Throughout an economic recognition workshop, among the inquiries elevated was: "What makes an excellent monetary plan as well as can you explain simply without any intricate lingo."
Thankfully, our trade-marked method to the financial preparation procedure named Financial Planning Pyramid was available in handy. The pyramid is just one of the most stable frameworks in the world; the Financial Preparation Pyramid is symbolic of noise as well as solid monetary plan.
Allow me first share the crucial items that cause the Financial Planning Building Blocks.
Geoffrey J Thompson states desire (Begin with the End in Mind)-- List down all the short-term (much less than three years), medium-term objectives (3-- 7 years) & long-term objectives (7 years & even more).
Truth Check (Where do you presently stand)-- Penciled down the regular monthly Earnings, ordinary monthly Expenses-- break down amount required for required expenditures, lifestyle expenses, EMIs) to reach your ability to save; as well as a list down the loans & responsibilities.
Available Resources-- The sources that you will undoubtedly utilize to attain your goals. Your existing assets, your current revenue surplus.
Means Forward-- is a candid photo of the commercial strategy. This captures the five necessary building blocks of your Financial Plan.
The alphabets "ERGRE" summarize the 5 foundations of the financial strategy.
Reserve-- A reserve set aside to fulfill costs connected to emergency situation (good/bad), such as an unanticipated trip for a marital relationship of a close relative, gifting a newborn of a close member of the family, repair services to your vehicle, and so on, making sure that long-term investments are not disturbed.
Threat Security-- Term insurance coverage, medical insurance and also individual crash insurance coverage (covering short-term, partial or long-term special needs) are the must.
" WHAT IF"-- Term Insurance coverage is positive insurance coverage offers a high insurance policy coverage by paying reduced costs-- an income substitute approach. If the individual does not die but is made partly as well as wholly impaired, the personal accident insurance coverage comes in convenient. Medical insurance is a have also to have a firm offered one. The cost of hospitalization has risen substantially; hence one should get in touch with the personal economic advisor for a mix plan that gives a high amount of insurance policy coverage by playing low costs.
Goal Planning-- Article note down the goal, it is necessary to appoint a current worth per objective; after that factor appropriate inflation per target to get to the future worth that will be needed when the aim matures.
Retirement Preparation-- Retired life is also an objective, however, is maintained separately to highlight the significance of this goal. The advanced medical center is slowly increasing human life-span. Not obtaining a salary for a couple of months could cause a nightmare to several; imagine funding for Three-Decade on secure income.
Estate Preparation-- Election is not a will. Making a will doesn't cost anything, yet will save a great deal of inconvenience. A childless couple acquired a house in a high-rise apartment in Noida. The partner had an unexpected sudden death. As per the Hindu Sequence Act if a partner dies, then the wife will have to get NOC from all the departed husband's siblings. A will, together with the complete document of all savings account, financial possessions, insurance policies, fundings as well as digital properties, such as a collection of arts, pictures, music, etc., is a must.
The first two ER (Emergency, Threat Security) helps to shield hard-earned loan.
The following GR (Objective & Retirement Preparation) adds direction to invest as well as enables
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The Final E (Estate Planning) permits transferring the full range to the liked ones flawlessly.
Planning for retirement can never come too early. Young people across the United States haven’t begun to set aside money for retirement purposes, thinking it is simply too soon to start worrying about something that will take place 30 or even 40 years from now. Unfortunately, there are many Americans who have put off retirement planning for far too long, and are now approaching retirement age with little or no finances set aside. Your own parents may not be adequately prepared for their retirement.
Now that Father’s Day has past, we’ve prepared a simple guide to help your father prepare for retirement. Think of it as a Father’s Day gift that keeps giving, helping to support your loved one and to give him a stable financial outlook well into the future. Let’s get started.
The Cold Facts about Retirement Planning
The Indexed Annuity Leadership Council conducted a survey to determine the status of retirement planning in the United States. The statistics collected in the survey were staggering. Of the findings, several important statistics stand out. These include:
The last number is especially concerning, as financial experts and retirement planners alike agree that savings should be based on one’s salary; ideally, one should have at minimum 10 times their final working salary set aside for retirement purposes. There’s even a timeline available to help track retirement savings:
The sad fact is that too little is being set aside for use during the retirement years. Without adequate retirement savings, people are working longer, skimping on critical healthcare and medications, living well below their accustomed comfort level, and potentially winding up in serious, detrimental financial situations.
Three Ways to Help Your Father Plan for His Retirement
Now that we have a clear picture of the dire need for retirement savings, many people wonder what they can do to help their parents as they approach retirement age. There are many potential options, but we’ve highlighted three time-honored methods to help ease the process.
If employer-sponsored plans are not available or not offered by a given employer, there are still other retirement savings options. Some of the most popular options are Individual Retirement Accounts, or IRAs. In these plans, there are specific tax advantages, helping to preserve the value of the savings in the accounts well into the future. Even if your father is enrolled in a 401(k) plan, having a diversified retirement portfolio makes smart financial sense. An IRA is one option, as are fixed indexed annuities, investments in real estate, and even stock/bond investments. With a diversified retirement plan, your father can weather the ups and downs of the economy, ensuring a stable source of income long after he retires from his job.
2. Recruit a professional retirement planner – while many people choose to “go it alone” when it comes to retirement planning, the services of a financial professional can be invaluable in creating a safe, stable retirement. Financial professionals — some who specialize in retirement planning options — can provide guidance, identifying future needs and goals and developing a plan to reach those goals. These professional planners can also provide advice and insight into tax implications, alternative savings strategies, and can recommend ways to fill financial gaps. If your father is nearing retirement age and hasn’t set aside enough money to live comfortably, the investment in a financial planner’s specialized services can create a positive situation, paving the way for a stable financial future.
3. Spend more time with your father – this last tip is not specific to retirement planning, but it can lay the groundwork for the future all the same. It has been shown in numerous studies and surveys that those approaching their retirement years struggle to find activities to occupy them after they’ve quit working. Many retirees discover they are aimless – without a sense of purpose — now that the routine of work is no longer part of their daily activity. Retirees want to feel valued and loved, and spending time with them can create connections that last. To help your father feel like a valued member of the family, spend time with him. Introduce him to new activities such as:
These cost-effective activities can open new doors of opportunity, allowing your father to discover something to contribute to and to keep him occupied when he no longer is working. And, of course, it brings families closer when they can enjoy activities together.
With these tips, it is easier than ever to create a retirement plan that accounts for current and future financial needs and goals. It’s never too early to start planning for retirement, and by the same token, it’s never too late to take charge of your financial future. Help your father overcome his retirement planning deficiencies with these three steps, and you can rest easy knowing that he can retire comfortably when he is ready.
Geoffrey J Thompson remarks throughout a monetary recognition workshop, among the concerns elevated was: "What makes a great monetary strategy and can you clarify simply with no intricate lingo."
Fortunately, our trade-marked strategy to the economical preparation process called Financial Preparation Pyramid came in convenient. The pyramid is just one of one of the most stable frameworks on earth; the Financial Planning Pyramid is symbolic of a noise and company economic strategy.
Let me very first share the essential items that cause the Financial Preparation Structure Blocks.
Desire (Begin with the End in Mind)-- List down all the short-term (less than three years), medium-term goals (3-- 7 years) & long-lasting goals (7 years & even more).
Truth Examine (Where do you presently stand)-- Pen down the monthly Earnings, month-to-month Expenses-- damage down quantity required for necessary expenses, lifestyle expenditures, EMIs) to arrive at your capacity to conserve; as well as a list down the lendings & obligations.
Available Resources-- The sources that you will undoubtedly make use of to attain your objectives. Your existing properties, your current income excess.
Means Onward-- is a simple snapshot of the economic plan. This records the five important foundations of your Financial Plan.
The alphabets "ERGRE" sums up the five building blocks of the commercial strategy.
Emergency Fund-- A reserve set aside to satisfy costs connected to emergency (good/bad), such as an unexpected trip for a marriage of a close relative, gifting a newborn of a close member of the family, repairs to your cars and truck, etc., ensuring that lasting financial investments are not disturbed.
Risk Security-- Term insurance, medical insurance, and personal crash insurance coverage (covering momentary, partial or permanent handicap) are the must.
" WHAT HAPPENS IF"-- Term Insurance is actual insurance policy supplies high insurance protection by paying reduced costs-- an earnings substitute approach. If the person does not pass away, however, is provided partly as well as permanently impaired, the individual accident insurance is available in useful. Medical insurance is a must also if you have a company provided one. The price of hospitalization has risen dramatically; therefore one must get in touch with the individual economic consultant for a combination plan that gives a high sum insurance coverage cover by playing reduced premium.
Goal Preparation-- Post note down the objective, it is necessary to assign a current worth to each goal; then element ideal inflation to every target to get to the future value that will be required when the purpose grows.
Retired Life Preparation-- Retirement is additionally a goal, however, is maintained different to stress the value of this objective. The innovative medical center is gradually boosting human life-span. Not receiving a salary for a couple of months can cause a nightmare to be numerous; think of financing for 30 years on easy revenue.
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Estate Planning-- Election is not a will. Making a will certainly don't set you back anything, but will save a great deal of trouble. A childless couple purchased a residential property in a skyscraper apartment in Noida. The spouse had an unexpected early death. As per the Hindu Succession Act if a hubby passes away, then the other half will undoubtedly need to get NOC from all the departed partner's siblings. A will, along with the full record of all bank accounts, commercial properties, insurances, loans and also electronic possessions, such as a collection of arts, pictures, music, and so on, is a must.
The first two ER (Emergency situation, Threat Protection) assists to protect hard-earned money.
The next GR (Objective & Retired life Preparation) includes direction to spend and also allows
The Final E (Estate Planning) permits transferring the full range to the loved ones correctly.
No matter where we are in our careers, thoughts often turn to retirement.
From the young person just starting out in the employment journey to the seasoned veteran who is counting the days until finally being able to retire in peace, the concept of retirement is filled with challenges, misconceptions, and even some surprises.
Retirement may not be all about relaxation and freedom; the reality is that retirement can be a lot of work on its own.
In this article, we’ll talk about some of the aspects of retirement that may surprise you. The goal is to prepare you for a retirement that is both enjoyable and free from financial stress.
Difficulty in Spending Retirement Savings
As responsible adults, many of us have spent our entire careers setting aside money for retirement. If done correctly – with a diversified retirement savings portfolio – chances are that the savings have grown over the years, thanks to the power of compounding interest and favorable market conditions. It may come as a surprise, then, that many retirees discover how difficult it can be to spend down that nest egg.
Throughout the process of retirement planning, we have been programmed to save, save, save. Now that retirement is here, the concept of spending that hard-earned savings seem alien and more than a little discomforting.
Retirement planners and financial professionals alike must oftentimes encourage their clients to spend down the retirement savings; in effect, giving their clients permission to spend their own money.
Government Retirement Benefits Aren’t Enough
It is an unfortunate fact in the United States that most of us do not save enough for retirement. One of the factors that influence this is the misguided belief that government-sponsored retirement benefits like Social Security, Medicare, and pension plans will provide all the funding we need after we retire. The sobering truth is that these benefits are simply not enough. Let’s look at some of the particulars behind these government retirement benefits:
When we look at these numbers, it is clear that our expenses in retirement are hardly covered by government retirement benefits. The solution to this shortfall is to start saving right now with retirement plans of your own. Relying solely on government benefits is a recipe for failure. A retirement planning professional can help you get started with a portfolio that will provide the funding you need to retire comfortably. This can include a variety of investment strategies and accounts, from annuities to Individual Retirement Accounts (IRAs), life insurance, stock and bond investments, and more.
Retirement Savings Must Continue to Grow
It may sound counterintuitive, but after saving all that money for retirement, it is still incredibly important that those assets must continue to grow in value. What does this mean? In simple terms, it means that saving enough to retire should not be the final goal; rather, developing a plan to make your retirement assets last the rest of your life should be the real goal.
The key to this is allowing the bulk of retirement savings to remain in place, where they will continue to grow in value due to interest rates, and only make the withdrawals needed to pay for expenses. In other words, taking a lump sum of all your retirement savings can negatively affect the overall value, and may subject you to significant tax implications.
Minimizing risks in investments is one way to preserve the value of retirement assets. Taking advantage of tax-deferred or tax-free investment/savings opportunities is another. A retirement planning professional can help you develop strategies that allow you to invest wisely, gain asset value, and protect that value for the years after you retire.
Retirement Can Be Lonely
Many people discover that after they retire, they’re no longer as active as they once were. Going to work every day offers some measure of social interaction with others; once that is taken away, many retirees find out that their days may be spent in isolation. This can have profound effects, causing people to feel a loss of purpose.
To counteract this lost purpose and the feelings of loneliness, retirement experts suggest developing hobbies outside the home. Retirees have many options when it comes to engaging with others, from social clubs to hobbyist groups, outdoor clubs, and activities. Volunteering is another great way to regain lost purpose and to make connections with others. Retirees often delve deeply into volunteer programs, such as giving time and effort to services for the underprivileged.
By remaining active and taking part in volunteer opportunities and outside-the-home interactions, retirees can continue to lead productive, engaged lives.
Retirement May Mean Help from Others
As we age, we are often no longer able to do the tasks that help us lead our daily lives. Depending on health, simple tasks such as cooking, bathing, and dressing can become difficult. It’s a fact that retirees need a support system, regardless of their health status, and this is especially true for those with debilitating illnesses.
Planning for a support system in the future is part of the overall retirement process. Long-term care insurance is one way of preparing for the future, as is investigating the possibility of retirement homes and long-term care facilities.
In a perfect world, our family members pitch in to help with daily tasks, but it is crucial to remember that our families typically have commitments of their own and may not be able to assist in the manner we need. Setting up a contingency plan for the future is a smart move, and can help ensure a comfortable retirement.
In the first part of our two-part series on business loan insurance solutions, we introduced the concept of these life insurance plans and how they can provide advantages to businesses of many types. We contrasted unincorporated versus corporate business interests, went over the financial hardships that may be experienced in a business owner’s untimely death, and talked about the many benefits such a plan provides.
In this article, we will delve into the mechanics of a business loan insurance plan and how they work to protect both business and personal assets. Finally, we will provide both a summary and a checklist to give business owners the information they need to make sound financial decisions. As with any business insurance plan, it is important to seek out the expertise of a qualified insurer to find the plan options that meet the specific needs of each individual business interest.
How Do Business Loan Insurance Plans Work?
Business loan insurance policies are economical and efficient methods for protecting critical business (and personal) assets. If a business owner were to die unexpectedly, any outstanding business debt would still need to be repaid, either through remaining business assets or by tapping into personal financial assets.
Let’s take a look at the mechanics of this insurance plan to understand how it works for a given business:
First, like many businesses, the business itself or its owner obtains a business loan or makes arrangements for an open line of credit. Lenders and creditors will require sole proprietor/sole partner businesses to personally guarantee repayment of the debt. Larger companies, such as multi-owner/multi-partner operations or corporations, may still have to provide assurances that the loan debt will be repaid.
To guarantee the funds needed to repay the loan debt in the case of an owner’s unexpected death, the business or business owner purchases a life insurance policy in an amount roughly equal to the outstanding loan. The business or owner pays the premiums on the policy, which are typically non-tax-deductible. For the purposes of this policy, the business is named as the beneficiary or the owner names a specific personal beneficiary, depending on the structure of the company and which entity actually owns the insurance policy. To summarize:
In many cases, creditors/lenders may require the assignment of collateral benefits of the policy, as their financial interests are at stake.
At the business owner’s death, benefits of the insurance plan kick in. Proceeds from the policy are paid income-tax-free, and are used primarily to pay the outstanding loan debt and any interest that has accrued on the debt. If the policy was assigned to the creditor(s) as mentioned above (collateral benefits), then the proceed payments go directly from the insurer to the creditor(s). If the business is named as the beneficiary, or the owner assigns a personal beneficiary, proceed payments will be made to them for repayment of the loan debt.
Any policy proceeds in excess of the amount needed to satisfy the outstanding debt can be used by the beneficiary to cover any financial needs that may have arisen at the owner’s death. These excess proceeds can often be used to pay for surviving family member expenses or sometimes to indemnify the business against the loss of the owner and his or her experience and skill.
Potential Value of Business Loan Insurance Proceeds
Value of the Tax-Free Insurance Proceeds
There are many advantages to business loan insurance plans. Many companies can benefit from obtaining such an insurance policy to protect their interests and assets from creditors in the event of an unforeseen owner death. There are other benefits, particularly in the value these policies (and their proceeds) represent.
The value of insurance proceeds received tax-free upon the death of the owner can be quite significant, especially when compared to t pre-tax profits or their equivalents. An example to illustrate this value can be useful: imagine a company existing in the 25% tax bracket. With a business loan insurance policy in place, $100,000 of tax-free proceeds from that policy are equivalent to $133,333 in pre-tax profits.
To make this value even clearer, consider that depending on a company’s profit margin, the sales required to reach $133,333 in pre-tax profits can be substantial. A company with a 10% profit margin would have to have $1,333,333 in sales; a company with a 20% profit margin would expect $666,667 in sales, and a company with a 30% profit margin would need $444,444 in sales to reach that $133,333 pre-tax profits number. So, with a $100,000 business loan insurance policy in place, the proceeds from this policy resulting from the death of the business owner could replace $666,667 of sales or receipts that would have to be used to satisfy any outstanding loan debt. This is assuming a 20% profit margin for the example company.
A Checklist and Action Plan for Businesses
Smart businesses protect their assets, no matter the circumstances. Small business owners that carry business debt must also protect their personal assets, as many lenders require personal guarantees of business loan repayment. Business loan protection insurance can provide that critical asset protection. There are three steps business owners should take now, including:
In the short term, there are additional steps to take to ensure that this valuable and important insurance is ready to protect business assets. These short-term steps include:
Draft and execute a resolution to authorize the purchase of business loan protection insurance if appropriate for the needs of the company and its ownership.
Execute any collateral benefit assignments, particularly if required by lenders/creditors.
Review the issued insurance policy to make sure it meets all needs. Make adjustments with the insurer as necessary.
Finally, companies change from year to year, and their needs will also change. It is a good idea to establish an annual review of all insurance policies, including business loan protection insurance, to ensure they remain current to the specific needs and circumstances of the business and its owners. It is also a good idea for businesses to evaluate their business continuation planning needs, such as establishing a buy-sell plan in case of death or permanent disability of the owner or other key employees.
Companies around the world insure their assets with business insurance. This is designed to protect from financial losses arising from property and equipment damage or destruction, such as in the case of certain natural disasters. Protecting key employees, however, is a commonly-overlooked area for many firms. Most people know that successful businesses are made up of more than just buildings and equipment, and the employees are a major contributor to the success or failure of a given business operation. In fact, it can be argued that employees are among a company’s most valuable assets.
To fill the gap, protecting both the company’s physical assets and its most valuable employees, key employee indemnification insurance policies are a great solution. In this two-part article series, we will investigate what may happen to a company if critical personnel should die, and the solution for protecting against financial losses associated with that death.
When Key Employees are Lost
Businesses are comprised of far more than physical assets like buildings, equipment, product inventory, and vehicles. Employees form the core of any business operation. As some of the most valuable assets a company can have, certain employees with extensive experience or unique talents tend to stand out. These are called “key employees”, and such employees can account for much of the success a business enjoys. Key employees include managers, department leaders, and directors, but are not limited to these categories. Such employees may be:
What happens when key employees were to die unexpectedly? First, profits may suffer. Businesses may also have to face significant expenses in recruiting and training suitable replacements for the lost employee(s). There both tangible and intangible losses a company may experience, including:
When a valued employee central to the operation is lost, it is clear that companies may face significant hurdles, both financially as well as in relationships with other employees or business partners. It is also clear that a logical move would be for a company to protect itself against these losses. How can companies protect themselves and their financial interests?
Key Employee Indemnification Insurance
A potential solution for protecting against the tangible financial losses of an unexpected death of critical employees is that of life insurance, specifically key employee indemnification insurance. In simple terms, this is an insurance policy purchased by a business to compensate that business for financial losses that would arise from the death or long-term disability of important company employees. This type of insurance is sometimes referred to as key man or key person insurance.
A key employee indemnification policy is typically a life insurance policy purchased on any employee who is considered a critical part of the business operation. Proceeds from such a policy can be used for a number of purposes, including:
There are many advantages in having these policies on critical employees. When a key employee dies unexpectedly or becomes permanently disabled and can no longer fulfill his or her duties, insurance proceeds work to maintain business continuity and to offset any potential financial hurdles the company may experience.
We’ve learned what key employee indemnification insurance is and how it can protect a company from financial loss when a critical employee dies or becomes permanently disabled. We’ve also talked about how the proceeds may be used for a wide range of purposes. In our next article in this two-part series, we will go over the components of key employee indemnification policies and how they work, including tax implications. Finally, we will provide a summary of the benefits these financial protection solutions provide to companies that rely on their most valued employees.
In our first article about business expense protection, we discussed the odds of a business owner becoming disabled at some point in his or her career. We also talked about typical business overhead expenses and the potential funding sources that can be used to pay for these expenses while the owner is disabled. We also covered three scenarios that impact the future of a given business. Finally, we introduced the concept of business overhead expense protection as the sole means of providing reliable funding for the business as the owner recovers from a disability.
Business Overhead Expense Protection Explained
Business owners may opt to purchase a business overhead expense protection policy. This is a type of insurance product available from many business-oriented insurers. This method of protection is the only reliable source of funds to pay for overhead expenses, especially as compared to the alternatives of draining business and personal savings accounts, conducting a forced liquidation of the business, or taking out a loan.
There are significant advantages associated with this type of business insurance. After purchasing such a policy, the business owner can pay overhead expenses during the recovery period from a short-term disability. This can ensure that when recovery is complete, the business will still be a going concern and can resume its operation when the owner returns.
In addition to providing a reliable means of paying for overhead expenses when the owner becomes disabled, this insurance protection can also accomplish:
In simple terms, business overhead expense protection insurance is a relatively affordable and efficient means of providing funds needed to keep the company running, covering expenses like rent, salaries, utility costs, and mortgages, only to name a few of the many overhead expenses a typical business faces.
How Does a Business Overhead Expense Protection Policy Work?
To understand a business overhead expense policy, it is useful to know its makeup and how it is configured. The owner of the business is insured by the policy, which is in turn owned by the owner or the business. For sole proprietorships, the owner is the policy owner as well. In businesses that are arranged as corporations or partnerships, the business itself is listed as the policy owner. Premiums paid to the policy are paid by the policy owner (individual or business). If the business owner becomes disabled as defined in the specific language of the insurance policy, the benefits are paid directly to the policy owner (the beneficiary of the policy).
If the owner becomes disabled, benefits covering all taxable business overhead expenses are paid to the policy owner. In general, these insurance policies provide coverage for up to two years of disability, which typically gives the business owner sufficient time to recover and to return to operation. If the disability is longer than the term in the policy, this two-year coverage window is usually sufficient for the owner to arrange an orderly and equitable business liquidation or sale. So, in other words, such a policy covers overhead expenses and buys the time needed to recover without rushing into a situation that may impact the future of the business operation.
As discussed earlier, any overhead expense benefits paid from the policy are reportable as income and are subject to taxation. However, business expenses actually paid by the benefits are eligible for tax deductions. Typically, there will be no additional income tax payable, eliminating the tax burden on the disabled business owner. The only potential tax implication is if benefits paid by the policy exceed overhead expenses. The overage may need to have tax paid on it as income.
Finally, premiums paid by the policy owner are fully tax deductible. This tax advantage is regardless of the type of business entity, including sole proprietorships, partnerships, LLCs, or corporations.
Final Words on Business Overhead Expense Protection
After evaluating the potential for a business to be impacted by the owner’s short-term or long-term disability, it is clear that there are few easy answers. Business owners face significant odds in becoming disabled for 90 days or longer at some point before they reach the age of 65. Faced with a disability, the business owner and his or her family must scramble to make several very tough decisions; should they sell the business? Liquidate its assets? Try to maintain the business until the owner can return? It can be a difficult and confusing situation for even the savviest business professional.
Business overhead expense protection stands as the logical and economical solution to these difficult situations. As a form of business insurance policy, overhead expense protection insurance allows the business to continue, paying overhead expenses as it goes along and allowing the business owner to recover without the financial worries associated with the company’s operation. Business insurance agencies can help company owners find the right policy to meet their specific needs, regardless of business type.
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The decision to liquidate a family-owned business is not one to be taken lightly. The death of a business owner, or a situation where the owner becomes disabled and is no longer able to manage business operations, can cause family members to feel pressure to divest themselves of business assets. This can have long-ranging negative effects.
In the first part of our series on business liquidation insurance, we discussed two potential scenarios, that of a forced liquidation or of a planned business liquidation. We also talked about some of the difficult decisions surviving family members must make regarding the future of the business or its sale. In this part, we will introduce the concept of business liquidation insurance, particularly the role of life insurance in buying time to dispose of the business assets in an advantageous manner.
Considerations on Business Liquidation Insurance
There are many types of insurance, including policies that protect business assets as well as life insurance policies designed to provide income after death or disability of the policy owner. For the purposes of this discussion, life insurance is the focus for business liquidation purposes.
As mentioned in our previous installment, a planned (or unplanned) business liquidation requires that the owner’s executor and/or family members need time to address the sale of the business, helping it to command a sale price that is fair and adequate. Rushing into a quick sale of a business after the owner dies or becomes disabled, or being forced into such a situation due to the lack of funds after the owner dies, can result in significant loss of value. Life insurance may be the solution that buys time.
In the Event of a Business Owner Death
When the liquidation of a business and its assets become the sole course of action when a business owner dies, life insurance can provide the financial liquidity needed to plan the sale of the business. Without adequate funds, the family of the deceased or his or her executor may be forced into a sale, creating a potential financial disaster for surviving family members. Life insurance can be put to use in several ways during a planned business liquidation:
In simple terms, only life insurance policies can protect a family’s financial future in the case of a business liquidation. The guaranteed funds from such a policy can stave off a forced liquidation, allowing family members or executors the time needed to make smart and advantageous decisions on the sale. Of course, the guarantee is dependent on the claims-paying ability of the policyholder and the insurer itself.
Insurance in the Event of Business Owner Disability
The disability of a business owner can take many forms. An owner may become disabled for a short period of time or may face a long-term or even permanent disability. It goes without saying that any disability severely impacts the owner’s ability to conduct business, and in many cases may result in the need to liquefy the business and its assets.
When a disability occurs, a business owner and his or her family will want time to make tough decisions about the future of business operations. As in the case of an owner death, life insurance buys critical time for the planned liquidation to occur.
For a short-term disability, it can be useful to consider the following scenario: imagine the owner wishes to keep the company operating while he or she recuperates and to avoid a forced business liquidation. As might be expected, business expenses continue to accrue, and the need for an income is paramount. Two special types of insurance policy may be valuable in providing continuity of business interests. In the first, business overhead expense insurance can be used to reimburse costs incurred by the business owner during a short-term disability. Disability income insurance is similar in that these policies are designed to provide income, especially lost income due to the disability.
Longer-term disability considerations are also similar. Loss of income can mean a forced business liquidation, and funds are needed to put an advantageous liquidation plan into place. In the case when a business owner is sick for an extended period of time and unable to work, disability income insurance serves as an income replacement. This helps provide the time needed to make decisions about the future of the business, such as who it will be sold to, its fair sale value, and when the sale may take place.
An Action Checklist for Business Liquidation Insurance
Now that we’ve learned the value of life insurance in buying the time needed to liquefy a business, an action plan can be useful. In the following checklist, there are three components: implementing a life insurance plan, implementing a disability insurance plan, and conducting an annual review of policy coverage.
Implementing a Life Insurance Plan:
Implementing a Disability Insurance Plan:
Smart business owners know that circumstances change. Because of these changes, it is critical to review insurance coverage, policy premiums, and specific terms on an annual basis. The guidance of a qualified insurance agent can be greatly beneficial during this review, helping business owners make the financial decisions needed to ensure a smooth business liquidation if the situation arises.
There are many factors that influence the success or failure of a business. The costs of doing business, including manufacturing, distribution, and marketing of products or services are some of these financial factors. Overhead costs, such as rents, employee salaries, and utilities can also eat into the profitability of a given company.
If the company’s owner and/or key employees should die unexpectedly or become disabled and cannot work, overhead costs continue to pile up. Business operating expenses may be protected using a specialized form of insurance that helps to cover overhead costs in cases of disability or loss of the owner. These policies provide money when it is needed, and premiums are generally considered tax-deductible business expenses. Business overhead expense insurance policies protect a company from forced liquidation, helping to preserve the hard work and market share the company has developed over its time in operation. In this guide, we will introduce business overhead protection plans and discuss options available to business owners.
Before delving into business overhead protection plans, it is useful to take a look at statistics associated with disability. The odds of a business owner becoming disabled for 90 days or longer before reaching the age of 65 is surprisingly high. If there is more than one owner, the odds increase dramatically. For example, a single business owner aged 30 has a 54% chance of becoming disabled for 90 days or longer. A business with 5 owners, all around the age of 30, shows a 98% chance of one of the owners becoming disabled.
The odds drop with age, but the numbers are still significant. Building on the example above, a single owner aged 55 has a 25% chance of a 90-day or longer disability. With 5 owners the same age, there is a 76% chance one of those owners will become disabled.
The length of disability is high as well. For disabilities lasting longer than 90 days, the average duration of the disability is approximately 2.2 years for a business owner aged 30. For a 55-year-old owner, the average duration of disability is right at 2.5 years. These numbers have serious implications for business operations.
How Will Business Overhead Expenses Be Paid?
In the case of a long-term disability or the death of one or more primary business owners, many companies struggle to pay for the day-to-day expenses associated with keeping the business running. Day-to-day expenses, or business overhead, consists of costs like:
These costs continue to stack up, even if the owner were to become disabled and cannot work. Of course, these expenses must continue to be paid, regardless of the circumstances. The business and its leaders have important decisions to make regarding the future of the business and its continued operation, especially when it comes to a long-term disability.
Alternatives in Cases of Owner Disability
When a business owner becomes disabled for a length of time, three potential scenarios as to the future of the business arise. Each scenario has its own advantages and disadvantages. The first is to sell the business, which can serve as a relatively viable alternative only if the current owner wishes to sell and can identify an interested party with the funds needed to complete the sale on favorable terms.
A business may liquidate – and, in fact, financial analysts refer to this scenario as a forced liquidation. The business may be disposed of rather quickly in this scenario, but the terms may not be favorable. The business may sell for a fraction of its true value, especially when contrasted to the value of the business if it was still operating with an eye to the future. Owners and family members may also rush into agreements before carefully evaluating the business operation and its intrinsic value.
Finally, remaining owners and family members may wish to maintain the business. This has advantages when the owner’s disability is considered to be a short-term situation; he or she can return when recovery is complete. Without a viable source of income, however, operating expenses pile up and the remaining alternative may end in a company sale or forced liquidation.
Funding Sources for Overhead Costs
Business expenses continue to accrue, even if a business owner is disabled. There are several potential sources of income to cover these expenses. As with the scenarios discussed above, there are strengths and weaknesses to each of these income sources – and most stand out as insufficiently reliable to ensure business continuity. Funding sources include:
Business and Personal Savings – smart business owners know that they need to create a savings plan to hedge against future circumstances. However, saving revenues can be a lengthy process. If a business owner were to set aside 10% of revenues each year, it may take 10 years or more to save one year’s worth of business revenue. Owners facing a long-term disability may consider dipping into personal savings to cover overhead costs, but this can create further financial instability and hamper the ability to pay for personally-related expenses.
Loans – a loan is an option, but finding a lender willing to fund a loan while the owner is disabled is difficult, at best.
Asset Liquidation – a business may opt to sell a portion of its assets, including equipment, inventory, properties, and vehicles. Again, this option is considered a forced or emergency liquidation. Selling assets can interfere with the continued operation, and it also lowers the value of the overall business.
Personal Disability Income – like personal savings, a business owner may attempt to cover operating expenses with this income source. However, the owner and his or her family’s expenses will still need to be covered, and using disability income for business means that it may create significant financial hurdles for the family.
There is only one reliable source of funds to pay for business overhead expenses. Referred to as business overhead expense protection, this funding source has many advantages over the alternatives. In our next article, we will go over the highlights of this source, helping business owners to make smart decisions about the future of their operations.
Family-owned businesses are unique in the world of commerce. These businesses may have started simple, then grown over the years to become local, regional, or even national powerhouses. Family businesses may be passed down from generation to generation.
When a business owner dies or becomes disabled and is no longer able to handle business operations, family members are often confronted with difficult decisions. This is especially true when there are no heirs to pass a business down to, or they are uninterested in continuing operations. Business liquidation may become the only option available. In this guide, we will discuss the concept of business liquidation insurance, when it is appropriate, and how to make smart decisions concerning the final disposition of a business interest.
Liquidating a Business: Tough Decisions Ahead
As mentioned earlier, family-owned businesses are often multi-generational affairs. The business is handed down to subsequent generations. What if, however, the business owner dies and doesn’t have a trusted family member to pass the company down to? What if surviving heirs are not interested in carrying on business operations? What if the owner becomes disabled and cannot carry on the duties he or she needs to complete to keep the business running? What if no other outside buyer is interested in purchasing the company from surviving heirs? These are difficult questions, and raise the possibility of very tough decisions. In these cases, a business liquidation may be called for.
Let’s dig a little deeper and explore two scenarios that may make a liquidation the only outcome, particularly when the current owner dies or becomes disabled:
Faced with the sudden death or disability of the current business owner, there are two potential scenarios of a business liquidation: forced or planned.
A Forced Liquidation
Without a successor plan in place, if a business owner were to die or become disabled in some way as to not be able to continue business operations, a forced business liquidation can be the only recourse. This is often the case when surviving heirs inherit business interests and are disinteresting in continuing. In a forced liquidation, public knowledge of the potential liquidation of the business can create incredible pressure on those who are left with the operation. This pressure can lead to unpleasant results, including:
The major takeaway of a forced liquidation is that in this situation, the value of the business can be greatly reduced. The value of a business is always unpredictable, but a forced liquidation further complicates the picture.
A Planned Liquidation
Smart business owners know that nothing lasts forever. For business owners without heirs, or with family members or business partners that may not wish to continue the business operation after the owner dies or becomes disabled, strategic planning for future liquidation is a logical move.
There are two major components to consider when planning for a future liquidation: Authority and Time.
Authority: while a business owner is still alive or able to conduct business without disability, he or she generally has the authority needed to sell the business or its assets. This authority includes who the business can be sold to, how much to sell the business or its assets for, and when the sale might take place. For the purposes of a liquidation, it is critical that the executor of the owner’s wishes have the same decision-making authority. This authority is often granted in a well-drafted will.
In the will, specific details must be included. These give the executor the power to decide how and to whom the business is sold, how much to sell the business and/or its assets, and what form of payment will be accepted in the sale. The will should also include provisions for the timing of the sale; executors should be given the power to decide to continue operating the business until it can be liquidated in an advantageous manner. Finally, personal liability provisions included in the will should protect the executor from any personal liability, covering reasonable actions taken in the continued operation and eventual sale of the business and its assets.
Time: a disabled owner or the executor of the owner’s wishes after death still needs adequate time to make decisions about the future of the business and its liquidation. Here, there are two scenarios that must be considered in the planning stage. The first scenario is the owner’s death. In that event, the deceased owner’s estate must have sufficient funds available to buy the time needed to liquidate the business assets in a manner that is advantageous to the surviving family’s financial interests. Funds may be needed to pay estate settlement costs, estate taxes, and to provide an income for surviving family members. Without sufficient funding for these costs set aside, the executor may be forced to move too quickly in liquidating the business, potentially losing significant value, not to mention market leverage.
In the second scenario, the owner becomes disabled. Here again, adequate liquidity in finances makes it possible for the owner to sell the property at a fair market value rather than being forced to move too quickly. Income for expenses and for family needs buys the time necessary to liquidate the business assets in an orderly manner.
Business Liquidation Insurance
In our next article – part two of this series — we will discuss the option of business liquidation insurance and how it can protect the value of business assets in the case of death or disability of the owner. This generally takes the form of life insurance to provide funding needed for orderly and fair liquidation of the business interests.