How can I reduce business owner risks?

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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 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.

How does Disability Insurance protect a Buy-Sell Agreement?

Disability Buy-Sell Agreements

A detailed look at two ways to guard against potential liabilities when a major shareholder becomes disabled.

Two strategies protect shareholders against the liabilities associated with another major shareholder becoming disabled.

Criss-Cross Buy-Sell Agreement

  • The agreement provides for a mandatory sale and purchase of an interest in the corporation once a shareholder has been disabled for a specified period.
  • Shareholders own disability insurance on each other to fund the purchase.
  • The agreement guarantees the purchase of the disabled partner’s business interest over the period of the policy’s payout period.
  • Premiums are paid with after-tax income.
  • Policyowners receive tax-free disability benefits.
  • Capital gains on the sale of the asset can be offset by an allowable reserve for a time if full proceeds are not collected up front.
  • Personally owned income replacement insurance is normally purchased in addition to the above coverage to provide an income (in addition to the buy-out benefit) to the disabled shareholder.

Corporate Share Redemption

  • The agreement provides for the mandatory redemption of the shares once a shareholder has been disabled for a specified period.
  • A taxable dividend, equivalent to the full amount of the purchase price, less the paid-up capital value of those shares, is deemed to have been received in the year in which the redemption of the shares takes place.
  • The dividend is subject to the Dividend Tax Credit and the Alternative Minimum Tax rules.
  • A lump-sum disability insurance contract owned by the corporation covers the funds required for the redemption.
  • The corporation could pay out an amount in addition to the redemption value to cover taxes payable by the disabled shareholder.
  • A promissory note can cover shortfalls in payment

How can indebtedness jeopardize a business?

Business Banking relationships are important. If a business owner who has a good relationship with his bank were to die, chances are the bank may call the loan if the business begins to experience financial duress and defaults on repayment. Many businesses have no option but to acquire a bank loan collateralized by the full value of their assets in order to financially survive.

  • Avoid collateralizing personal assets. Where the loan equals or exceeds the value of the business assets and/or personal assets, the prospect may not be favourable.
  • Following established rules, a bank may ask a business-owner to collateralize a loan, not just with business assets, and land, but with additional personally owned assets which may encumber a wife’s co-owned assets.
  • Add to that, a possible collateralizing of any assets of a son or daughter (and spouses), who also share in family business ownership.
  •  Family members of small business owners can also lose their financial security if the business defaults on loan repayments.
  • If you own a business, avoid being held a financial hostage by the lending institution or forced into liquidation.

Life insurance can reduce these risks associated with debt in family businesses:  You can solve this to a degree in a family business such as a farm, by insuring the oldest owners and succeeding generations using joint-first-to-die life insurance policies or individual plans. Where there are non-family businesses, each owner/partner should be insured to cover 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?  Also, for the same reason, consider purchasing a Critical Illness Insurance policy on each of the principal business owners and key persons. This product can provide a very large sum of money to pay off debt if one were to experience a major illness such as heart attack or stroke. If an individual were to be incapacitated, he or she 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 critically ill and the bank manager loses confidence in the stabilizing influence of that owner.

How does a Buy-Sell Agreement protect my business?

Many business owners face a common question of how to effectively sell their business to a partner, employee or another interested buyer should something happen to them. A buy-sell agreement might be the solution, but it is important to set up a buy-sell agreement while you are alive and capable of doing so. Here are some important steps to consider:

1. Get legal advice. You’ll need to hire a corporate lawyer who has had experience assisting business owners in establishing  buy-sell agreements. The wording and structure need to meet the IRS’s standards, especially regarding measuring the value of the company. This is because the IRS may stand to receive tax on any capital gains that may be triggered at any future date.

Your lawyer may advise you as to what method of buy-sell agreement will work better in your case, depending whether you are a sole proprietor or corporation.

2. Assess your company’s value. You and perhaps your buyer(s) will need to have your business value professionally appraised. If the value is different (it usually is), your lawyer will need to negotiate the purchase price. This will show the IRS (if necessary) that you have done the evaluation professionally (two valuations are better).

3. Funding a buy-sell agreement. Determine if the company has the cash flow or a large amount of money available to fund the buy-out of the deceased or disabled owner. Permanent life insurance is generally always used to fund a buy-sell agreement as it can pay a large amount of tax-free capital precisely at the right time; at the decease of the business owner.

4. All parties agree on the solution. Many larger insurers have pre-designed, sample buy-sell agreements. Therefore, it is wise to have your insurance representative present with your lawyer and the buyers’ lawyers. After the agreement is drafted, all parties will review it to their satisfaction; then sign it to make it legal.

5. Consider pre-approving your life insurance purchase. It is suggested that the life insurance be purchased first to ensure that one is insurable. Even where there is a medical problem, in most cases, there may be an insurer willing to design a policy to suit the risk, based on the respective health of the individual.

How can life insurance protect key business people?

Every business has one or more key players who lead.  Our economy depends on small family businesses which employ millions of people. If family businesses are to remain successful in our fast-paced economy, they must address the following issues:

Continuing success depends on leadership.  Continued success may depend on the leadership of the founding owner. If the owner desires to retire in 10 or 15 years, succession planning may be necessary today. Have you made plans to sell, or to pass the company on to the children or another successor?

Talk to your CA or tax lawyer to assess possible capital gains tax liabilities. If these liabilities exist, life insurance policies may be able to solve the problem in advance; purchased individually or jointly on the lives of the owner and/or the spouse while in reasonably good health.

If the owner of the company will depend on the company’s resources for retirement income, it may need to be budgeted as an ongoing disbursement during his or her retirement via a salary or dividend payments.

Groom successors to take over the business. An immediate (as well as long-term) successor can be groomed to take over the company, just in case the owner suffers a disability. Owners need to ask, “What would happen if I was laid up and incapable of giving directives? Would that force a quick sale of my company?”

To prepare for the potential event of a disability, owners should make sure that they are covered with both disability and critical illness insurance to replace income or deliver a lump sum emergency benefit.

What could happen if a business owner died unprepared? Life insurance can meet capital needs and cover liabilities such as company debt. Acquiring loans may be harder for unknown successors. Servicing debt could get costly if interest rates go up. Life insurance can wipe out company debt entirely upon an owner’s death, spouse’s death, or after both have died (using a joint-last-to-die policy).

Owners need to make sure that key family members actively working in the company (including active owners), and important employees, are covered with key-person insurance. If a key-person is afflicted with a disability or dies, the business may need money to acquire replacement help.

Agreements direct the insurance benefit’s use. Buy-sell agreements are essential for partnerships and many corporations. Often family members in joint ventures will overlook this planning device as they feel they can solve business issues when one dies or is disabled. Without proper pre-planning, businesses could get bogged down in conflicts, and may not have enough capital to buy out the interest of a partner. Back up the agreement with life insurance, disability insurance, including critical illness insurance coverage to solve these often hidden business risks.

Can you pay your bills if disabled?

Disability insurance (DI) can be purchased from a life insurance company to cover up to 80% of your regular income (or more) in the event you become disabled. This coverage is referred to as “income replacement” insurance.

If you work for a corporation, your employer may offer a group plan with short-term disability (DI) coverage. Examine it to determine the coverage period and to ensure it meets at least 60% of your current income for longer than three months.

Additional DI can be purchased (and owned privately) to extend the period of income payment, and increment payments to the increasing cost of living. Some policies actually increase your paycheques according to the consumer price index (CPI).

If self-employed If you have dependents it is important to ensure that  you have income replacement insurance to pay your expenses until age 65. This is also wise also to take care of your own needs if you are single.

Consider the following questions as to where the money might come from if you were unable to earn a living for a month, a year or forever.

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How would withdrawing part or all of your retirement savings and/or money on deposit at the bank to use as income when convalescing, affect your retirement?

  • Would living off the equity or your home, allow your net worth to increase in value?
  • Could you borrow money if your banker knew you might never work again?
  • Could you live on your spouse’s income?
  • Could you ask a parent, sibling or friend to loan you money? How would you repay it?
  • Would you rely on the government to pay a disability income that lasts until you retire?
  • Would you want to sell your house or cottage?