How banks view lending money to business owners.
Banks follow established rules, which include asking a business owner to collateralize a loan, not just with business assets, but also with personally owned assets, such as a principal residence and cottage. Collateralization can include requesting a spouse’s co-owned assets to be collateralized, even if the business is incorporated.
Add to that a possible collateralization of any assets of a partner or adult child (and their spouses) who also share in ownership. Small business owners can lose their shirts if they default on a loan.
What if an owner dies? It is unwise to assume that a good relationship with the bank will continue if the heir of a small business, or a partner, is not in favour with the bank manager. Bank managers can change or apply strict policies while reassessing leniency shown to previous owners or administrators.
Eliminate any doubt in a family business, such as a farm, by insuring the oldest owners and succeeding generations using joint-first-to-die policies or individual life insurance policies. In the case of a non-family business, each owner/partner should be insured to cover the company’s debt. When the life insured dies, the tax-free life insurance proceeds can be used to pay back loans and, essentially, win back ownership and discharge any liens of personally owned assets.
What if there is a critical illness? For the same reason, small business owners should consider purchasing a critical illness (CI) insurance policy on each of the principal business owners and key persons. CI insurance could pay off a considerable bank debt if one were to experience a major illness such as a heart attack or stroke. One could end up incapacitated and may need to be bought out by a partner or an heir (there should be a buy-sell agreement in place). The risk of a loan being called increases when an owner-manager is sick and the bank manager loses confidence in the stabilising influence of that owner.
Start-up firms and smaller companies are especially vulnerable to potentially devastating financial risk because they often lack big company sophistication and in-house risk-control expertise. We will help you gain control of your financial risk.
- Life Insurance We help business leaders provide appropriate life insurance to pay off debts and/or the mortgage, educate the kids, and/or provide income for a spouse or a disabled dependent.
- Disability Income Replacement Insurance We will examine your need for income replacement insurance that can help replace your paycheque in case you get hurt or sick.
- Key Person Insurance We will assess your need for an insurance policy designed to provide money to help you hire the right person if a key individual became sick or died.
- Critical Illness Insurance If a business owners develop cancer, a heart attack, or a stroke, the illness can wipe out a small business. We have many plans to protect you from such concerns.
With a permanent Universal Life Insurance (UL) policy, there are many options and tax advantages available within the plan. Death benefits may vary, funds can be invested in tax-sheltered accounts, cost and types of insurance can be manipulated – all to the benefit of the consumer’s goals! What are the primary benefits of Universal Life (UL) for Estate Planning? The options abound:
• The death benefit is adjustable. The amount of life insurance can be increased or decreased to reflect an insured’s changing needs, and there are multiple options available when creating a plan. Typically, a person will choose an increasing death benefit that will pay out all life proceeds as well as any cash in the plan at time of death. Or, a person could choose a plan that pays out the death benefit as well as all premiums paid into the plan. This option ensures that family assets will not be eroded due to premium payments for the life insurance policy. A person may also choose a level death benefit, however the advantages of this structure are limited. Or, if a person eventually is insured, or does not require their current amount of insurance on their policy, they can simply reduce the death benefit. In the end, a policy’s death benefit can be structured to suit the needs and goals of the insured.
• Insure multiple lives in a UL plan Several lives can be insured or added to one plan, including a spouse and children. Business associates may also be named as multiple insured’s on a business policy.
• Special riders can be added In some cases, term riders can be added to the policy, allowing for a structured policy that addresses insurance needs now and in the future. For example, you can structure a policy with permanent Universal Life insurance as a base amount, then add a Term 10 or Term 20 rider.
• Disability riders can be added Policies may provide a disability rider called a waiver of premium. Upon disability, the policy premium can be waived until such a time as the person is no longer disabled.
• Create capitalized income for a surviving spouse Life insurance proceeds can be structured as an annuity, thereby providing lifetime income for the surviving spouse.
• Capital creation can be deferred Alternatively you can arrange to have the death benefit paid after the second spouse’s death to maximize the value of your family’s inheritance or meet your estate’s tax liabilities. These policies are typically called Joint Last to Die policies.
Mortgage insurance is creditor insurance which financial institutions offer to pay off the indebtedness of a mortgage if the mortgagor died during the term of the mortgage.There is another strategy to achieve this using personally owned life insurance which offers you flexible choices with more freedom as to how you will approach insuring your mortgage liability.
Compare the mortgage insurance your bank or financial institution uses for your mortgage creditor life insurance to buying your own personally owned term insurance.
Mortgage Life Insurance from the financial institution
- Premiums can be much higher.
- The death benefit replaces only your remaining balance of mortgage indebtedness.
- Premiums do not reduce when your mortgage debt is reduced.
- The death benefit only pays off your remaining mortgage debt.
- The contract stipulates that the financial institution is the only life insurance beneficiary.
- You cannot alter the irrevocable beneficiary of the contract.
- The entire amount of life insurance is lost upon mortgage repayment, or when in default.
- The mortgage life insurance is not transferrable to another financial institution or private lender.
- Because so few health questions are required, underwriting is often done at time of claim, resulting in denied claims.
- When you move your mortgage to another firm, you generally lose the coverage issued from an existing institution. If you have health concerns you may not be able to buy more coverage.
- Creditor insurance may cover two parties who jointly mortgage their property. However, it pays only on the first death, even if the two were to die. When one spouse dies, creditor insurance no longer covers any survivors.
- In contrast, by owning your own insurance policy, two spouses or partners may each own separate life insurance death benefits. In the case where both parties die, double the benefit would be paid, thus adding increased value to the estate. If one survives, the coverage on that life continues.
Your own Term Insurance
- You have full control over the type of life insurance plan.
- You can set up multiple beneficiaries, including a fund to pay off some or all of your mortgage debt.
- Beneficiaries can choose to not pay off the mortgage if they prefer to pay off higher interest debt.
- You can add or revoke beneficiaries.
- Your life insurance face benefit amount does not shrink with a reducing mortgage debt, and can actually increase with some plans. Your coverage level is controlled by you.
- Many term plans offer level premiums for longer periods or are convertible to Term to Age 100 plans, without a medical exam, even if your health declines.
- In time, in most cases, you can reduce your coverage to have enough for the proceeds to pay your final expenses to take the financial burden from your loved ones.
- You needn’t qualify for new mortgage life insurance if you move your mortgage to a new financial institution. You just continue using your existing term plan, which covers you regardless where your mortgage is.
- Once your mortgage is repaid or reduced you will have life insurance to cover other liabilities or for other estate planning purposes.
- Term insurance allows you to look at your entire capital needs and buy coverage applicable to you total needs, in the event of death.
- A custom life insurance plan often offer other optional benefits that you can include, such as riders which can include: life insurance coverage for children, disability coverage, and critical illness coverage.
- More control over the cost of premiums which can go up over time if you don’t own and control the life insurance contract.
- Your insurer underwrites your policy when you apply for it. Other mortgage life insurance from a financial institution offer you little control and may choose to underwrite your health history at claim time.
- Ask your advisor how to shift out of mortgage life insurance into personally owned life insurance to achieve the above advantages.
A testamentary trust is established in a will. It directs a named trustee to manage and distribute assets and income to named beneficiaries of the trust.
You can designate the number of years it will survive, within permissible, legal limits. The trust becomes effective at the time the will is probated. The assets undergo the probate process and are therefore, exposed to creditors’ claims. If your intent is to avoid probate, a living trust would be a more suitable alternative.
Individuals commonly choose between two types of trusts: family and spousal. Family trusts are established to:
- Protect the interests of underage children and any family member with special needs.
- Safeguard adult children’s assets from creditors or divorce settlements.
- Manage funds for spendthrift adult children.
- Minimize disclosure of small business assets that could be susceptible to lawsuits or creditors
Spousal trusts are established to provide your spouse with funds. These trusts also:
- Protect your children’s assets should your spouse remarry.
- Assure the inheritance of children from a previous marriage.
- Reduce income tax through income splitting.
If an estate will have significant capital gains tax due and/or debts, consider using life insurance to cover all liabilities. You can also increase the death benefit to pay off business agreement liabilities (if any) and provide specific trusts with the necessary cash.