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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 Accuquote.com 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.

Guest Post: How Declaring Bankruptcy Affects Your Life Insurance Rate

April 21, 2010 · Filed Under Insurance · 4 Comments 
Today’s guest post was provided by Denise Mancini of Accuquote. Check out Accuquote.com for free life insurance quotes from top-rated companies.

For some people, debt is a part of life, but when debts careen beyond control to a point where you can no longer repay, filing for personal bankruptcy is a way out. However, before you file for bankruptcy, there are important repercussions you should consider, especially facts related to your life insurance premiums.

Bankruptcy and life insurance
If you own an existing life insurance policy, it is usually left untouched by the bankruptcy court, to protect the interests of your beneficiaries. If you own a permanent life insurance, you will be allowed to retain a portion of the cash value that has accumulated on it. How much you are allowed to retain depends on where you live, because the rules are different from State to State. If you have taken out a life insurance policy on someone else like your spouse or your kids, you will have to surrender the same to the court.

Bankruptcy will affect your life insurance rate.

Most people file for bankruptcy because it wipes the slate clean and helps them to start over. It is common knowledge that a bad credit score will adversely affect life insurance premium rates. However, will bankruptcy improve the situation? Let’s explore the repercussions of bankruptcy on life insurance premium rates.

If you are already in deep debt, it makes sense to file for bankruptcy. Buying life insurance with a bad credit score is not a good idea because of the exorbitant premiums you will be charged, which in turn will worsen your financial situation. For someone in this situation, it makes sense to first file for bankruptcy, and then wait a while before applying for a life insurance.

It definitely won’t be easy then too, because life insurance companies see your bankruptcy as a lack of restraint, and being careless with your finances. They therefore have reservations about your ability to pay premiums. It usually takes about 7 to 10 years until your credit report will stop reflecting your bankruptcy.

Buying a life insurance policy after bankruptcy

Since life insurance is a purchase that can never be put off, waiting out for a decade until your credit report stops reflecting your bankruptcy is definitely not advisable. The better option is to buy a 10-year term life insurance policy. You will be paying higher premiums and it may turn out to be quite a struggle, but it is better than putting your family’s welfare at risk. The first few years on a policy are the most expensive for a life insurance company, and their high up-front costs make them very cautious when approving policies. As someone with a bad credit history, you will be considered a risky customer.

The good news is that there are term life insurance companies out there, who will look favorably on your case if they know that your bankruptcy has been completely discharged. The key is to find such companies. Luckily, with the advent of a host of online life insurance quote providers, it is not difficult to identify such companies. All you need to do is, fill up their online form as accurately as possible. Don’t forget to click ‘Yes’ when you are asked if you have filed for bankruptcy in the last 5 years. Based on the information you submit, you will be given quotes from companies that look most favorably on your bankruptcy and on other information you have submitted. These quotes are unbiased, genuine and correct because they are chosen from among hundreds of policies and reflect information in real-time.

Bankruptcy can be a very difficult experience, and you may be tempted to wait a while before getting your life insurance. However, you will risk putting your family going through dire financial hardships. Once your bankruptcy is taken off your credit report, you can request the life insurance company to review your policy, so that you can qualify for lower premiums.

Guest Post: Options for Term Life Insurance Death Benefits Payouts

February 12, 2010 · Filed Under Insurance · 2 Comments 
Today’s guest post was contributed by Denise Mancini of Accuquote.  If you are looking for term life insurance, (and you probably know I am a big proponent of life insurance, especially term life insurance) Accuquote is a good place to start investigating specific term life insurance policies.

There are pages written about how to buy term life insurance, but very few devoted to death benefit claims and payouts. Sadly, this topic is so neglected, that awareness levels on this matter are very low. Term life insurance is the best kind of life insurance available today, and it would be a shame if your beneficiaries do not know or are misled about payout procedures. This article
will help fill the gap and provide some insights into the types of term life insurance payouts.

The first step
When a loved one has expired and the funeral formalities are finished, you, the beneficiary needs to submit a certified copy of the death certificate to the insurance company. The death certificate is a must in order to file an insurance claim. Instead of contacting the insurance company, contact the agency or agent that sold the policy to the insured. Numbers of both the agent/agency and the life insurance company are usually found on the policy itself. The agent will help you understand the procedure better, and will ease the process for you in your time of grief.

Death benefit payout options
When your claim has been filed and approved, the life insurance company will ask you how you would like to receive the death benefit amount. There are two main payout options:

Lump Sum
Almost every term life insurance policy allows you to withdraw the entire death benefit amount in a lump sum. Most beneficiaries opt for this payout plan if there are pressing financial commitments like loan payments or an urgent need for the entire amount. Some beneficiaries prefer to withdraw the entire amount, and then direct it to tax-deferred investment vehicles.

Annuity Methods

For those who do not wish to receive the death benefit in a lump sum, life insurance companies offer several types of annuity (yearly) payout options depending on how you want to receive the amount. These include:

  1. Life income: The beneficiary is guaranteed an annual income as long as he or she lives. The insurance company determines the payment amounts based on the age and gender of the beneficiary. If the beneficiary dies, the insurance company retains the balance amount.
  2. Life income, period certain: The beneficiary is guaranteed an annual income for life, or a specified period of time, whichever is longer. If the beneficiary dies before the specified period, his or her beneficiary i.e. a second beneficiary receives the outstanding payments.
  3. Last survivor income: If there is more than one beneficiary, life payments will be made until the last surviving beneficiary dies.
  4. Specific Income: The beneficiary gets to choose how much and for how many years death benefits will be received, until the entire death benefit is exhausted. If the beneficiary dies before the last payment, his or her beneficiary receives the remaining payouts.
  5. Interest income: This is a great option for minor beneficiaries. The beneficiary is guaranteed payments on the interest paid on the death benefit for a specified time, or until the beneficiary reaches a certain age. The original benefit is then made available to the beneficiary.

Always think your options through

Before choosing a payout option, evaluate your financial needs to determine which option is best for you. It is always wise to speak to a financial advisor or a tax consultant. Though the payment options are relatively simple and easy to comprehend, it is wise to understand them thoroughly and know the implications of each kind of payout method. Beneficiaries must be aware that though the lump sum benefit is tax-free, all interest amounts received on the lump sum are taxable.

If you do not own a term life policy yet, the Internet is a great place to shop around and get free term life quotes. Just make sure that your beneficiaries are kept in the loop about the options available to them when claiming your death benefit.

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:

Things to Consider when Replacing a Life Insurance Policy

October 8, 2008 · Filed Under Insurance · 1 Comment 

Over the past few posts, I’ve been talking a lot about insurance, specifically life insurance.  In the last two posts, I’ve discussed the process we used to buy new life insurance policies and then discussed why we decided to cash in our variable adjustable life policies and replace them with term policies .  Though I recommend buying term life insurance, I would be remiss to not discuss some of the concerns to be aware of if you decide to replace your current policy.  (I would also be remiss to have any more posts concerning life insurance in the near future!)

Be cautious when replacing life insurance coverage

Photo by Picture Perfect Pose

If you currently have a variable or whole life insurance policy (let’s call it "cash value" today), I urge you to be very cautious when replacing your existing coverage.

The first and most important rule when replacing your current coverage, term or cash value, is do not cancel your current policy until you are sure your new policy is in effect .  This is absolutely critical – you can’t afford to have something untoward happen after you’ve canceled your policy but before your new one is in effect.  Or, what if you cancel your current policy and your application for new coverage is rejected?  For someone who needs life insurance, expensive coverage is much better than no coverage at all! Please, proceed slowly and cautiously when doing this.

Your current policy may have surrender charges

If you haven’t had your cash value coverage very long, you might have to pay a surrender charge to free your money.  Yes, you may have to pay the insurance company more of your money to take out your money.  Of course, since almost 100% of the premiums go to the insurance company the first year or so, you might not have much money to take out anyway.

Make sure a new policy is cost-effective

On the other hand, if you’ve had your policy a long time, even a new term policy might be just as expensive as your current policy.  This is especially true if you’ve developed health issues or started smoking (or took up sky-diving) in the meantime.

But on the other hand (that’s 3 now?), insurance rates have gone down quite a bit in the last few years, so it might be worth it to check out the current rates.  You might be able to save a significant amount of money, especially if you’ve improved your health by quitting smoking or losing weight (or stopped sky-diving)

Two miscellaneous words of caution

Remember that most insurance policies have an exclusion period during which they won’t pay the death benefit under certain circumstances.  For instance, on my new policy, they will not pay the death benefit if I commit suicide within the first two years. Also, if they determine that I lied about something on my application, they won’t pay out if I die within the first two years and the thing I lied about contributes to my demise.  (don’t lie and don’t commit suicide and you can ignore this warning – you know, that’s just two real good pieces of advice for everyday living right there)

Also, when choosing a replacement term policy, remember that the insurance company still has to be around in 25 years or whatever to pay out the death benefit if you die while you have the policy.  So, don’t scrimp too much and get a unstable company just to save a little money each year.  (Of course, in the current economic climate it is very difficult to determine which companies, if any, are stable…but do your best)  Check out ambest.com to get the current ratings of insurance companies – you do have to register to see their ratings but registration is free.

Talk to someone

If you are considering replacing your cash value policy, my advice would be to talk to a professional or someone with a lot of experience in this area to see what makes sense for you.  Of course, talk to someone who will have your best interests in mind and not just his/her commission check.  Whatever you do, don’t let him/her churn you into another expensive cash value policy that will trigger another set of surrender charges and crazy first year fees.

So, check out rates on insweb.com or selectquote.com and see if replacing your current coverage is worth it, then go through the entire process before doing anything with your current policy .

Photo Credits: Picture Perfect Pose and upyernoz

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