Traditional Applications • Key Person Life Insurance • Collateral Life Insurance • Buy/Sell Agreements • Business Succession
The success of a business • The right strategy • The right product / service • The right market • The right price • The right people!
Key employees • Who are “key employees”?
Key employees • Key decision makers • Financial and operations management • Research • Technology • Marketing • Sales • etc.
Key employees • The owner-manager • Other employees who have a financial impact on the future of the business
The problem • Premature death of the owner-manager or other key employee: • Bankers may call loans • Suppliers may not extend credit • Customers may not return • Employees may seek more secure employment Without a source of working capital, the business may not survive!
Power phrases “Could your business survive your death?” “The day after your death, who will step in to run the business? Your spouse? Children?” “You insure your premises and equipment, but have you thought about insuring your most important assets -- your people?”
Fact-finding • Are you able to take regular vacations away from the business? • Are other family members involved in the business? • Who are the key employees of the business? Are they insured?
Profile • Private corporation, closely held • Owner-manager and / or other key employees who have a financial impact on the business, age 30 - 50, healthy • Cash flow
Key person insurance protection • Type of policy • Owner • Life insured • Beneficiary • Premium payer • Premiums are not tax deductible • Death benefit is tax-free • Credit to CDA
The problem • The business will need cash to • Meet immediate working capital needs • Repay short-term loans • Hire interim management • Find, attract, hire and train a replacement But, where will the cash come from?
The solution • Business earnings? • The bank? • Family? • Friends? • Investors? • LIFE INSURANCE!
Key PersonAn Example Male Age 45, Non-Smoker Death Benefit $2,000,000 Plan Type 10 Year Term Renewable to Age 75 Convertible to Age 65 Annual Premiums Years 1-10$3,790 10-20 $12,890 20-30 $35,650
Corporate finance • Need for funds: • Working capital (inventory, receivables) • Investment • New equipment • New business property • Re-finance existing debt • Redeem shares • Dividends
Corporate finance • Funding sources: • Issue new shares • Re-invest retained earnings • Borrow • Shareholder loans • Line of credit • Equipment lease • Bank loans • Mortgages Your friendly banker?
Corporate finance • Terms and conditions • Collateral security • Personal guarantees • Repayment?
The problem • In the event of the premature death of the owner-manager, business debts can threaten the future of the business • Cash flow and profits may be affected • The banker may call the loan • The banker may not extend further credit • Where will the funds come from? • Can the business survive?
The solution • Another bank? • Family members? • Friends? • Colombian cartel? • LIFE INSURANCE!
Collateral insurance • Two situations where life insurance premiums are tax-deductible: • Charitable gifting • Collateral insurance
Collateral insurance • History • Interpretation Bulletin IT-309R • Administrative relief • The Queen v. Antoine Guertin Ltee • New subparagraph 20(1)(e.2) • Revised IT-309R2 • Revised IT-430R3
Collateral insurance 20(1)(e.2) Deductions: Premiums on life insurance used as collateral Such portion of the lesser of (i) the premiums payable by the taxpayer under a life insurance policy (other than an annuity contract) in respect of the year, where (A) an interest in the policy is assigned to a restricted financial institution in the course of a borrowing from the institution, (B) the interest payable in respect of the borrowing is or would, but for subsections 18(2) and (3.1) and sections 21 and 28, be deductible in computing the taxpayer’s income for the year, and (C) the assignment referred to in clause (A) is required by the institution as collateral for the borrowing and (ii) the net cost of pure insurance in respect of the year, as determined in accordance with the regulations, in respect of the interest in the policy referred to in Clause (i)(A) as can reasonably be considered to relate to the amount owing from time to time during the year by the taxpayer to the institution under the borrowing
Collateral insurance • Key points for deductibility • Loan interest must be deductible i.e., loan must be used for the purpose of gaining or producing income from a business or property • Lender is a bank, trust company, etc. • Collateral assignment is a loan condition • Lesser premiums paid and NCPI • Deduction must be reasonable • Borrower and policyowner must be the same
Collateral insurance • Type of policy • Owner • Life insured • Beneficiary • Premium payer • Death benefit is tax-free • Credit to CDA
cost renewable cost renewal privilege control portability credit to CDA personal attention expertise ability to convert the coverage death benefit amount Collateral insurance • Creditors life insurance Vs individual insurance:
Profile • Private corporation, closely held • Owner-manager age 30 - 50, healthy • Owner-manager has a family • New business or expansion phase • Cash flow
Fact-finding • Are there any debts currently owing by the company? Personal debts used for business purposes? Are they insured? • Do you anticipate incurring any debts in the near future (within 2 years)? • Do you have any short-to-medium term plans for expanding the business?
BUY-SELL AGREEMENTS What happens to the shares of a deceased shareholder if there were no prior arrangements?
BUY-SELL AGREEMENTS Shares go to the deceased’s estate who then becomes a “partner” in the business!
BUY-SELL AGREEMENTS Typically, the estate would prefer having cash and the surviving shareholder, control of the company.
BUY-SELL AGREEMENTS The solution: Pre-funding a buy-sell agreement with a life insurance policy!
What have you got to offer ... • The ability to createandpreserve wealth • Life insurance products • Savings and investment products • Retirement income products • Etc. • Experience and expertise • Access to the best products • Access to the best resources
Business Succession • 70% of family-owned enterprises do not survive to the 2nd generation • 90% do not survive to the third Going Out of Business Sale
Family Business Survey • 53% of owners have a written estate plan • Only 28% had a SUCCESSION PLAN • Only 57% intended to transfer the business to a family memberSource: The Family Business Advisor
Family Business Survey • Over 50% had most of their wealth tied up in the business • Most owners had no plans to retire“I’ll work till I drop” • 71% of those over 65 had no plans to retireSource: The Family Business Advisor
Business Succession • Business survival kit • The right product or service • The right marketing • The right financial plan • The right people • The right succession plan
Business Succession • Four alternatives to choose from: • Personally retain ownership • Pass ownership to the heirs • Sell the ownership • Liquidate and walk away
Business Succession • Factors to consider • What should happen to the business in the event of premature death of one or both parents? • What should happen to the business if one or both parents suffer a long-term disability? • What should happen to the business if one or both parents decide to retire? • Do your current plans reflect your wishes?
Business Succession • Factors to consider • What do the children have to offer in terms of ability / interest / age? • Is there a natural “heir apparent”? Are there other children not active in the business? • What do the key employees have to offer in terms of ability / interest / financial resources?
Business Succession • Factors to consider • What is the medium- to long-term potential for the business? • Is there a ready market for the parents’ ownership interest in the business? • What is the relative importance of the business to the overall financial plans of the parents?
Business Succession • Excuses • Unaware there is a problem • Want to avoid conflict • Want to avoid cost • Will live forever • Too busy
Business Succession • Consequences • Family feuds • Lack of family business direction • Possible family successors driven away • Possible business failure or forced sale outside the family
Business Succession The role of life insurance: to help ensure the business succession plans can be fully implemented at the time of maturity. How? • Funding the buy-sell agreement • Providing working capital to the business • Paying off business debts • Providing personal estate liquidity for income taxes, final expenses, estate equalization, bequests, etc.
Other Business Planning Opportunities • Executive Compensation • Retirement Compensation Agreement • Insured Retirement Program
Investment Security Bond • What happens when someone must use their savings to live because of a Critical Illness? • Savings diminish • inheritance could disappear • money can run out!
Investment Security Bond • Critical Illness insurance allows for the security of your client’s investment objective while providing funds to either live or receive medical treatment.
Investment Security Bond • Power Phrases • “Tell me how long your savings would last if you became critically ill?” • “Are you willing to dramatically affect your savings because of the costs of a critical illness?”