Companies need life insurance for various reasons. A policy may be purchased to fund a buy/sell agreement.
Often, it’s to provide supplemental key
employee benefits for C-level executives.
Also, start-up companies with significant
capital expenses and debt and very little
cash flow may purchase a term policy to
protect against the loss of key members in
early years.
The goals and unique business environment of each company will determine
what type of life insurance policy is appropriate. And because businesses grow, companies trade hands and people move on, a
policy that is suitable one year may need
updating a few years down the road.
“It is critical to take stock of your company, assess your goals and review the status
of the life insurance policy each year, ” says
Richard Gary, associate director, SS&G
Financial Services, Inc. in Akron, Ohio.
Smart Business spoke to Gary about
what type of policy is appropriate for your
corporation and why an annual review is
important.
What are the first questions an executive
should ask when purchasing a life insurance
policy for the company?
First, determine the amount of insurance
you need, and then decide how long you
will need it. While your answer may be, ‘We
need the insurance until the key person
dies,’ the question then becomes: What if
this person retires and leaves the company? Do you want your insurance policy to
live on? How much money will you need to
cover the loss of this key person? To
replace him or her, you will need working
capital immediately.
Perhaps your company consists of multiple, unrelated shareholders; one passes
away and the remaining want to buy out
his or her stock in the company. Insurance
can make this possible. How much will you
need? To choose the right company life insurance policy, you have to nail down these
two variables: How much and how long?
What types of life insurance are available for
corporations?
The two main policy groups are term and
permanent insurance. If you answered the
question ‘how long’ with a relatively short
period of time, a term policy may be appropriate. Term insurance premiums may cost
less today, because of the limited life of
these policies — generally 10-, 15- and 20-year coverage — and a significant increase
in premiums at the end of the premium
guarantee period. Or, if a key person will
definitely leave your company within a
short period of time — say 10 years — a
term insurance policy is appropriate if
there is no deferred compensation plan or
buy/sell agreement involved.
How is a permanent policy different from
term insurance?
If you answered the ‘how long’ question
with ‘for life,’ or you want to insure a key
person until he or she is at least 90 years
old, you’re wise to purchase a permanent
policy. These are long-term contracts, and
you may purchase either whole life, universal life or a variable universal life policy.
Universal life is based on interest crediting
rates. Let’s assume you purchase a policy
today at a 5.5 percent interest rate. You
then decide how long you want the policy
and how many years you want to pay premiums. A computer calculates the premium based on these assumptions and the
nonguaranteed costs of the insurance.
There are policies that are funded by various investment sub-accounts. There may
be up to 60 different options, and these
investments are the cash value of the policy. Review the investment objectives and historical performance for each sub-account and then choose the ones that
meet your risk tolerance. You must manage
the sub-accounts you choose because
these fund the value of your life insurance
policy, including the cost of the insurance.
This arrangement is just like any long-term
investment vehicle.*
How should company executives evaluate
the performance of these various policies?
Regardless of your type of policy, you
should review an inforce illustration each
year to make sure the policy still meets
your needs and is tracking the original projections, even if you opted for a policy with
guarantees. Meet with the agent who wrote
your policy to discuss how the arrangement meets your needs today and tomorrow. If you have a term policy, you may
decide halfway through the term that you
want to extend the term or convert the policy to permanent insurance. Those with a
universal life policy may need to adjust
their plan depending on corporate dynamics. If you hold a variable universal life policy, you should review your investment
choices each year to determine how they
are performing.
Remember, take your time when choosing a policy and think through changes during annual consultations with your agent.
The life insurance guarantees are backed
by the claims paying ability of the issuing
insurance company.
Securities offered through Multi-Financial Securities Corporation, Member FINRA, SIPC, an ING company. SS&G
Wealth Management and SS&G Financial
Services are not affiliated with Multi-Financial Securities Corporation or ING.
*Variable life insurance frequently
involves substantial charges for early
withdrawals. Investment sub-accounts
value will fluctuate with changes in market conditions. Investors should carefully
consider the investment objectives, risks,
charges and expenses of the variable life
insurance. This and other important information is contained in the prospectus.
Please read prospectus carefully before
investing.
RICHARD GARY, CLU, is an associate director at SS&G
Financial Services, Inc. in Akron, Ohio. Reach him at (330) 668-9696 or [email protected].
