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Posts by Katie Vidal:

insurance coverage

Closing Gaps in Your Insurance Coverage

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insurance coverage

Buying insurance is about sharing or shifting risk, but you may think you’re covered for specific losses when, in fact, you’re not. Here are some common coverage gaps to consider when reviewing your own insurance coverage.Life Insurance

In general, you want to have enough life insurance coverage (when coupled with savings and income) to allow your family to continue living the lifestyle to which they’re accustomed. But changing circumstances may leave a gap in your life insurance coverage.

For example, if you have life insurance through your employer, a job change could affect your coverage. Your new employer may not offer the same amount of insurance, or the policy provisions may differ. Review your income, savings, and expenses annually to help ensure that the amount of life insurance you have matches your needs.

Homeowners Insurance

It may not be clear from reading your homeowners policy which perils are covered and how much damage will be paid for. It’s important to know what your homeowners policy covers and, more important, what it doesn’t cover.
You might think your insurer would pay the full cost to replace your home if it were destroyed by a covered occurrence. But many policies place a cap on replacement cost up to the face amount stated on the policy. You may want to check with a building contractor to get an idea of the replacement cost for your home, then compare it to your policy to be sure you have enough coverage.

Even if your policy states that “all perils” are covered, most policies carve out many exceptions or exclusions to this general provision. For example, damage caused by floods, earthquakes, and hurricanes may be covered only by special addendums to your policy, or in some cases by separate insurance policies altogether. Also, your insurer may not cover the extra cost of rebuilding attributable to more stringent building codes, or your policy may limit how much and how long it will pay for temporary housing while repairs are made.

To help avoid these gaps in coverage, review your policy annually with your insurer. Also pay attention to notices you may receive. What may look like boilerplate language could actually be significant changes to your coverage. Don’t rely on your interpretations — ask for an explanation from your insurer or agent.

Auto Insurance

Which drivers and what vehicles are covered by your auto insurance? Most policies provide coverage for you and family members residing with you, but it’s not always clear-cut. For instance, a child who is living in a college dorm is probably covered, but a child who lives in an off-campus apartment might be excluded from coverage. If you and your spouse divorce, which policy insures your children, particularly if they are living with each parent at different times of the year? Notify your insurer about any change in living arrangements to avoid a gap in coverage.

Other gaps include no coverage for damaged batteries, tires, and shocks. And you might not be covered for stolen or damaged mobile phones or other electronic devices. Your policy may also limit the amount paid for a rental while your vehicle is being repaired.


In fact, insurance coverage for rental cars may also pose a problem. For instance, your own collision coverage may apply to the rental car you’re driving, but it may not pay for all the damage alleged by a rental company, such as loss of use charges. If you’re leasing a car long term, your policy may cover the replacement cost only if the car is a total loss or is stolen. But that amount may not be enough to pay for the outstanding balance of your lease. Gap insurance can cover any difference between what your insurer pays and the balance of your lease.


Policy terms and conditions aren’t always easily understood, and you may not be sure what’s covered until it’s time to file a claim. So review your insurance policy to help ensure you’ve filled all the gaps in your coverage.

need life insurance

9 Reasons You Need Life Insurance

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need life insurance

As a young person, life insurance may not be a pressing concern. With so much life ahead, saving and investing may not take precedence for you right now. However, it’s important to recognize that present choices profoundly impact your future financial security. Explore the significant advantages that life insurance can provide for the present and the years to come.

Understand the Misconceptions

Many misconceptions deter young people from realizing the value of life insurance. Life insurance offers numerous advantages for young people, including lower premiums and potential long-term savings. It secures your future, supports loved ones, and shields you against unexpected financial burdens.

Secure Financial Protection Early On

Starting a life insurance policy in your 20s brings undeniable benefits. Young age and better health translate to lower premiums, enabling you to lock in long-term affordable rates. Acting early saves significantly compared to waiting until later when premiums rise due to increased risk.

Safeguard Your Loved Ones

Life insurance offers crucial financial protection for your loved ones in the face of an untimely death. Imagine the burden on your parents, siblings, or other family members left to handle outstanding debts. Funeral expenses are overwhelming and emotionally distressing. Additionally, the loss of your income could destabilize their financial security.

Plan for Future Responsibilities

Consider future responsibilities such as marriage, parenthood, or co-ownership of assets in your 20s. Life insurance can secure your financial stability during significant life milestones. It provides a safety net for your spouse and children, ensuring their protection in case of the unexpected. Moreover, it safeguards shared assets, guaranteeing financial security for your loved ones and preserving the legacy you have worked hard to build.

Student Loan and Debt Management

The burden of student loan debt weighs heavily on many young adults. In the unfortunate event of the insured’s passing, cosigners or family members become responsible for the remaining loan balance. Life insurance can alleviate this strain through the death benefit, which pays off the outstanding student loans, sparing loved ones from inheriting the debt.

Furthermore, life insurance is a valuable tool for debt management and protection. You can use it strategically to create a safety net for various financial obligations, including credit card debt, mortgage loans, or personal loans. In the case of shared debts or joint ventures, the death benefit can settle outstanding balances, preventing financial hardships for the surviving parties.

Lock in Affordable Rates and Coverage

“Insurability” refers to an individual’s eligibility for life insurance based on age and health. Obtaining coverage becomes more challenging and expensive as you age or develop health conditions. Take advantage of your youth and seize the opportunity to secure life insurance now. Your impeccable health affords you affordable rates and comprehensive coverage for the future.

Build Cash Value and Future Flexibility

Cash value is a savings component included in some permanent life insurance policies. It works as an insurance and investment tool. As you pay your premiums, a portion contributes to the death benefit, and the remainder builds the cash value. The savings grow tax-deferred and are accessible during your lifetime. You can use the funds for a home purchase, cover education expenses, or supplement retirement income.

Living Benefits and Riders

Life insurance riders like critical illness or long-term care provide added security beyond traditional coverage. For instance, critical illness riders offer a lump sum payout upon a severe medical condition diagnosis, helping cover treatment expenses. Long-term care riders provide financial assistance for extended care needs, ensuring comprehensive protection for any health challenges that may arise.

Peace of Mind and Emotional Well-Being

Life insurance’s true worth lies in the intangible benefits it brings. It grants peace of mind and lessens anxiety about the unknown future. The emotional well-being it provides is immeasurable. It assures you that your loved ones will be financially secure even in your absence.

your financial plan

Choosing the Right Disability Insurance Plan: A Comprehensive Guide

your financial plan

Have you ever wondered how you would manage if you suddenly fell ill or were in a debilitating accident? What would you do if you’re unable to earn a living or financially take care of yourself and your loved ones?

According to data published as of 2021, 13% of adults have at least one disability. Only 31.1% of people with disabilities are in active employment compared to 74.8% of people without disabilities, increasing their exposure to financial hardships.

Disability insurance (DI) provides a safety net, enabling you to meet your financial obligations as you recuperate or forebear with disability. It’s an insurance policy that supplements between 50% and 80% of your income when you cannot work or earn because of disability.

What to Consider When Choosing a DI Plan

Benefit Amount

The insurance benefit from a DI plan is 60% to 70% of income earned 5 to 18 months before your first claim. Most DI insurers cover up to 60% of the insured income. It’s crucial to consider your ongoing expenses and desired lifestyle after a disability when choosing a benefit amount. Consider your debts, dependents, benefit duration, renewability provision, elimination period, and future increase to ensure your finances meet all your developing financial obligations after disability.

Elimination Period

The period between insurance issuance and benefit claim after illness or injury is the elimination period. Insurers use this period to ascertain if you meet the benefit criteria. You’re liable for your medical expenses and lost income during this duration.

It typically occurs between 30, 60, 90, or 365 days. The shorter the duration, the higher the premium cost. A short duration means the insurer starts paying benefits sooner, translating to increased risks for them as claims get shelled faster. Consider your financial situation and risk tolerance. A long elimination period is beneficial if you have an emergency fund or are comfortable taking on risks.

Occupation Type

Disability coverage language varies between insurers. Some insurance companies provide an “own occupation” plan, which defines total disability as a condition preventing the insured from performing their duties in their regular job, even though they can seek another type of employment. On the other hand, some insurers provide “any occupation” coverage, which defines total disability as inability to work.

Own-occupation DI is generally more expensive but offers better protection, especially for specialized professions. For instance, a surgeon can become disabled if they develop tremors, making it impossible to perform operations. The own-occupation policy provision does not disqualify them when they can still work in diagnostic medicine. However, the any-occupation coverage disqualifies them if they can still earn a living by performing any task in their occupation.

Your occupation determines the type of plan you get. Construction workers may need an own-occupation coverage because of the risks involved in their line of work. Any-occupation insurance policy is perfect for employees in specialized fields involving education, training, and experience. 

Future Earning Potential

You may also want to consider a DI with a future purchase option rider, especially if you’re young with a rising earning potential or in a fast-growing field. Increasing your benefits adds a layer of protection to your finances, securing your future according to your rising income.

Additional Considerations

Other factors to consider when choosing a DI include cost-of-living adjustments. Inflation can reduce the value of your benefits. Therefore, choosing a policy with provisions for future adjustments is essential. You can also consider residual benefits riders to supplement a portion of your income in case of partial disability significantly reducing your income.

Shopping for Disability Insurance

Due diligence is essential when looking for DI. Aside from personal considerations, get quotes from multiple insurers to compare plans and pricing. Work with a financial advisor or insurance broker to understand the fine print for every potential DI and personalized guidance resonating with your present and future financial obligations and objectives.

Get The Appropriate DI Plan Today

Choosing the right DI plan requires research and financial insights. Understand your current and future financial obligations, DI prerequisites, and how your profession affects your benefits to choose a policy suitable for your conditions. It’s also crucial to compare plans to get cost-effective coverage. DI is an effective financial safety net in case of disability. Talk with a financial professional at Barnum Financial Group for tailored guidance today.

your financial plan

Disability Insurance in Your Financial Plan

choosing the right disability insurance

Save your money. Stick to a budget. Invest in a 401K. Plan for your children’s education. Prepare for retirement. As we all work in our various career fields, these are the phrases we hear consistently. Building a financial plan is essential in preparing for your future and the future of your loved ones, but where does Disability Insurance (DI) fit into those plans? With the month of May being Disability Insurance Awareness Month, it’s the perfect time to evaluate your financial plan and see if disability insurance is right for you.

For most people, disability insurance is a box they check when they’re hired by an employer as they opt for the basic group plan. But serious consideration should be given to obtaining your own individual disability insurance plan. You get what you pay for, but it’s very important to know what your plan covers at work, features included, and to know if you are also being covered if you are heavily compensated in bonus/commission. With life insurance, the choice is a simple one. When we pass away, we all want to make sure our loved ones are taken care of and that’s why life insurance makes sense. But DI protects us from financial losses throughout our life, whether its an accident or an illness, 43% of all people aged 40 will have a long-term disability by the age of 65.[1]

There are two different types of Disability Insurance Coverage:

  • STD (Short-Term Disability) Policy
    • Waiting period of 0-30
    • Maximum benefit period of no longer than 2 years
  • LTD (Long-Term Disability) Policy
    • Waiting period of several months
    • Maximum benefit period of a few years to retirement age (65, 67, 70)
    • 90 days is the typical waiting period for a long-term disability that can stack onto a short-term policy 

There are many reasons to include disability insurance in your financial plan, but none are more important than this: It’s all about protecting your income. 88% of disability insurance claims are because of illness.[2]  Obviously, we cannot predict our health as we grow older. We also cannot predict or plan to have a car accident, but we don’t think twice about obtaining car insurance. If you became too sick or hurt to work, why are we not insuring your most valuable asset? Your income.

A plastic surgeon who develops Dupuytren’s Disease, which causes the fingers to be pulled towards the palm, is unable to operate. A teacher with anxiety develops consistent migraines that impede their ability to instruct their students. A bus driver is diagnosed with cancer, which keeps them out of their job for several months. With disability insurance coverage, these people could protect their lost income from being unable to perform their jobs.

Another facet of disability insurance is the difference between Any-Occupation (Any-Occ) and Own Occupation (Own-Occ) policies. With Any-Occ, a person only qualifies for disability insurance payments if their disability prevents them from performing any occupation. Own-Occ deals with disabilities that prevent a person from performing their specific job. Like the surgeon, with a disabled hand, who cannot perform operations. They would be able to take a teaching position at a university. Disability insurance will pay the surgeon for being unable to perform their own job, while still mainlining employment in another field of study. There are also features to mitigate the risk of a drop in income if you were to become partially disabled and had a loss of time and duties which would result in a loss of income.

As mentioned above, your employer probably offers you group disability insurance coverage and while that’s a form of protection, it’s not your best form. Obtaining your own, individual disability coverage, subsidizes the gap in coverage that any group plan with offer. It also provides you with other incentives. An individual plan stays with you throughout your life. It will follow you if you happen to obtain employment at another company. Disability insurance benefits are also tax-free since you purchased your individual plan with after-tax dollars as opposed to group plans, which are taxable, since your payments are taken out of your gross wages by your employer.

If you’re thinking about disability insurance or this article has brought up more questions on the subject for you, the financial planners at Barnum Financial Group can easily walk you through those answers and guide you in the right direction if looking to purchase an individual disability insurance coverage plan.

Remember. Disability Insurance is about protecting your income.

[1] https://www.iii.org/main-responsive/disability-income

[2] https://disabilitycanhappen.org/disability-statistic/

life insurance questions

10 Life Insurance Questions You Should Ask Yourself

life insurance questions

Life insurance – we’ve heard of it, we know how important it can be, we think we probably need it, but do we know how it works? What are we paying for when we make monthly policy payments? If you’re single with no children, do you still need life insurance?

Bottom line is, acquiring life insurance is one of the most positive financial moves you can make. It’s an even better decision to get it when you’re young and healthy, resulting in a more affordable rate on your policy. To clarify any confusion on what type of policy to choose or how much coverage to get, we’ve answered a healthy mix of commonly asked questions below.

Which different kinds of life insurance are there, and which one would work best for me?

There are essentially two forms of life insurance: term and permanent (also widely known as “whole life”).

A permanent life insurance policy lasts your entire life, while a term life insurance policy lasts for a specific amount of time — i.e. your policy’s term length. Usually, this can be 10, 15, 20, or 30 years. Typically, term life is a simple, affordable type of life insurance that’s easy to purchase and manage.

The core differences between term and permanent are cost, complexity, and cash value. Permanent life insurance has a cash value component that can allow it to grow over time and be borrowed from while you’re alive. Permanent insurance cash value capability and its lifetime coverage can make it more expensive and more complex to manage.

When it comes to term life insurance, you apply to have coverage in place until a certain point in your life when you would no longer need the coverage. This can include, but is certainly not limited to, your children becoming adults, or paying off your mortgage. Term life insurance’s primary goal is to protect your loved ones in the event of your (or your spouse’s) untimely passing, compared to a permanent life policy which may also be used as a vehicle for cash accumulation and/or estate planning purposes. For many, term life insurance is a sound, cost-efficient choice that protects your loved ones during the years they need it most.

If I’m single or don’t have kids (or both), do I still need life insurance?

If you have any sort of financial obligation — whether it be student loans, co-signed debt, a mortgage, etc. — life insurance is always good to have. That way in the event of an untimely death, someone else will be able to pay these off for you. Especially if you have a partner, whether or not you’re married or have children, you share financial responsibilities. It’s important to have the conversation of who will take on your financial duties should something unexpected happen. Your term life insurance is a way to protect your loved ones, and you control designating beneficiaries.

If I’m married, does my spouse need life insurance too?

Typically, both spouses have a life insurance policy with their partner listed as the beneficiary. You want to avoid your partner grieving and worrying about handling finances all at once.

A common misnomer is stay-at-home parents don’t require coverage since they don’t earn any income. This couldn’t be further from the truth, as a stay-at-home parent has a major impact on a household that is irreplaceable. If he or she were to pass away, extra space would be needed in the surviving partners budget for childcare, household needs, and more.

How much life insurance do I need?

The short answer for “how much” life insurance coverage you need is 5-10 times your income. However, the “optimal” amount depends on your specific circumstances. What’s important is to ensure the policy amount is adequate to cover any major expenses your loved ones would take responsibility for in the wake of your death.

How long should my life insurance policy be for?

The length of your policy depends on how long your loved ones need a financial safety net. For example, if you recently purchased a home and have a 30-year mortgage, you’d want the policy to last until the mortgage is paid off. You’d also need to consider the coverage length for your beneficiaries — how long until your kids are financially independent? How long until your student loans are paid off? These are some things to consider when choosing a term length policy.

What kinds of expenses would life insurance cover should my loved ones ever receive a payout?

A term life insurance payout can be used for anything your loved ones desire. The range includes, but certainly not limited to, funeral/any end of life costs, mortgage payments, childcare or caregiving for your dependents, healthcare costs for your dependents, children’s education costs, or just everyday living expenses.

When you purchase life insurance, try to use it as an opportunity to talk to your beneficiary about the coverage amount and your vision for the proceeds being used. Ensuring your loved ones’ financial stability no matter what happens to you speaks volumes.

How do I start the conversation of life insurance with a spouse or family member?

Death isn’t exactly the most pleasant topic to discuss with anybody – let alone people you’re close with.

However, life milestones are the most ideal starting point to help spark the life insurance conversation. Whether it’s getting married, a new baby on the way, or purchasing a home – all these life events are ideal segues. This approach takes the attention off of death, putting more focus on protecting your loved ones should the unexpected occur, turning it into a positive talk on financial planning.

These conversations also empower your relationship to cultivate positive financial behavior. These discussions open the door for financial planning in all areas of your financial life, not just the morbid ones. Think of life insurance as the contingency plan which compliments the most exciting areas of life and your plan for tomorrow.

What do insurance companies consider when determining your rate?

Life insurance companies consider your age, gender, overall health, coverage amount, and a few other items when determining your premium pricing. Generally, the younger and healthier you are, the more affordable pricing will be.

Am I allowed to modify my life insurance policy?

After purchasing an insurance policy, it’s always a best practice to check in on your coverage needs periodically — especially if you experience a major life change that impacts your financial situation. If you determine you require a longer-term length or a higher coverage amount, you’ll usually need to go through the application process again. Therefore, it’s usually a good idea to keep that policy from when you were younger and healthier and purchase an additional, supplemental policy that fills your coverage gap.

On the other hand, if you discover you require less coverage, you can always reach out to your life insurance provider or financial advisor and request to lower your coverage amount (which will also lower your monthly premiums.)

What’s the best type of life insurance?

Whether it’s a term or permanent [whole] life policy you choose to purchase, the best type of life insurance is the one that’s in force after the insured passes away. It’s the careful attention and detail a financial advisor provides that can help you determine what approach to life insurance would work best for your specific needs.

Have a question? Contact us here and let us know!

buy long-term care insurance

Should You Buy Long-Term Care Insurance?

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Should-You-Buy-Long-Term-Care-Insurance-

The longer you live, the greater the chances you’ll need some form of long-term care. If you’re concerned about protecting your assets and maintaining your financial independence in your later years, long-term care insurance (LTCI) may be for you.

Who needs it?

As we age, the odds increase that we’ll need some form of long-term care at some point during our lives. And with life expectancies increasing at a steady rate, the likelihood of needing long-term care can be expected to grow in the years to come.

But won’t the government look out for me?

Medicare pays nothing for nursing home care unless you’ve first been in the hospital for 3 consecutive days. After that, it will pay only if you enter a certified nursing home within 30 days of your discharge from the hospital. For the first 20 days, Medicare pays 100 percent of your nursing home care costs. After that, you’ll pay $185.50 in 2021 per day for your care through day 100, and Medicare will pick up the balance. Beyond day 100 in a nursing home, you’re on your own–Medicare doesn’t pay anything.

If you’re at home, Medicare provides minimal short-term coverage for intermediate care (e.g., intravenous feeding or the treatment of dressings), but only if you’re confined to your home and the treatments are ordered by a doctor. Medicare provides nothing for custodial care, such as help with feeding, bathing, or preparing meals.

Medicaid covers long-term nursing home costs (including both intermediate and custodial care costs) but only for individuals who have low income and few assets (eligibility guidelines vary from state to state). You will have to use up most of your savings before you qualify for Medicaid, and aside from a small personal needs allowance, you will have to use all of your retirement income, including Social Security and pension payments, to pay for your care before Medicaid pays anything. And once you qualify for Medicaid, you’ll have little or no choice regarding where you receive care. Only facilities with Medicaid-approved beds can accept you, and your chances of staying in your own home are slimmer, because currently most states’ Medicaid programs only cover limited home health care services.

Looking out for yourself

If you want to retain your independence, protect your assets, and maintain your standard of living while at the same time guaranteeing your access to a range of long-term care options, you may want to purchase LTCI. This insurance might be right for you if you meet the following criteria:

  • You’re between the ages of 40 and 84
  • You have significant assets that you would want to preserve as an inheritance for others or gift to charity
  • You have an income from employment or investments in addition to Social Security
  • You can afford LTCI premiums (now and in the future) without changing your lifestyle

Once you purchase an LTCI policy, your premiums can go up over time, but the rates can only rise for an entire class of policyholders in your state (i.e., all policyholders who bought a particular policy series, or who were within certain age groups when they bought the policy). Any increase must be justified and approved by your state’s insurance division.

Several factors affect the cost of your long-term care policy. The most significant factors are your age, your health, the amount of benefit, and the benefit period. The younger and healthier you are when you buy LTCI, the less your premium rate will be each year. The greater your daily benefit (choices typically range from $50 to $350) and the longer the benefit period (generally 1 to 6 years, with some policies offering a lifetime benefit), the greater the premium.

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

keeping your auto and home insurance low

Keeping Your Auto and Home Insurance Low

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keeping your auto and home insurance low

As a responsible adult, you know that you need to have auto and home insurance. But that doesn’t mean you have to break the bank to get it. In fact, you have many options to keep your rates low.

On average, most homeowners pay over $1,300 a year on insurance. That can be a hefty financial burden, but it doesn’t have to be. Here are some steps you can take to keep your auto and home insurance low:

Consider One Insurer

You can often save money by choosing one insurer for your auto and home insurance. Most insurers offer discounts for having multiple policies with them. You’ll also only need to work with one company for both policies when the time comes to make a claim. Loyalty to one company can also prove profitable. Some insurance companies also reduce the rate for customers who have been with them for a long time.

Increase Your Deductibles

Raising your deductibles is a great way to lower your premiums. A higher deductible means you’ll pay more when you make a claim, but it also means that your monthly premium will be cheaper. This, of course, is a judgement call that you need to evaluate and investigate. Make sure you choose an amount you can afford in the event of an accident or other incident.

Don’t Forget to Account for Home Improvement

Some improvements can reduce the risk of damage and help you save money on your insurance through discounts. This includes deadbolt locks, storm shutters, smoke alarms, and fire extinguishers. Inform your insurer about any improvements you make so that they can adjust your policy accordingly. In fact, it’s always a good idea to foster and maintain a regular dialogue with your insurer.

Take Advantage of All the Discounts

Insurance companies offer a variety of discounts for different things. These can include good driver discounts, multi-policy discounts (Having multiple policies with one company), student or military discounts, and more.

Another source of discounts may come from affinity programs. These may be offered through certain employers, professional organizations, and universities. Ask your insurance provider if you qualify for any of these types of available discounts.

Compare Different Providers

Comparing different providers when shopping for auto and home insurance is a good idea. Some companies may offer lower rates for the same coverage, so it’s worth looking around. You can use an online comparison tool or speak to an independent insurance agent who can help you find the best deal.

Although bundling multiple policies with one company is often the most cost-effective option, it doesn’t always mean it’s the best choice for your situation. Cheaper isn’t always better.

Conclusion

By following these steps, you can keep your auto and home insurance costs low while still getting the coverage you need. Check with your insurance provider to ensure you get the best deal possible. With a little effort, you can save money on your insurance premiums without sacrificing the quality of your coverage.

Funding a Buy-Sell Agreement

Funding a Buy-Sell Agreement with Life Insurance

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Concept of signing contracts to buy-sell, rent, mortgage, real estate.

As a partner or co-owner (private shareholder) of a business, you’ve spent years building a valuable financial interest in your company. You may have considered setting up a buy-sell agreement to ensure your surviving family a smooth sale of your business interest and are looking into funding methods.

One of the first methods you should consider is life insurance. The life insurance that funds your buy-sell agreement will create a sum of money at your death that will be used to pay your family or your estate the full value of your ownership interest.

How funding with life insurance works with Key Employee Insurance

When using life insurance with a buy-sell agreement, either the company or the individual co-owners buy life insurance policies on the lives of each co-owner (but not on themselves). If you were to die, the policyowners (the company or co-owners) receive the death benefits from the policies on your life.

That money is paid to your surviving family members as payment for your interest in the business. If all goes well, your family gets a sum of cash they can use to help sustain them after your death, and the company has ensured its continuity.

You’ve got a great group working for you now, and business is good. Would your business survive losing a key employee?

Advantages of using life insurance

  • Life insurance creates a lump sum of cash to fund the buy-sell agreement at death
  • Life insurance proceeds are usually paid quickly after your death, ensuring that the buy-sell transaction can be settled quickly
  • Life insurance proceeds are generally income tax free; a C corporation may be subject to the alternative minimum tax (AMT)
  • If sufficient cash values have built up within the policies, the funds can be accessed to purchase your business interest following your retirement or disability

Disadvantages of using life insurance

  • Life insurance premiums are paid with after-tax dollars because the premiums are generally not a tax-deductible expense
  • Premium requirements are an ongoing expense
  • One or more co-owners may be uninsurable due to age or illness
  • If the co-owners’ ages vary widely, younger co-owners will have to pay higher premiums on the lives of the older co-owners
  • If the ownership percentages vary widely, more insurance will be needed to cover the owners with the larger ownership interests, resulting in higher premium costs for those with smaller ownership interests

How to set up different types of buy-sell agreements

In an entity purchase buy-sell agreement, the business itself buys separate life insurance policies on the lives of each of the co-owners. The business usually pays the annual premiums and is the owner and beneficiary of the policies.

In a cross-purchase buy-sell agreement, each co-owner buys a life insurance policy on each of the other co-owners. Each co-owner usually pays the annual premiums on the policies they own and are the beneficiaries of the policies. If your company has a large number of co-owners, multiple policies must be purchased by each co-owner.

A wait and see (or hybrid) buy-sell agreement allows you to combine features from both the entity purchase and cross purchase models. The business can buy policies on each co-owner, the individual co-owners can buy policies on each other, or a mixture of both methods can be used.

The buy-sell agreement should be fully funded

The amount of insurance coverage on your life should equal the value of your ownership interest, so there will be enough cash from the policy proceeds to pay your family or estate in full for your share of the business after your passing. But if all that is affordable is insurance coverage for a portion of your interest, you might want to go ahead and fund that amount. The company may be able to increase the amount of insurance or use additional funding methods and the agreement should specify how your family or estate will be paid.

The value of the business could change over time

What if the insurance proceeds turn out to be less than the value of your business interest because of growth in the business? Your surviving family members might end up getting less than full value for your business interest. Your buy-sell agreement should specify how the valuation difference will be handled.

Conversely, the insurance proceeds might be greater than the value of your business interest when you’ve passed. Your buy-sell agreement should address this potential situation upfront and specify whether the excess funds will belong to the business, the surviving co-owners, or your family or estate.

Should group life insurance be used?

Using a company’s group life insurance plan to fund a buy-sell agreement is generally not recommended. Normally, group life insurance premiums are tax deductible to the company. But premiums are no longer deductible if the business is the beneficiary.

Potential negative tax consequences

  • Life insurance amounts are generally tax-free so long as appropriate procedures regarding notice and consent to the insured employee are followed.
  • Assume your business is a corporation or is taxed as one. When one of your co-owners dies, their estate becomes the owner of the insurance policies covering you and the other co-owners of the business in a cross-purchase agreement. If these policies are then transferred to the surviving co-owners to pay for future buyouts, a transfer-for-value (gain) may occur, and a portion of the proceeds received from the transferred policies may be taxable.
  • If a policy is canceled (surrendered) for cash to buy out your interest while you’re living, any gain on the policy is subject to federal income tax for the policyowner. Gain includes all policy loans outstanding at the time of surrender. Also, the policy may carry surrender charges.
  • The proceeds received by a C corporation under an entity purchase agreement may be subject to the AMT.

Keeping track of your buy-sell agreement

Each year, the premiums on the policies must be paid, or the insurance will lapse. So monitor premium payments carefully. Your buy-sell agreement should include a feature requiring ongoing proof of payment. Also, review the amount of insurance regularly.

The insurance coverage may have to be increased periodically to reflect increases in the value of the business. If additional insurance is not possible, another funding method should be established. Finally, periodically check the financial rating of your insurance company. The policies funding your buy-sell agreement will do your family no good if the insurer becomes insolvent.

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