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Guest Post: Buy-Sell Agreements

August 27, 2010 · Filed Under Insurance · 5 Comments 
Today’s guest post was provided by Denise Mancini of Accuquote. Check out for free life insurance quotes from top-rated companies.

If you are a partner or a shareholder in a family or small business, you would want your business to flourish even after you are gone. Yet, statistics reveal that only 30% of family businesses survive after shareholders pass on. This makes it all the more pertinent for you to have a business succession plan in place, so that your business is protected from financial mismanagement, a buy-out or even bankruptcy after you die. A key tool in your business succession plan is a buy-sell agreement.

What are buy-sell agreements?

A buy-sell agreement is an agreement between business partners to buy out the share of a deceased partner. A buy-sell agreement is uncomplicated and economical; it removes all the problems associated with buying another partner’s interest in the business – the question of whether the business can fund a buyout, and if it can replace the job of the deceased partner. Life insurance is an important tool in the execution of business succession plans. How does it work? It is very simple – after determining the value of the business, life insurance is purchased based on each partner’s share. This allows a no-hassle transfer of interest in the event of a partner’s death.

Types of life insurance-funded buy-sell agreements

There are two types of buy-sell agreements, Cross Purchase and Stock Redemption. In a Cross Purchase each owner buys a life insurance policy on the other owners, and is named the beneficiary of such a policy. In a Stock Redemption situation the business purchases the life insurance policies. When a partner or shareholder dies, the other partners use the proceeds of the policy to redeem the deceased partner’s share.

The process

Though buy-sell agreements can be drafted and executed by the partners themselves, it helps to take the help of an attorney, an accountant and a life insurance professional to guide you through the process and spot any loopholes in your succession plan. Make sure you work with professionals with either a CLU (Chartered Life Underwriter) or a CFC (Chartered Financial Consultant) designation. An attorney’s role is vital in drafting the agreement, the value of the firm, and in deciding the best alternative from the perspective of tax benefits.

These professionals will also help you choose the best kinds of life insurance policies for the execution of your buy-sell agreement. Free life insurance quotes are also available online.

Buy-sell agreement/policy review

Experts in buy-sell strategies recommend that the agreement should be reviewed periodically, preferably every alternate year. The value of your business will keep changing, and you need to make the corrections in your policy values accordingly.

In the event that the owners decide to wind up the business or sell it, it doesn’t take too much work to convert the life insurance policy into a personal life insurance policy.

Advantages and disadvantages of a buy-sell agreement

A buy-sell life insurance agreement lays to rest many of the succession-related uncertainties that business partners are faced with. The life insurance death benefit aids the partners/ the business to buyout the deceased partner’s share. The deceased partner’s family benefits from the proceeds of the sale, and the amount is tax-deferred. The proceeds are also exempt from corporate alternative minimum tax and creditor claims.

A qualified adviser will be able to help businesses iron out the few creases that buy-sell agreements have – life insurance premiums are not tax deductible, the premiums will vary as per the partners’ individual age and health conditions, etc.

Buy-sell agreements are vital to succession plans of small businesses

Even if the partners are in total agreement about future plans, a formal buy-sell agreement will set things in stone, and help ease the minds of all the parties concerned. A buy-sell agreement is vital to the smooth continuity of every small business, so get started on getting quotes online for your buy-sell plan today.

Financial Peace University Lesson 7 – Clause and Effect

November 13, 2009 · Filed Under Financial Peace University · 4 Comments 

The Role of Insurance in your Financial Plan

This week’s lesson was about insurance – all kinds of insurance.  Ramsey  introduced the various types of insurance that he recommends for each person and also briefly touched on the types of insurance coverages to avoid.

The purpose of insurance is to transfer risk

Insurance is an essential financial planning tool as some types of losses can financially devastate you.  For instance, if your house burns down or you are permanently disabled, these are events that can be catastrophic to your financial well being.  The point of insurance then is to transfer these huge risks away from you and onto someone else.  Ramsey states, “I want them to catch the catastrophes.”  You can survive bills of a few thousand dollars if you have an emergency fund and good financial habits….the issue is the very rare but very large problems that your emergency fund won’t even come close to covering.

Types of Insurance that Ramsey Recommends

  1. Homeowner’s or Renter’s Insurance
  2. Auto Insurance
  3. Health Insurance
  4. Disability Insurance
  5. Long-Term Care Insurance
  6. Identity Theft Protection
  7. Life Insurance

Ramsey spent the majority of the lesson giving some information and tips on each insurance type.

Homeowner’s and Auto Insurance

The best way to lower your insurance premiums is to raise your deductible.  If you have a full emergency fund, then raising your deductible from $250 to $500 or even $1000 should save you a significant amount on your premiums.

He also recommends carrying adequate liability coverage (at least $500,000) or carrying an umbrella personal liability policy to protect your assets (if you have significant assets to protect, that is).

Health Insurance

Again, the key to reducing your premiums is to increase your deductible, coinsurance, or maximum out of pocket expense – but never decrease your maximum lifetime benefits.  Another option that Ramsey recommends is an Health Savings Account (“a really, really, really good idea”).  This is a tax-sheltered savings account that you never pay taxes on (going in or coming out) if you use it for medical expenses.  It is paired with a high-deductible insurance policy.  Depending on your situation (especially if you are healthy), you can save a lot of money using one of these policies.

Disability Insurance

Disability insurance replaces your income if you are unable to work.  The best type of disability insurance to buy (though it is usually more expensive) is occupational or “own-occ” insurance.  This means  your insurance payments will kick in if you can not perform the job you were educated to do.  He recommends you purchase coverage for 65% of your current income.  Remember, your income is your biggest asset so it is a really good idea to protect it!

Long-Term Care Insurance

LTC insurance pays for nursing home, assisted living facilities, of in-home care if you need it.  Ramsey states that 69% of people over the age of 65 will require long-term care at some point.  He recommends that everyone purchases LTC insurance on their 60th birthday (but not before).

Identity Theft Protection

The average victim of identity theft spends 600 hours cleaning up the mess (“you now have a new hobby”) so he recommends enrolling in a protection plan.  The plan you choose should include restoration services instead of just providing credit report monitoring.  (See the right sidebar for a link to save on LifeLock’s plan)

Life Insurance

Dave is a big proponent of life insurance – but not of cash value life insurance.  In fact, he spent the biggest part of the class explaining why cash value life insurance is a bad idea.  The most common life insurance myth, he states, is that you have a permanent need for life insurance.  Imagine this scenario: twenty years from now your children are grown up and out of the house, you are completely debt free including your 15 year mortgage, and your investments have grown to a considerable sum – you are now self-insured.  In this scenario, why do you need a big life insurance policy if you die?

Not only does he think that there is no permanent need for life insurance, he also points out that these life insurance policies are not a good way to invest.  The biggest reason is the myriad fees that are tacked onto them.  These high fees act to drastically reduce your long-term return.  If you are eligible, a Roth IRA is a much, much better way to invest your money.

To be fair, I have heard other arguments for purchasing permanent life insurance such as for estate planning reasons and as another tax-advantaged way to save money – but these are both for high net-worth people.  Ramsey did not touch on these reasons, possibly because they only apply to a small segment of the population.

Dave’s recommendations for purchasing life insurance:

  • Buy low-cost level term insurance – term is for a specified period of time and is substantially cheaper.
  • Insure your spouse – even if he/she is a stay-at-home spouse.
  • Stay away from fancy options such as accidental death, return of premium, waiver of premium.
  • Children only need enough for burial expenses – usually can be purchased inexpensively as a rider on your policy.
  • Purchase coverage of about 10 times your income

Insurance coverages to avoid

  1. Credit life and disability to pay off your loan if you die, they are generally extremely expensive compared to life insurance
  2. Credit card protection
  3. Cancer and hospital indemnity – health insurance should cover this
  4. Accidental death – stick to standard life insurance
  5. Any insurance with cash value, investments, or refund
  6. Pre-paid burial policies – pre-plan your burial and save up for it if you want, but don’t pay for it until it is time to pay for it.
  7. Mortgage life insurance – If you can’t get normal life insurance, then this might make sense; in general, though, it is decreasing term insurance that is about 10x too expensive.
  8. Any kind of duplicate coverage – for instance, having two health insurance policies will not ensure you have full coverage, in fact, you will end up with no coverage as the two companies fight over who is the “primary” insurer.

So, that was the lesson.  There was a lot of detail in this lesson, and a lot of railing against permanent life insurance!  Of course, it is not possible to provide enough detail on each individual type of insurance I mentioned in this post to be able to make an informed purchasing decision.  But take the list of recommended insurances as a starting point to evaluate your current coverages and see where you may need to do a little more risk transference.  Just remember to do some more indepth research before modifying or purchasing any policies.

Check out my previous FPU posts:

15 Key Questions to Ask when Looking for an Insurance Policy

September 11, 2009 · Filed Under Insurance · 2 Comments 

I was contacted recently by a reader who also happens to be an employee of State Farm Insurance. He passed along to me a list of 15 questions that you will want to ask an insurance company when either shopping for a new policy or evaluating your current provider.  So, if you happen to be in the market for a new insurance policy or want to re-evaluate your current policy (something I would actually recommend you do periodically), here are some questions to get you started.

Again, I did not create this list, I’m just passing it on to you as I feel it’s a good list of questions to discuss.  I’d be particularly interested in the answers to questions 2, 3, 6, 7 and especially 10.  Regarding #10, I’ve always found quite annoying the idea that I faithfully pay my premiums to the insurance company but they raise my rates as soon as I file a claim (wasn’t that why I was giving you all that money in the first place?  So, you could cover my claim if I needed something?).

State Farm® Key Questions for Consumer Empowerment

  1. How do I know that I’m getting the right amount of coverage for my situation – not overpaying for things or leaving me exposed?
  2. What are the advantages of having different types of insurance policies (home, auto, life, etc.) with the same provider?
  3. What disadvantages are there of having multiple insurance policies (home, auto, life, etc.) with the same provider?
  4. How can I understand what comprises a good policy for my situation under each of the insurance categories? Language is complex and difficult to understand.
  5. How does your company make sure that I can get smart, trusted advice if my personal situation changes?
  6. What can I do to make sure that I get all of the discounts I’m entitled to?
  7. Are there benefits to renewing with the same company when my policy ends?
  8. How can I ensure that I’m making an apples-to-apples comparison if I’m price shopping among several companies?
  9. How can I make sure that my insurance decisions fit into my overall personal financial picture?
  10. What is the impact on me if I file a claim? Explain to me why my policy goes up when I make a claim? How is this protecting my financial needs if my insurance company raises my premium?
  11. What are the most overlooked discounts that are relatively easy to get?
  12. How frequently should I review insurance policies to ensure they are up-to-date and meet my needs?
  13. How can I tell if an insurance agent is being “straight” with me, or just trying to sell something else?
  14. Do my kids get a discount when they buy a policy with the same company that I have been with for years and years?
  15. Will a poor credit rating influence the coverage I qualify for and my premiums? How do I know if an insurance agency is investigating my credit report? Is that legal?

Personal Finance Basics Part 1 – The Basics of the Basics

August 11, 2008 · Filed Under PF Basics · 2 Comments 
Personal Finance Basics

Today I am starting a series on personal financial planning basics. In this series, I’m going to go over some of the main topics of personal finance – this will be a high level introduction to the topics that most people should consider when they first get started thinking about personal finances.

Today’s post will go over the very basic necessities – these are the things that you must think about for any basic financial plan. This is the bare minimum you should consider if you want to properly take care of yourself and your family. In part 2 of this series, I will go over some “optimizations” to the plan (hey, I’m an engineer, this is just how I talk)(no, not the kind that drives trains). These first two posts are to serve as the introduction to the topic. In future posts, I will get into more detail on each topic.

So, this is my list of the basic items needed for a financial plan: Click here to continue reading…

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