Business Planning – Page 3 – Adviceon Library

Can insurance replace my income if I am sick or hurt?

A spirit of independence and optimism is typical of many business owners. It is important to realistically plan for your financial security should you become disabled.

When you own your own business, you do not have the security of group insurance that employees have. After several years, you may find that you are drawing a substantial income from a successful venture.

Disability planning brings us face-to-face with a reality check. If you become disabled, would your business continue to generate the same profits? If not, how would you meet your mortgage payments and pay for your groceries? When we are independent-minded, we tend to be optimistic, to the degree that we might believe one of the following money myths.

Money Myth #1. I will borrow the money until I get well. Reality: Few people will lend money to a disabled person. It’s hard enough to borrow money when you’re in perfect health with a steady income.

Money Myth #2. I’ll live off my savings. Reality: How long would your savings last? Using up your savings at an age when you ought to add to your investments may ruin your retirement plan.

Money Myth #3. I’ll sell off some or all of my business assets.
Reality: How many assets does your business own, that are not required for its successful operation? Who will pay fair market value to one perceived as liquidating out of a dire need for cash? The timing may not coincide with market demand for your assets.

Money Myth #4. My business will pay me a salary. Reality: Your partners may need to hire someone to fulfil your responsibilities. Flip the perspective around. If your partner became disabled, how long could you keep paying him or her a salary in addition to the salary for the replacement? If you are a sole proprietor and disabled to the degree you cannot work, how could you hire and train someone to work hard enough to produce his own salary and yours?

Business Owner Disability Insurance Check-List

Income Replacement Insurance Pays you a cheque to cover a major portion of your present income drawn from the company.
Key-Person Insurance Pays a benefit to enable the business to hire a replacement.
Office Overhead Insurance Helps you pay for day-to-day overhead and salaries.
Buy-Sell Insurance Creates the cash to allow your partners to buy out your interest, or vice versa, based on a written agreement.

Universal Life Insurance (UL) offers adjustability

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.

What evidence proves that life insurance is worthwhile?

Life insurance has unlimited tactical financial uses.

Life Insurance includes cash benefit payouts arising from personal life insurance, disability insurance, group life and group disability insurance; and income from annuity payments, which together have risen to approximately 40 billion dollars per year in the first decade of the new millennium.

For a person running a business, a disability insurance policy can replace up to 75% or more of the value of a disabled person’s normal working paycheque.

“Life insurance is the first foundation of wealth preservation.”

Personally owned individual life and/or disability insurance can:

Pay off a home mortgage if the family breadwinner dies.
Pay debts and taxes accrued in larger estates leaving heirs with financial stability.
Help small businesses using agreements pass the baton to new leaders.
Fund key-man insurance to replace a leader in a small business.
Help family businesses and farms stay in the family through succession planning while passing wealth (and paying off liabilities) to the next generation.
Pay off capital gains taxes on second properties such as a cottage.
Cover taxes due when remaining Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) holdings.
Pay off large capital gains on investments at home and abroad.
Equalize estates divided amongst siblings whose parents own significant business assets, where some work outside the firm.

The use of life insurance is increasingly creative the more wealth preservation becomes necessary and can assist in this important strategic area of fiscal protection. It can pass substantial sums of cash to future generations using techniques such as estate bonds.

What are the benefits of an Employee Benefit Plan?

The following largely coincides with the guidance of the IRA’s information. The Information can change over time and your advisor and/or tax professional should be consulted.

Retirement can last a long time

Retirement can last for 30 years or more?
You might need up to 80% of your current annual income to retire comfortably?

Why should you set up a retirement plan, and what are some of the benefits?

A retirement plan has lots of benefits for you, your business and your employees. Retirement plans allow you to invest now for financial security when you and your employees retire. As a bonus, you and your employees get significant tax advantages and other incentives.

Business Benefits

Employer contributions are tax-deductible.
Assets in the plan grow tax-free.
Flexible plan options are available.
Tax credits and other incentives for starting a plan may reduce costs.
A retirement plan can attract and retain better employees, reducing new employee training costs.

Employee Benefits

Employee contributions can reduce current taxable income.
Contributions and investment gains are not taxed until distributed.
Contributions are easy to make through payroll deductions.
Compounding interest over time allows small regular contributions to grow to significant retirement savings.
Employee has an opportunity to improve financial security in retirement.

Examine the Future Retirement Income from potential savings in the following graph.

Source: Calculations by Adviceon

How do you set up a plan?

A good place to start is by contacting a tax professional familiar with retirement plans or an advisor and/or a financial institution that offers retirement plans.

Establishing your Employee Plan

You take the necessary steps to put your plan in place. Depending on the type of plan you choose, the administrative steps may include:

Adopting a written plan
Arranging a funding plan for the plan’s assets
Notify eligible employees about the terms of the plan
Developing a recordkeeping system.

Operating your Employee Plan

You want to operate your retirement plan so that the assets in the plan continue to grow and the tax-benefits of the plan are preserved. The ongoing steps you need to take to operate your plan may vary depending on the type of plan you establish. Your basic steps will include:

Covering eligible employees
Making contributions
keeping the plan up-to-date with retirement plan laws
managing the plan assets
providing information to employees participating in the plan

Drug Plan Management Solutions

Drug Plan Management Solutions: There is a wide range of drug plan options that can be fine-tuned to suit your organization’s needs, while allowing you to better manage the rising cost of prescription drugs. Yet you can still provide your plan members with the coverage they need. We can help you keep your drug plan affordable for both you and your plan members, by implementing drug plan cost management solutions.

Two-tiered plans: A two-tiered drug plan design allows you to cover two formularies at two different levels of reimbursement. A tier-one managed formulary with a higher coinsurance can be supplemented by a more comprehensive formulary at a lower coinsurance level. This allows your plan to maintain broad drug coverage, while still lowering overall costs.

Managing your drug plan with formularies: A formulary is a list of drugs the benefits plan will cover, out of the thousands of prescription and non-prescription drugs on the market today. There are many types of formularies, but the overall goal of each one is to control the eligibility of drugs, and therefore help manage drug costs by either: adding new drugs only after their therapeutic value and cost effectiveness have been proven, or allowing only generic drugs, or following the guidelines set by provincial governments.

Formularies may be designed such as:

Managing your drug plan with cost-containment options
We offer a number of plan design options to help you manage your healthcare plan costs. Let us help you determine which of these solutions fit your needs.

Using Generic Substitution
Cost reimbursement is established to the value of the generic equivalent of a drug, regardless of what has been prescribed, unless the physician indicates ‘no substitution’ on the prescription

Per-prescription deductibles: This is the amount the plan member must pay for each prescription drug claimed. It can be set to a specific amount, or equal to the dispensing fee portion of the drug.

Coinsurance: Coinsurance is the determined percentage amount that the plan will pay for eligible prescriptions after any deductibles have been met.

Dispensing fee limits: This is the plan’s coverage up to the maximum amount of the fee pharmacies charge to cover their business expenses.

Drug maximums: This is the maximum amount the plan will reimburse for prescription drug coverage per person, per calendar year; maximums can be set at a specified amount per year, or can be unlimited.

Note: Plan Sponsors in Quebec: The Quebec government has a public drug plan that covers anyone who is not eligible for coverage under a private plan. This plan is administered by the Régie de l’Assurance Maladie du Québec (RAMQ). The law in Quebec also requires private drug plans to provide equivalent or better coverage than the public plan. Plan sponsors in Quebec are limited in how much they can alter their drug coverage, since they must ensure it conforms to RAMQ.

Note: Plans and coverage vary depending on the carrier used.

Dental Care Benefits

Dental Care Benefits

Whether you and your plan members require basic maintenance or major procedures, group dental care benefits help cover the cost of dental services and supplies offered by licensed dentists. Employees significantly value dental care benefits. Many coverage options are available, and electronic “real-time” claims filing directly from the dentist’s office can save time. Your organization can specify coverage percentages and/or apply a fixed dollar amount per year.

Dental care covers such options as:

Ongoing care and maintenance of teeth, roots and gums
Diagnostic services – exams, radiographs, X-rays and tests
Preventative treatment – polishing, scaling, oral hygiene instruction, it and fissure sealants, and space maintainers
Minor restorations – fillings, prefab crowns for primary teeth, and other services completed in conjunction with minor restorations
Endodontics – root canal therapy
Periodontics – treatment of gums
Denture maintenance – relines and rebases
Oral surgery – removal of teeth
Adjunctive services – anaesthesia, medications and pain relief

Major coverage includes work such as:

Crowns and Onlays
Dentures and bridges
Related items such as posts, pins and denture-related surgery
Replacements when the existing appliance is five or more years old
Appliance maintenance – denture relines and rebases, denture or bridgework repair

Orthodontic coverage includes work (with limitations) such as:

Ortho-exams, X-rays, diagnostic radiographs and casts
Braces and retainers (usually limited to children between certain ages)

Note: Plans and coverage vary depending on the carrier used.

What is Disability Insurance?

Disability Insurance provides a monthly income if you are incapacitated and incapable of working due to an injury or illness. Often called “Income Replacement Insurance”, this coverage is essential for self-employed individuals and those without disability insurance via their employer.

The risks of income loss Your ability to earn income may be compromised through injury or illness if you become disabled. Your ability to pay bills or save for retirement could remain the same. Disability insurance plans are designed to help you meet necessary income requirements enabling you to concentrate on recovering from your disability and returning to an active income-generating life.

Do you know who can be covered? Income protection can provide peace of mind for professionals such as lawyers or doctors, small business owners like plumbers or carpenters, leading business executives, and full- or part-time or home-based workers. You can also supplement the disability coverage you have with an employer or an association such as the Canadian Association of Retired Persons (CARP).

How do you collect disability benefits? Your policy contract determines how soon and for how long you can collect benefits. Generally, disability benefits are received if you can’t perform the duties of your occupation, a similar job in your field, or any job at all.

How are befits paid? Disability insurance benefits are payable every month during a disability for the benefit period of the contract, which can vary. When you recover from a disability, the policy continues, usually payable again for a subsequent or recurring disability.

I’m healthy: why should I be covered? Most people know the importance of life insurance but rarely think about having a disability despite the statistics indicating they are pretty standard. Death is inevitable, while disability is probable at any given age.

Develop your backup plan today! If you are running a business (or work as an employee), you should be covered by some form of disability insurance (income replacement insurance). Such planning is the only way to avoid the financial and emotional stresses resulting from long-term disability.

Note: Life and disability insurance taxation varies in accord with the strategies used by the life insurance specialist, changing legislation, and hiring an accountant to guide significant business strategies relative to succession or an estate.

Is Mortgage Life Insurance practical?

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.

Three types of Key-Person Insurance for your business

If you are a business owner, you may have an individual critical to your success. Insurance can protect you against financial loss if incapacitated in three areas.

1) Key-Person Life Insurance
2) Key-Person Critical Illness Insurance
3) Key-Person Disability Income Protection

Key-Person Life Insurance Life insurance is usually the foundation of a key-person protection strategy. It provides an immediate injection of capital into the business precisely when needed—when a key person dies. At this time, the death benefit is paid to the company tax-free.

Renewable Term Life Insurance is usually the most economical option over the short term. In certain circumstances, permanent insurance may provide better protection when coverage is needed over a long time.

Key-Person Disability Income Protection Disability insurance can be used for two purposes in a key-person context:
• The provision of a continued salary to a key person that becomes disabled, usually until the earlier of age 65 or recovery from the disability.
• Owner-managers can purchase insurance that provides continued payment of office expenses and salaries during disability, usually for a limited period.

Key-Person Critical Illness Insurance Critical illness insurance provides protection when a key person is afflicted by a specified disease or health problem that does not necessarily render them disabled but affects their desire or ability to work. Depending on the policy, this insurance coverage can pay a lump sum, or an income payable to the business, to help cover losses created by the absence of or lower productivity of the individual.

How does a business create a Succession Plan?

Succession planning allows you to transfer your wealth creating potential.

Many who own family businesses, will move into retirement over the next two decades. A delicate process referred to as “succession” or “business continuity” planning can lead to relinquishing leadership roles while transferring their businesses to the next generation.

By developing a succession strategy you can fairly distribute business assets; transfer the power and authority associated with leadership from the senior to next generation; and cultivate family harmony. The successor then becomes the new steward of the family legacy.

An excellent plan will establish the best possible tax planning to limit liabilities that can occur.