THINGS TO CONSIDER
You’ve worked hard to build your business. It’s the underpinning to your family’s financial security. When was the last time you reviewed your business plans and the life insurance policies securing them? Have you considered whether the plans you made a while ago are sufficient to secure the business today or that your executive benefits designed to recruit, retain and reward key people are still competitive in the marketplace?
You should review your business’s situation on a regular basis.
- Has the value of the business increased significantly since the last time you updated your buy-sell agreements? Is the current amount of insurance sufficient to fund the value of the business?
- Has your business’s line of credit increased since your last review? Is the key person death benefit on you sufficient to cover the impact of a call on that line of credit at your death?
- Is the current amount of key person insurance in force on your key employees still sufficient to cover the costs of hiring and training their successor should they die?
- When was the last time you reviewed your executive benefits plans for key employees? As the business has grown, some key employees’ compensation packages may not reflect their current salary or have kept up with the marketplace. Key employees who joined your company recently may not have been included in existing discretionary benefit plans.
In-force illustrations may be requested from the issuing life insurance carrier. Here are some questions to consider while reviewing the policies.
- Are the policies performing as expected?
- Have the policies experienced market volatility, or have they experienced decreased interest or dividend crediting rates?
- Has there been any change in the carrier’s financial status?
- Have there been any improvements in medical underwriting of the insureds’ impairments, or are there table-shaving programs available that could reduce a policy’s mortality costs or eliminate undesirable ratings?
- Have there been reductions in the current costs of insurance available in the marketplace?
Life insurance is a complex and highly flexible financial instrument that should be monitored regularly. Like any financial asset, it won’t necessarily perform as originally illustrated. Policies may not be performing due to market downturns over the past few years or historically low interest rates. Some carriers have even increased their cost of insurance charges in order to continue to be profitable where they’ve been unable to further lower interest crediting rates due to contractual guarantees.
Life insurance products, like many products available to consumers, are constantly evolving in design and focus. Recent design improvements may not have existed at the time the current policy was issued. For example:
Extended Maturity Riders
These riders address the increasing life expectancy of aging America by preventing the life insurance policies from endowing during an insured’s lifetime. If a policy were to endow due to the insured living to the policy endowment age (e.g., age 95 or 100), the policy cash value would be payable and taxable as ordinary income to the extent it exceeded the tax basis of the policy.
Indexed Universal Life (IUL) Policies
The cash accumulation within an IUL policy is based on the performance of a stock index, such as the S&P 500, or multiple indices. The cash value inside an IUL policy is adjusted based on the movement of the selected index and not the actual purchase of stocks, bonds, or mutual funds. Additionally, IUL policies usually provide a floor that can protect the policyholder from negative returns and a cap that limits how much of the selected index’s performance can be credited to the cash value growth.
No-Lapse Guarantee (NLG) Products/Riders
These products maintain the death benefit in force, regardless of the cash value performance, as long as the required NLG premium is paid. Guarantees are subject to the claims-paying ability of the issuing insurance company.
Long-Term Care (LTC)/Chronic Illness Riders
An LTC or chronic illness rider allows the insured to accelerate the life insurance policy’s death benefit on a tax-free basis to pay for qualifying expenses as defined in the policy. Any amount paid out reduces the policy’s death benefit. Once acceleration begins, the death benefit is generally reduced “dollar for dollar” and the cash value is reduced proportionately.
THE BOTTOM LINE
Life insurance is an important component of one’s business plan. Too often, it’s purchased for a specific purpose and then forgotten about. Situations change, and the current coverage could be insufficient, or the policies may underperform, leaving the policyholder at risk for unexpected premiums or taxable events. Business owners should review their policies regularly, as well as their current business plans, to be sure the policies are performing, and the coverage is in line with their current needs.
LIFE INSURANCE – AND A WHOLE LOT MORE
PartnersFinancial is a national community of industry-leading, independent life insurance and financial professionals. For more than 30 years, the organization has supported its members as they build insurance industry knowledge and expertise. In the process, PartnersFinancial members created a powerful culture of idea-sharing and collaboration — all for the benefit of their clients.
PartnersFinancial members take advantage of the organization’s preferred market access and clout to offer clients a comprehensive selection of high-quality insurance and wealth transfer solutions. Members also have access to an extensive range of resources, technology, tools, and knowledge-sharing forums and events. A division of NFP, PartnersFinancial also offers members access to capabilities that go beyond an individual company’s scope.
PartnersFinancial is a membership platform of NFP Insurance Services, Inc., a subsidiary of NFP Corp. (NFP). Members of PartnersFinancial may or may not be affiliated with NFP. NFP and its subsidiaries and affiliates do not provide legal or tax advice. Compliance, regulatory and related content is for general informational purposes and is not guaranteed to be accurate or complete. You should consult an attorney or tax professional regarding the application or potential implications of laws, regulations, or policies to your specific circumstances
05/21 | PF-19192-16 | Copyright © 2021 NFP. All rights reserved.