How to Insure a Valuable Employee
What could happen to my business if I lost a key employee?
A key employee may be a specialist who has knowledge that is critical to your organization (such as a programmer) or he or she may be a generalist who has key contacts, is highly efficient and/or drives production or sales. Regardless, losing such a person could result in:
- lost sales,
- unexpected termination or delay of important projects,
- a loss of lines of credit,
- a slowdown in productivity, or
- increased business expenses.
Can I protect my business against the loss of a key employee?
One popular method for protecting your business is life insurance. Your organization can buy coverage, often called key employee or key man insurance. Such a policy can minimize the potential for disaster since the following are among its benefits:
- provides funds for recruiting and hiring a replacement employee;
- creates a tax-free source of cash to help offset lost profits; and,
- assures customers and creditors that business will continue with as little disruption as possible.
What if my insured key employee lives until retirement?
While the key person works for you, the life insurance can still be valuable. The cash value life insurancecan:
- provide a reserve fund;
- reinforce your business’ credit worthiness;
- strengthen your key employee’s loyalty; and
- (at retirement) be used to create or supplement retirement income.
How does Key Employee Insurance work?
Remembering that you will definitely need the help of your insurance agent and your attorney, it goes like this:
- a corporation purchases an insurance policy on the key employee’s life,
- the amount of coverage is typically based on an estimate of the employee’s value to the company,
- the business pays the premium and is the owner of the policy,
- the company appears as the beneficiary, collecting the benefit in a lump sum in the event that the key employee dies.
Making arrangements with an insurance or benefits professional and a lawyer is critical, since key employee insurance has legal and tax implications.
Charitable Giving through Life Insurance
If there is a charity in which you would like to really make a difference, you might want to consider the option of leaving life insurance proceeds to a favorite charity.
What are some of the advantages?
- With a life insurance policy, the proceeds are guaranteed. Of course, it is very important to remember that any guarantee is based solely on the assets and financial ability of the company that issues the insurance policy.
- You pay the premium in monthly installments which can may be tax deductible as a charitable contribution.
- A small outlay creates a meaningful amount.
- Your other assets are not affected.
- Life insurance proceeds are not subject to federal taxes or included in probate.
If this sounds like an interesting idea for you to pursue; discuss it with your professional insurance agent or financial planner. You may also need to seek the advice of an attorney.
Should I Contribute to my 401(k) Plan at Work?
A 401(k) plan is a qualified employer-sponsored retirement savings plan. Employee participation is up to each individual employee. There are definite benefits to both the employer and the employee.
For an employer, a 401(k) helps retain good employees at a relatively low cost. The plan is simple to set up and maintain and has modest administration costs. The plan is flexible both in the design and in the choice of investment choices. Employees discuss their plans and it can boost employee morale and loyalty.
If your employer has a plan available and you are not participating, you might want to reconsider. The contribution that you make reduces your taxable income so that so pay no federal tax, social security tax, Medicare tax, etc. (The government sets a maximum contribution amount each year…check with your plan administrator at work.) Your contributions are 100% vested immediately. If you leave the company, you are entitled to all of your own deposits plus interest, if applicable. When you leave a company, you can roll your 401(k) money into another qualified retirement account and incur no penalties. Your money is invested how you choose (within the parameters of the plan) by professional investors.
Many employers will match the contributions that you make with additional money. This makes the plan even more attractive! Check with your human resource representative to see what choices are available. If you are an employer, check with your insurance agent to see if your agent can set up a 401(k) plan.
Long Term Care Policies…The Basics
Long-term health care includes much more than just nursing home care for the elderly. Today’s long-term care may also refer to a variety of protection, such as:
- health care
- rehabilitative services
- personal care
- social services
However, there is a common theme among the different types of coverage: they all feature care for people who, due to illness or disability, need special assistance with daily activities. A common reason for use of a convalescent nursing facility is when a patient has been discharged from a hospital but still needs continued medical care and rehabilitation therapy while recuperating from an illness or injury. However, it important to know that LTC can be provided in either a special care facility or in the home. What’s The Cost And Type of Long Term Care?
The cost for a convalescent center stay can rise as high as $40,000 annually. Some experts predict that the cost may exceed $80,000 by the year 2010. Of course the cost is greatly affected by the level of care involved, such as:
- Custodial care – where the (licensed or non-licensed) caregiver assists a person in performing routine activities typical of daily life such cleaning, bathing, eating, dressing, etc. These services are often referred to as Activities of Daily Living (ADLs).
- Intermediate care – generally involves care provided several times weekly by nurses or aides to help restore a person’s health or physical capabilities. The care is typically supervised by a physician.
- Skilled care – involving care that is 24 hours a day and 7 days a week. The treatment is always supervised by a physician and is administered by licensed health care professionals.
What About Medicare and Medicaid?
Medicare policies contain only a limited amount of coverage for skilled nursing care and nothing for care that is considered intermediate or custodial.
Medicaid is a federal and state program that covers medical bills for the needy. If you qualify, it will pay for your long-term care expenses. In order to qualify for Medicaid, you will have to have essentially no assets. Benefits Of LTC Insurance
Because of the length and cost of long term care, LTC insurance policies may provide you with a number of critically important benefits, such as:
- enabling you to keep your assets
- protecting your spouse’s quality of life and independence
- protecting your family home and estate
- protecting your business and other personal property
- allowing you to maintain your independence
- providing cash so that you may choose the long-term care options that you feel are most suitable for you
Are There Different LTC Policies?
Technically, no. It would be more accurate to say that all LTC policies have the intent of providing coverage for extended care, with each policy providing some level of reimbursement for the following:
- nursing home stays
- home health care
- nursing home stays and home health care
Coverage may be provided by an individual policy or a group policy. Further, the policy may qualify for tax benefits. It is important to work with an experienced insurance professional when purchasing this type of insurance.
What Does Medicare Part B Cover?
(Note: All Dollar Amounts Are Based On 2005 Figures.)
What Services Are Covered?
Medicare Part B is medical insurance rather than hospital insurance. This coverage helps to pay for the following:
- physician services
- outpatient hospital services
- emergency room visits when you are treated and released
- outpatient surgery
- diagnostic tests
- clinical lab services
- outpatient physical therapy
- speech therapy
- medical equipment and supplies
- rural health clinic services
- renal dialysis
- other health services and supplies
Part B Deductible
$110 per year for the year 2005.
Part B Monthly Premium
The Part B premium is $78.20 per month for the year 2005.
What Does Medicare Cover?
(Note: All Dollar Amounts Are Based On 2005 Figures.)
Medicare is packaged in two parts: Part A and Part B. Qualified individuals automatically receive “Part A” which is hospitalization insurance. When all coverage requirements are met, Part A of Medicare will help pay for limited hospitalization coverage, limited post-hospital skilled nursing home care, home health care, limited hospice care and blood, after the first three pints.
How Much Does Part A Pay For Skilled Nursing Care?
It will pay for the first 20 days if you go directly from the hospital to the skilled nursing care facility. It will pay $114.00 per day for the 21st through the 100th day per benefit period.
How Much Does Part A Pay For Inpatient Hospital Care?
During a benefit period, Medicare Part A will help pay for the first 90 days of medically necessary care in a Medicare-certified hospital. During the first 60 days, Medicare will pay all covered costs except the deductible. During a benefit period, you pay the deductible only once, regardless of the number of times you go to the hospital. However, during the 61st through the 90th day, Medicare pays all covered costs except for coinsurance of $228 per day. You are responsible for paying the coinsurance.
What Is A Reserve Day?
If you are in the hospital for more than 90 days in a benefit period, you can use your reserve days to help pay the bill. If a reserve day is used, Medicare will pay all covered costs except $456 per day. You are responsible for the coinsurance.
Under Part A, Which Hospital Services Are Covered?
Covered expenses include the following:
- semiprivate room and meals
- regular nursing costs and rehabilitation services
- drugs, lab tests and x-rays
- operating and recovery room expense
- intensive care, coronary care and medically necessary services and supplies
However, Part A will not pay for expenses which are care-related such as telephone, television, private duty nurses or the amount between a semiprivate and private room rate unless it is medically necessary
What About Filing A Claim and Handling Deductibles?
The best news yet is that you do not have to file a claim for payment. The facility from which you received care will file the claim for you. However, there is a deductible that is an amount that you pay before Medicare pays anything. As of January 1, 2005, the deductible per benefit period is $912.
Disability Insurance: How Much Do You Need?
How much would you need if you found yourself unable to work due to a disability? To meet monthly expenses:
_________ Mortgage or rent
_________ Other Living Expenses
To plan for the future:
_________ Cash Reserve
_________ College Funds
_________ Retirement Planning
Disability Insurance…The Basics.
A disability policy is designed to replace lost income when a policyholder is unable to work due to a covered accident or illness. Disability policies generally have:
- A waiting period-A waiting period in disability insurance is like a deductible on your car insurance. The difference is that while a deductible for auto insurance is expressed in dollars ($250, $500, etc.), a waiting period for disability insurance is expressed in time, such as 60 days, 90 days, or longer. It is the amount of time that you must wait before benefits will be paid. The longer the time period, the lower the premium.
- A benefit period-A benefit period can be two years, five years, etc. The most comprehensive policy is one that pays benefits to Age 65.
- An occupational classification-Depending on the occupational classification, the premium and the benefit period will be determined.
- A monthly benefit amount-A monthly benefit amount can be up to 60% of the present income. Benefits are tax free on an individual policy. The older you are, the more disability insurance will cost, but once a premium has been established, it is likely to stay the same throughout the life of the policy.
Are All Beneficiaries Alike?
What Is A Beneficiary?
In the world of life insurance, beneficiary is an important, common term. It refers to a person or entity who is named by the life insurance policy to receive the policy’s benefits. The benefits (or proceeds) received after a policyholder dies are generally cash, but sometimes benefits are in the form of services or other types of awards. Entities are included because, besides people, business partnerships, corporations, trusts, churches, schools/colleges/universities, or charities may all be selected as beneficiaries. Beneficiary Types
Beneficiaries are not all alike. Life insurance policies are designed to protect persons/entities that are important to the life insurance policyholder. These policies may use different types of beneficiaries to fit a policyholder’s preferences and/or to comply with legal or tax issues. The types of beneficiaries also have a LOT to do with the control of the proceeds and the beneficiary’s rights. Here are the most common types of beneficiaries:
- Absolute Beneficiary – please refer to Irrevocable Beneficiary.
- Contingent Beneficiary – the party named to receive policy benefits, but only in the case of death of the primary beneficiary. Contingent Beneficiaries are often called secondary beneficiaries.
- Irrevocable Beneficiary – a beneficiary whose right to receive the insurance proceeds may not be changed UNLESS that beneficiary gives the policyholder his written consent to do so. Also known as an absolute beneficiary.
- Primary Beneficiary – typically, the party named to be first to receive the policy benefits and proceeds. If any others should be listed, they are considered contingent or secondary beneficiaries.
- Revocable Beneficiary – any beneficiary for which the policyholder retains the right to change. These beneficiaries exist at the whim of the policyholder.
- Secondary Beneficiary – please refer to Contingent Beneficiary.
Note that several of these beneficiaries can be combined, i.e. Revocable, Primary Beneficiary or Absolute, Secondary Beneficiary. Other Methods For Designating Beneficiaries
Class Designation – refers to when a group is chosen to share equally in a policy’s proceeds. The class designation has an advantage of providing equal benefits to a group that may change between the time the designation is made and when the proceeds are paid. Commonly a policyholder’s children, grandchildren, or siblings are selected as a class.
Specific Designation – typically means that a beneficiary selected by his or her name and relationship to the policyholder, such as Gwenna Mygirl, daughter of the insured.
Per Capita Designation – this method of designation permits greater flexibility than a straight class designation. For instance, a policyowner can name his children to share the proceeds equally and, in the case of a child’s death; the deceased beneficiary’s children may receive in EQUAL (per capita) shares with the surviving policyowner’s children. Example: Joe designates his children, Bill, Trudy and Stan, to equally share $3 million in policy proceeds on a per capita basis with any children who survive them. Joe dies in a car accident and Bill dies in the same tragedy. Therefore, Bill’s children, Gary, Paulie and Pam become equal participants in the proceeds ($600,000 apiece). If only Joe had died in the accident, Joe’s children would have received $1 million apiece.
Per Stirpes Designation – this method is the ultimate contingency plan. It allows the policyowner to pass the proceeds equally to his direct heirs and, in the event of any person’s death, that particular share is passed on to any descendants. Example: Joe designates his children, Bill, Trudy and Stan, to equally share $3 million in policy proceeds ($1 million a piece). Joe dies in a car accident and Bill dies in the same tragedy. Therefore, Bill’s children, Gary, Paulie and Pam become equal participants in Bill’s share of the proceeds. In this instance, Joe’s surviving children each get $1 million while Bill’s children share the amount that Bill would have received (roughly $333,000 apiece).
If you need to discuss your plans on providing for your loved ones, an insurance professional is a great place to start.
How Can I Preserve My Smaller Business?
Where Small Businesses Are Vulnerable
In a small to medium-sized business, the death of a partner or key officer/shareholder reduces the value of its business assets (as well as legally terminates a partnership). In order to preserve the partnership assets, the survivors must liquidate the partnership with care. The partnership’s reformation must deal with different needs. Typically, the surviving partners wish to continue the business without the deceased partner’s heirs. The deceased partner’s family is most concerned with income replacement.
The death of a stockholder in a small, closely held corporation also creates a substantial risk of business failure. At best, the corporation may face a serious loss of business, reduction in asset values and the loss of jobs.
All of the above consequences may be avoided with a carefully planned buy-sell agreement. Buy-Sell Agreement
A popular method of keeping a business in operation after the death of a partner or a major officer/shareholder is the use of the Buy-Sell Agreement (also known as a Business Continuation Agreement).
A typical buy-sell agreement between the partners allows the surviving partner to purchase the interest of the deceased in order to keep the business operating and keep it out of the deceased’s estate and probate. A buy-sell agreement stipulates that if one partner dies, the other partner will have the right to purchase the deceased partner’s share of the business at a predetermined price or according to a specified formula.
In a small business where money is often tight, finance is the critical piece of the buy-sell scenario. The purchase of a life insurance policy is an ideal way to fund the agreement.
For purposes of illustration, let’s assume that we have two partners who formulate a buy-sell agreement. In the formulation of the policy, they agree that each will take out a $100,000 policy on the other. Their small corporation purchases the life insurance. Upon the death of one, the other will have the money to pay to buy out half of the business. Cross-Purchase Plans
If the two partners were to personally purchase the life insurance on the other, the arrangement would be referred to as a Cross-Purchase Plan. Let’s assume for a minute that we have multiple partners. If we have six partners and try to do a cross-purchase plan, then each partner would own 5 policies on the other partners for 30 total policies. While this may be a life insurance salesperson’s dream, it certainly isn’t a practical arrangement. In this situation, we would be more likely to use the entity agreement. In an entity agreement, the partnership owns life insurance on each partner, and the partnership agrees to purchase the share of the business that belonged to the now deceased partner. This requires 6 policies rather than 30. The Advantages
While the life insurance premiums are not tax deductible, the proceeds are not subject to federal income tax. Further, a funded buy-sell agreement offers other advantages, including:
- A fair market value for the business is established
- Funding ensures that the surviving family is financially compensated
- The agreement legally binds the partners
- Each partner’s interest in the business is determined
- The partnership gains greater security
- The employees’ jobs at the business become more secure
- The money is available to implement the agreement
It’s extremely important to involve both an attorney and an accountant when arranging a buy-sell agreement since the written terms vary with the structure of the business.
Cash Value Life Insurance; The Basics
There are several different types of cash value life insurance policies from which to choose. They are all designed to provide living benefits as well as the death benefit.
The principal objective of cash value life insurance is the same as with term insurance: to create an immediate estate should the insured die. The cash value in the policy can also be accessed through loans or withdrawals for emergencies or other needs. It is important to remember that loans or withdrawals of a policy’s cash value will reduce the policy’s death benefit.
- Whole Life Insurance
- Universal Life Insurance
- Variable Life Insurance
Whole Life Insurance
Whole life insurance offers a number of guarantees made by the issuing insurance company. The following are typically guaranteed with whole life insurance:
- death benefits
- cash values
- level premiums
Sometimes dividends are also guaranteed.
Whole life insurance can be a good tool for long term life insurance needs.
Characteristics of Whole Life Insurance
- Tax-deferred growth of cash value
- Cash values are guaranteed
- Premiums are guaranteed
- Can withdraw or borrow cash value
- Dividends are tax free
Universal Life Insurance
With a Universal Life policy, both premium payments and death benefits can be flexible, within limits.
When premiums are paid, part of the premium goes to pay for the term insurance and part of the premium is put into a side fund upon which interest is paid.
If the premium paid is not enough to cover the cost of the insurance, the additional amount needed is taken from the side fund.
The policyowner has a number of options with regard to premium payments. Within limits, premiums can be adjusted up or down. Premium payments can also be skipped entirely if there is enough cash value in the policy to make the payments. Also, the death benefit of the policy may be adjusted up or down. However, a request to increase the death benefit may require proof of insurability (such as updating some health questions or even submitting to a physical examination)
Characteristics of Universal Life
- Tax-deferred growth of cash value
- Interest rates are competitive
- Access to cash value through loan or withdrawal
- Premiums are flexible
- The policy’s death benefit may be adjusted (higher or lower)
Variable Life Insurance
Variable life insurance is a flexible life insurance product that is offered by a prospectus.
Variable life insurance has a term insurance foundation and an investment fund. The policyowner gets to choose which type of investment vehicle in which the cash value will be placed. The following are types of investment vehicles from which the policyowner can choose:
- Money Market Account
- Corporate Bond Portfolio
- Common Stock Portfolio
- Government Securities
- Fixed Account
Insurance agents must be properly licensed to sell securities in order to sell variable products which are sold by prospectus. Be certain that you CAREFULLY read the prospectus before purchasing any variable product.
Term Life Insurance…The Basics
Term life insurance provides a death benefit only. This form of life insurance policy does not build any cash value and there are three basic types: Annual Renewable, Level and Decreasing Term.
Annual Renewable Term
Death benefit remains level. Premium increases annually since, as the covered person ages, there is an increased likelihood of death.
Both the policy’s death benefit and its premiums remain level for a predefined period of time: usually, five, ten fifteen, or twenty years.
The death benefit decreases each year while the policy’s yearly premium stays the same. It reflects the fact that a certain level of premium purchases a reduced amount of protection with each passing annual term. This type of policy is often used to cover a mortgage or other loan obligation that has a decreasing balance.
Characteristics Of Term Insurance
- Low cost in the beginning
- Premiums increase over time
- Can help to meet specific short-term needs
- Has no cash value
- Lasts a specific, non-adjustable period of time