensive option in the short term. However, each renewal becomes considerably more expensive and cannot be renewed beyond the age of 85. There is no residual or cash value built into the policy. Permanent insurance is intended to pay out a benefit at some point. You also have the option of overpaying into the policy and building up residual cash value. Depending upon the type of permanent insurance (Whole Life or Universal Life), how much and how long you pay into the policy, you can leave a guaranteed death benefit and build up a considerable cash reserve. The cash grows tax-free within an insurance policy and depending upon how you access the cash value can be accessed in a very tax favourable manner.
- Underwriting: Some insurance carriers are more risk-averse than other insurance carriers. The higher the risk tolerance of the carrier, the greater the cost of the insurance carrier. Some carriers reward healthy lifestyle choices, clean medical history or family history with lower premiums. Some carriers have less stringent medical requirements, potentially no medical underwriting or only a questionnaire to gain life insurance. Generally speaking, these more tolerant carriers have lower life insurance limits. If you are healthy, make sure you are aware of the difference in the underwriting criteria before applying. On the opposite scale of things, if you’ve had some health issues, lifestyle challenges or a family history of illness, make sure you apply to the appropriate carrier for your coverage. What you don’t insurance record is a decline, postponement or rating with an insurance company. If you are afraid that you may fall into a questionable category on whether you’d be approved or not, you also have the option to fill out a Trial Application or get a preliminary underwriting assessment by the carrier in question to require you to answer.
- Convertibility: Another powerful consideration for choosing an insurance company are the options available for the policy owner to convert from term to permanent life insurance at a certain time in the future. Some carriers have great options, and others are minimal to choose from. Ask your advisor not only how it can affect you today but also the various options to convert to in the future.
- Been Sick in the Past?: If you’ve been sick in the past, especially within the last 5 years, underwriting for certain carriers may not even consider your application. Other carriers will assume a certain amount of risk, and you may get approved or have standard rates. What you don’t want to have happen, is be declined with a certain carrier and then go to another carrier that may not have as strict underwriting guidelines. One of the qualifying questions for these less stringent underwriting carriers is “within the last 2years, have you been declined coverage by an insurance company?” Your advisor should pair you with the appropriate carrier for the risk of your coverage.
- Permanent Insurance Policy Performance: Along the same lines of the convertibility from term to permanent, is the performance over the years of the various permanent insurance options. Whether it’s a Participating Whole Life Policy or Universal Life policy, check the past performance and, if appropriate, the annual dividend payout percentage.
- Guarantees: If a life product premium seems unusually low, ensure that they have guaranteed renewals and guaranteed convertibility. Most of the time these come standard issue but there are some options, usually due to price attractiveness or to only cover for a definitive period of time. These are crucial considerations. Once a life insurance company approves your application, they are underwriting the risk until you turn 85 (end of a term policy) or until death (permanent policy) with the appropriate renewal rates to reflect upon this risk.
- Trial Applications: If you have a precarious health or lifestyle history, ensure that the selected carrier will make a Trial Application. A Trial Application is not considered a formal application, and they base the information upon a questionnaire and the Attending Physician’s Statement (APS). Based upon receipt of this information, the carrier will do a preliminary underwriting report to give the applicant an indication of Acceptance, Decline or Rating. Based on the preliminary findings, the applicant can choose to proceed with the formal application or not. In the event of a decline or rated trial application, the applicant can choose to go to another carrier or not.
Life insurance for business owners is a fundamental and strategic way to mitigate against risk and strategically get money out of your business in a tax-effective way. In the case of permanent insurance, you want to pay the least amount for the Net Cost of Pure Insurance (NCOPI). The less your NCOPI, the more money that can go toward the Cash Value of your life policy.
Ask your Advisor why a certain carrier is being selected for your Life, Critical Illness or Disability policies. It’s important to be aware of all the potential variations and variables when selecting the appropriate carrier.
Chris Coulter is the Founder and President of The Finish Line Group. Chris works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies and allow them to create a strategy to exit their businesses on their terms.
Chris’ passion for what he does evolve from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversites and ultimately control where their finish line ends.