Embed Size (px)
Citation preview
CSF01-02-0135
Business Uses of Life Business Uses of Life InsuranceInsurance
CSF01-02-0135
Traditional ApplicationsTraditional Applications
Key Person Life Insurance
Collateral Life Insurance
Buy/Sell Agreements
Business Succession
CSF01-02-0135
KEYPERSON KEYPERSON INSURANCE PROTECTIONINSURANCE PROTECTION
CSF01-02-0135
The success of a The success of a businessbusiness
The right strategy The right product / service The right market The right price
The right people!The right people!
CSF01-02-0135
Key employeesKey employees
Who are “key employees”?
CSF01-02-0135
Key employeesKey employees
Key decision makers Financial and operations
management Research Technology Marketing Sales etc.
CSF01-02-0135
Key employeesKey employees
The owner-manager Other employees who have a
financial impact on the future of the business
CSF01-02-0135
The problemThe 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!
CSF01-02-0135
Power phrasesPower 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?”
CSF01-02-0135
Fact-findingFact-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?
CSF01-02-0135
ProfileProfile
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
CSF01-02-0135
Key person insurance Key person insurance protectionprotection
Type of policy Owner Life insured Beneficiary Premium payer Premiums are not tax deductible Death benefit is tax-free Credit to CDA
CSF01-02-0135
The problemThe 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?
CSF01-02-0135
The solutionThe solution
Business earnings? The bank? Family? Friends? Investors?
LIFE INSURANCE!LIFE INSURANCE!
CSF01-02-0135
Key PersonKey PersonAn ExampleAn Example Male Age 45, Non-Smoker
Death Benefit $2,000,000
Plan Type 10 Year TermRenewable to Age 75Convertible to Age 65
Annual PremiumsYears 1-10 $3,790 10-20 $12,890
20-30 $35,650
CSF01-02-0135
BUSINESS LOAN BUSINESS LOAN PROTECTION PROTECTION
(collateral insurance)(collateral insurance)
CSF01-02-0135
Corporate financeCorporate finance
Need for funds: Working capital (inventory, receivables) Investment New equipment New business property Re-finance existing debt Redeem shares Dividends
CSF01-02-0135
Corporate financeCorporate finance
Funding sources: Issue new shares Re-invest retained earnings Borrow
Shareholder loans Line of credit Equipment lease Bank loans Mortgages
Your friendly banker?
CSF01-02-0135
Corporate financeCorporate finance
Terms and conditions Collateral security Personal guarantees Repayment?
CSF01-02-0135
The problemThe 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?
CSF01-02-0135
The solutionThe solution
Another bank? Family members? Friends? Colombian cartel?
LIFE INSURANCE!LIFE INSURANCE!
CSF01-02-0135
Collateral insuranceCollateral insurance
Two situations where life insurance premiums are tax-deductible: Charitable gifting Collateral insurance
CSF01-02-0135
Collateral insuranceCollateral 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
CSF01-02-0135
Collateral insuranceCollateral insurance20(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
CSF01-02-0135
Collateral insuranceCollateral 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
CSF01-02-0135
Collateral insuranceCollateral insurance
Type of policy Owner Life insured Beneficiary Premium payer Death benefit is tax-free Credit to CDA
CSF01-02-0135
Collateral insuranceCollateral insurance
cost renewable cost renewal privilege control portability credit to CDA
personal attention
expertise ability to convert
the coverage death benefit
amount
Creditors life insurance Vs individual insurance:
CSF01-02-0135
ProfileProfile
Private corporation, closely held Owner-manager age 30 - 50,
healthy Owner-manager has a family New business or expansion
phase Cash flow
CSF01-02-0135
Fact-findingFact-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-mediumterm plans for expanding the business?
CSF01-02-0135
BUY-SELL AGREEMENTSBUY-SELL AGREEMENTS
CSF01-02-0135
BUY-SELL AGREEMENTSBUY-SELL AGREEMENTS
What happens to the shares of a deceased shareholder if there were no prior arrangements?
CSF01-02-0135
BUY-SELL AGREEMENTSBUY-SELL AGREEMENTS
Shares go to the deceased’s estate who then becomes a “partner” in
the business!
CSF01-02-0135
BUY-SELL AGREEMENTSBUY-SELL AGREEMENTS
Typically, the estate would prefer having cash and the surviving
shareholder, control of the company.
CSF01-02-0135
BUY-SELL AGREEMENTSBUY-SELL AGREEMENTS
The solution:Pre-funding a buy-sell agreement
with a life insurance policy!
CSF01-02-0135
What have you got to What have you got to offer ...offer ...
The ability to createcreate and preservepreserve wealth Life insurance products Savings and investment products Retirement income products Etc.
ExperienceExperience and expertiseexpertise Access to the best productsbest products Access to the best resourcesbest resources
CSF01-02-0135
Business SuccessionBusiness Succession
70% of family-owned enterprises do not survive to the 2nd generation
90% do not survive to the thirdGoing Out of
Business Sale
CSF01-02-0135
Family Business SurveyFamily Business Survey
53% of owners have a written estate plan
Only 28% had a SUCCESSION PLANSUCCESSION PLAN Only 57% intended to transfer the
business to a family member Source: The Family Business Advisor
CSF01-02-0135
Family Business SurveyFamily 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
CSF01-02-0135
Business SuccessionBusiness Succession
Business survival kit The right product or service The right marketing The right financial plan The right people The right succession plan
CSF01-02-0135
Business SuccessionBusiness Succession
Four alternatives to choose from: Personally retain ownership Pass ownership to the heirs Sell the ownership Liquidate and walk away
CSF01-02-0135
Business SuccessionBusiness 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?
CSF01-02-0135
Business SuccessionBusiness 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?
CSF01-02-0135
Business SuccessionBusiness 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?
CSF01-02-0135
Business SuccessionBusiness Succession
Excuses Unaware there is a problem Want to avoid conflict Want to avoid cost Will live forever Too busy
CSF01-02-0135
Business SuccessionBusiness Succession
Consequences Family feuds Lack of family business direction Possible family successors driven
away Possible business failure or forced
sale outside the family
CSF01-02-0135
Business SuccessionBusiness 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.
CSF01-02-0135
Other Business Planning Other Business Planning OpportunitiesOpportunities
Executive Compensation Retirement Compensation Agreement Insured Retirement Program
CSF01-02-0135
Investment Security Investment Security BondBond
What happens when someone must use their savings to live because of a Critical Illness?
Savings diminish inheritance could disappear money can run out!
CSF01-02-0135
Investment Security Investment Security BondBond
Critical Illness insurance allows for the security of your client’s investment objective while providing funds to either live or receive medical treatment.
CSF01-02-0135
Investment Security Investment Security BondBond
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?”
CSF01-02-0135
Thank You!
