Advisor Today - July/August 2016 - (Page 19)

PRODUCT SPOTLIGHT BUSINESS INSURANCE By Michael C. Staeb The Challenges of Writing Business-Related Insurance Read this article to learn how to avoid the pitfalls of providing business insurance. L ife insurance is the veritable Swiss army knife of a financial-planning tool. This is especially true for business owners. A well-designed policy can do far more than fund the death clause of a buy-sell agreement. Cash value can be used as a balance sheet savings vehicle and a source of future capital for growth initiatives, acquisitions, supplemental retirement income, ownership transitions and more. Riders like the waiver of specified premium can make a policy self-completing in the event of a disability. And a long-term care or chronic-illness rider can provide benefits to take care of a key person who gets sick. In offering these solutions to our clients, we must be prepared to navigate the challenges that are inherent in applying for, underwriting and placing business-related life insurance. Here are some of these pitfalls-and how to avoid them. a life insurance benefit greater than his group plan, create an executive bonus or make another use of business-owned life insurance. An easy way to find out what he really wants is to ask him a question: "Who do you want the life insurance proceeds payable to?" If the answer is "the business," then ask the next question: "What would the business use the life insurance proceeds for?" The answers to these two questions should help you determine the need the business is trying to fill and assist you in positioning you as an advisor, not just an order taker. Prospects asking for key person insurance Business owners don't know what they don't know, especially when it comes to life insurance. Often a prospect who is asking for "key person" insurance is not really asking about key person. He more likely wants to cover his buy/sell agreement, provide just salary. When underwriting key person needs, most carriers limit coverage to 10 times the person's income. What is often overlooked is that many carriers consider all forms of compensation. An executive making $100,000 as a base annual salary may have bonuses, benefits and stock options, Proving insurable interest While it is relatively simple to justify the amount of coverage needed to fund a buy-sell agreement, other business uses of life insurance can be a challenge. With an ever-evolving economy, employee compensation is rarely which can easily total another $50-100k. When you add all that up, you've taken a $1 million in insurable interest and doubled it. An additional means of documenting insurable interest beyond 10 times the income for key employees includes taking into account specialized skills or other criteria that make their positions difficult to replace. Owner and beneficiary designations Employer owner and non-employee spouse beneficiary One of the major tax benefits of life insurance is that death benefit proceeds are income tax free. However, an incorrectly titled policy can result in voiding that most valuable of features. Take the example in the chart below: What's wrong with this situation? Because ABC is the policy owner and premium payer, but not the beneficiary, the death benefit is effectively ABC writing a check to John for $1,000,000, which is likely taxable to John as ordinary income. It is advisable that for any business-owned policy, the business should also be the beneficiary. In the cont'd on page 20 July/August 2016 | ADVISOR TODAY 19

Table of Contents for the Digital Edition of Advisor Today - July/August 2016

From the Editor
A Question of Ethics: Reflections on the Dol Fiduciary Rule
Getting the Wealthy Investor to Hire You
Positioning Whole Life for Success
Rewarding Clients for Engaging in Healthy Activities
Feel the Heat: Sizzling Strategies for Boosting Worksite Sales
The Challenges of Writing Business Insurance
A Lifetime of Success
Safeguarding Your Business Interests
NAIFA Presents Nominees for Election
What’s Behind Brand Magic?
Making an Effective Call Back
A Story for All Your Clients
Ideas to Expand Your Practice
Advertiser Index
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Advisor Today - July/August 2016