Business Uses of Life and Disability Insurance Flashcards
What is a “closely held” business? (2 main parts)
-An entity whose ownership is not publicly traded or generally offered for sale
-Controlled by small group of owners and are usually involved in day to day activities of enterprise
Serious events that could have a huge negative impact on a closely held business
Death
Disability
Divorce (spouse can always argue for a claim, and may have one)
Departure (retirement, termination, personal bankruptcy, etc.)
What is Key Employee/Personal Life Insurance?
It is a way to provide needed cash upon the loss (death) of a key employee
What is Key Employee/Disability Insurance?
It can provide income tax free disability insurance provided to company in the event of disability of key person
What is Supplemental Disability Income Insurance?
(AKA Income Replacement Insurance)
Personal Disability Income Insurance with tax deductible premiums paid by company for key employees
What is Disability Business Reducing Term Insurance?
Can be purchased on a key employee to specifically repay principal & interest on a business loan (in case of key employee disability)
What is Business Overlord Expense Insurance? (BOE)
Purchased on key employee - owned; paid for by business with tax deductible dollars
Used to pay business overhead while key employee is out (typically up to 3 years)
-Income is taxed
-Overhead expenses paid with benefits are tax deductible
True or False
Business Overhead Expense Insurance is best for sole proprietors
True; with no other partners if a sole proprietor is disabled this insurance covers him/her
Common issues addressed in a buy-sell agreement:
6 things
- Who are the buyers going to be?
- What type of agreement will be used?
- What are the triggering events that cause a mandatory or optional buy out?
- What is the valuation date imposed by the agreement?
- What are the purchase price and terms of payment?
- How will the agreement be funded?
What is a Cross-Purchase Plan?
-Buy Sell Agreement
-Owners of business agree individually to purchase the interest of any other owner upon occurrence of triggering event (e.g. death)
-Each owner agrees his estate will sell to other owners in agreement
How do owners fund a Cross-Purchase Plan?
Each shareholder owns AND is beneficiary of AND pays the premium on the life and disability buy out insurance policies on the lives of other shareholders
(Divorce and Departure are tricky here)
What is a Stock Redemption Plan?
(AKA Entity Plan?)
-Buy Sell Agreement
-Business Entity owns and is beneficiary of insurance policies on owners
-Business Entity redeems interest being purchased from owners rather than owners doing this
-Benefits are held by Business as Treasury Stock
-Ownership of shares transfers to owners
Methods to fund Buy-Sell Agreements
(5 things)
-Personal funds of the buyers
-Sinking fund in the business (company sets aside money over time)
-Borrowed funds (AKA loans)
-Installment payments to heirs (puts a strain on business cash flow)
-Life Insurance (best option)
